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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 September 30, 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 000-31615
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DURECT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-3297098
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10240 Bubb Road
Cupertino, California 95014
(Address of principal executive offices, including zip code)
(408) 777-1417
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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 |_|
As of November 2, 2001, there were 48,100,280 shares of the registrant's
Common Stock outstanding.
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INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements........................................................................ 3
Condensed Statements of Operations.......................................................... 3
For the three and nine months ended September 30, 2001 and 2000 (unaudited)
Condensed Balance Sheets.................................................................... 4
As of September 30, 2001(unaudited) and December 31, 2000
Condensed Statements of Cash Flows.......................................................... 5
For the nine months ended September 30, 2001 and 2000 (unaudited)
Notes to Condensed Financial Statements (unaudited)......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................. 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................... 29
Item 2. Changes in Securities and Use of Proceeds................................................... 29
Item 3. Defaults Upon Senior Securities............................................................. 30
Item 4. Submission of Matters to a Vote of Security Holders......................................... 30
Item 5. Other Information........................................................................... 30
Item 6. Exhibits and Reports on Form 8-K............................................................ 30
(a) Exhibits................................................................................ 30
(b) Reports on Form 8-K..................................................................... 30
Signatures............................................................................................. 31
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
DURECT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Revenue, net $ 1,841 $ 1,101 $ 4,928 $ 2,182
Cost of goods sold(1) 963 645 2,548 1,256
------- ------- -------- --------
Gross profit 878 456 2,380 926
------- ------- -------- --------
Operating expenses:
Research and development 7,181 3,400 16,590 8,648
Research and development to related party 25 193 90 626
Selling, general and administrative 2,305 1,398 6,339 3,363
Amortization of intangible assets 555 206 1,290 508
Stock-based compensation(1) 750 1,432 2,605 3,932
Acquired in-process research and development -- -- 14,030 --
------- ------- -------- --------
Total operating expenses 10,816 6,629 40,944 17,077
------- ------- -------- --------
Loss from operations (9,938) (6,173) (38,564) (16,151)
Other income (expense):
Interest income 1,096 495 3,960 1,322
Interest expense (92) (34) (238) (88)
------- ------- -------- --------
Net other income 1,004 461 3,722 1,234
------- ------- -------- --------
Net loss (8,934) (5,712) (34,842) (14,917)
Accretion of cumulative dividends on Series B
convertible preferred stock -- 319 -- 972
------- ------- -------- --------
Net loss attributable to common stockholders $(8,934) $(6,031) $(34,842) $(15,889)
======= ======= ======== ========
Net loss per common share, basic and diluted $ (0.19) $ (0.62) $ (0.76) $ (1.96)
======= ======= ======== ========
Shares used in computing basic and diluted net loss
per share 46,906 9,802 46,120 8,118
======= ======= ======== ========
Pro forma net loss per share, basic and diluted(2) $(0.16) $ (0.44)
====== ========
Shares used in computing pro forma net loss
per share(2) 36,408 34,170
====== ========
(1) Stock-based compensation related to the following:
Cost of goods sold $ 31 $ 22 $ 118 $ 43
Research and development 503 1,020 1,798 2,685
Selling, general and administrative 247 412 807 1,247
---- ------ ------ ------
$781 $1,454 $2,723 $3,975
==== ====== ====== ======
(2) See note 1 for a description of the calculation of pro forma amounts.
See accompanying notes.
3
DURECT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2001 2000
---- ----
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 20,970 $ 46,702
Short-term investments 48,427 57,730
Accounts receivable, net 1,054 1,261
Inventories 2,052 2,682
Prepaid expenses and other current assets 1,848 938
-------- --------
Total current assets 74,351 109,313
Property and equipment, net 11,456 4,472
Intangible assets, net 10,631 5,175
Long-term investments 15,418 1,652
Restricted investments 3,421 --
-------- --------
Total assets $115,277 $120,612
======== ========
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 1,533 $ 658
Accrued liabilities 2,341 923
Accrued construction in progress 720 1,673
Accrued contract manufacturing -- 248
Accrued liabilities to related party 30 54
Contract research liability 1,455 290
Current portion of long-term debt 150 --
Equipment financing obligations, current portion 528 407
-------- --------
Total current liabilities 6,757 4,253
Long-term debt, less current portion 1,575 --
Equipment financing obligations, noncurrent portion 704 1,105
Other noncurrent liabilities 126 --
Commitments and contingencies
Stockholders' equity:
Common stock 4 4
Additional paid-in capital 188,937 165,638
Notes receivable from stockholders (621) (652)
Accumulated other comprehensive income 784 29
Deferred compensation (3,212) (4,830)
Deferred royalties and commercial rights (13,480) (13,480)
Accumulated deficit (66,297) (31,455)
-------- --------
Stockholders' equity 106,115 115,254
-------- --------
Total liabilities and stockholders' equity $115,277 $120,612
======== ========
See accompanying notes.
4
DURECT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine months ended
September 30,
----------------------
2001 2000
---- ----
Cash flows from operating activities
Net loss $(34,842) $(14,917)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 958 1,027
Noncash charges related to stock-based compensation 2,723 3,975
Amortization of certain intangible assets 1,290 --
Acquired in-process research and development 14,030 --
Changes in assets and liabilities:
Accounts receivable 881 (754)
Inventories 929 (2,908)
Prepaid expenses and other assets (592) (431)
Restricted investments (1,000) --
Accounts payable 598 (136)
Accrued liabilities (184) 1,052
Accrued liabilities to related party (24) 729
Contract research liability 1,165 226
-------- --------
Total adjustments 20,774 2,780
-------- --------
Net cash and cash equivalents used in operating activities (14,068) (12,137)
-------- --------
Cash flows from investing activities
Purchases of property, plant and equipment (5,195) (1,416)
Purchases of investments (65,000) (2,636)
Proceeds from sales and maturities of investments 61,292 11,690
Payment of transaction costs in the acquisition of SBS (450) --
Acquisition of intangible assets -- (4,635)
-------- --------
Net cash and cash equivalents provided by (used in) investing activities (9,353) 3,003
-------- --------
Cash flows from financing activities
Net proceeds from equipment financing obligations -- 1,279
Payments on equipment financing obligations (319) (200)
Purchase of restricted investments (2,421) --
Payments of issuance costs for IPO -- (1,562)
Net proceeds from notes receivable from stockholders 31 --
Net proceeds from issuances of common and preferred stock 398 25,074
-------- -------
Net cash and cash equivalents provided by (used in) financing activities (2,311) 24,591
-------- -------
Net increase (decrease) in cash and cash equivalents (25,732) 15,457
Cash and cash equivalents, beginning of the period 46,702 3,863
-------- -------
Cash and cash equivalents, end of the period $ 20,970 $19,320
======== =======
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 190 $ 52
======== =======
Issuance of stock, stock options and warrants for acquisition of SBS $ 22,716 $ --
======== =======
Notes receivable from stockholders issued in connection with exercise of stock options $ -- $ 619
======== =======
Issuance of warrants to equipment lessor $ -- $ 190
======== =======
Issuance of warrants to ALZA Corporation $ -- $ 6,480
======== =======
IPO proceeds receivable $ -- $78,120
======== =======
See accompanying notes.
5
DURECT CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
Note 1. Summary of Significant Accounting Policies
Nature of Operations and Basis of Presentation
DURECT Corporation (the "Company") was incorporated in the state of
Delaware on February 6, 1998. The Company is a pharmaceutical systems company
developing therapies for chronic disorders that require continuous dosing. The
Company's lead product is for the treatment of chronic pain. Additionally, the
Company manufactures and sells osmotic pumps used in laboratory research and
sells micro-catheters used in the treatment of ear disorders. The Company's
wholly owned subsidiary, Southern BioSystems, Inc. ("SBS") manufactures
biodegradable polymers used in pharmaceutical products and conducts research and
development of pharmaceutical products with third party pharmaceutical and
biotechnology company partners.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission and, therefore, do not include all the
information and footnotes necessary for a complete presentation of the Company's
results of operations, financial position, and cash flows in conformity with
generally accepted accounting principles. The unaudited financial statements
reflect all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of the
financial position at September 30, 2001, the operating results for the three
and nine months ended September 30, 2001 and 2000, and cash flows for the nine
months ended September 30, 2001 and 2000. The condensed consolidated balance
sheet as of December 31, 2000 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. These financial statements and notes should be read in
conjunction with the Company's audited financial statements and notes thereto,
included in the Company's annual report on Form 10-K filed with the Securities
and Exchange Commission.
The results of operations for the interim periods presented are not
necessarily indicative of results that may be expected for any other interim
period or for the full fiscal year.
Inventories
Inventories are stated at the lower of cost or market, with cost determined on a
first-in, first-out basis. Inventories consisted of the following (in
thousands):
September 30, December 31,
2001 2000
---- ----
(unaudited)
Raw materials $ 207 $ 191
Work in process 822 1,278
Finished goods 1,023 1,213
------ ------
Total inventories $2,052 $2,682
====== ======
Revenue Recognition
Revenue from the sale of products is recognized at the time product is
shipped to customers, provided no continuing obligation exists. The Company
maintains consigned inventory at customer locations for certain products. For
these products, revenue is recognized at the time the Company is notified that
the device has been used. The Company provides credit, in the normal course of
business, to its customers. The Company also maintains an allowance for doubtful
customer accounts and charges actual losses when incurred to this allowance.
6
Comprehensive Loss
Statement of Financial Accounting Standards No.130, "Reporting
Comprehensive Income" ("SFAS 130"), establishes standards for reporting
comprehensive loss and its components in the financial statements. SFAS 130
requires unrealized gains and losses on the Company's available-for-sale
securities to be included in other comprehensive income or loss. The Company's
comprehensive losses for the three months ended September 30, 2001 and 2000,
were $8,444,000 and $5,692,000, respectively, compared to its net losses of
$8,934,000 and $5,712,000, respectively. The Company's comprehensive losses for
the nine months ended September 30, 2001 and 2000, were $34,087,000 and
$14,919,000, respectively, compared to its net losses of $34,842,000 and
$14,917,000, respectively.
Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period presentation. Such reclassifications did not change the
previously reported net loss amounts.
Net Loss Per Share
Basic net loss per share and diluted net loss per share are computed in
conformity with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" ("SFAS 128") and Securities and Exchange Commission Staff Accounting
Bulletin No. 98. Basic net loss per share is calculated by dividing net loss
attributable to common stockholders by the weighted-average number of common
shares outstanding, less the weighted average number of common shares subject to
the Company's right of repurchase, which lapses ratably. Diluted net loss per
share includes the impact of options and warrants to purchase common stock
(using the treasury stock method), if dilutive. There is no difference between
basic and diluted net loss per share as the Company incurred a net loss in each
period presented.
Pro forma basic and diluted net loss per share has been computed as
described above and also gives effect, under SEC guidance, to the conversion of
convertible preferred stock (using the if-converted method) from the original
date of issuance. Upon conversion of the Series B preferred stock at the time of
the Company's initial public offering, all accumulated dividends were forgiven
and did not continue to accumulate. The net loss used in the pro forma basic and
diluted net loss per share excludes the accumulated dividends. The following
table presents the calculations of basic and diluted and pro forma basic and
diluted net loss per share (in thousands, except per share amounts):
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Net loss $(8,934) $(5,712) $(34,842) $(14,917)
Less: accumulated dividend on Series B preferred stock -- (319) -- (972)
------- ------- -------- --------
Net loss available to common stockholders $(8,934) $(6,031) $(34,842) $(15,889)
======= ======= ======== ========
Basic and diluted weighted average shares:
Weighted-average shares of common stock outstanding 48,015 12,438 47,369 10,899
Less: weighted-average shares subject to repurchase (1,109) (2,636) (1,249) (2,781)
------- ------- -------- --------
Weighted-average shares used in computing basic and diluted
net loss per share 46,906 9,802 46,120 8,118
======= ======= ======== ========
Basic and diluted net loss per share $ (0.19) $ (0.62) $ (0.76) $ (1.96)
======= ======= ======== ========
Pro forma:
Net loss $(5,712) $(14,917)
======= ========
Shares used above 9,802 8,118
Pro forma adjustment to reflect weighted effect of assumed
conversion of convertible preferred stock 26,606 26,052
------- --------
Shares used in computing pro forma basic and diluted net loss
per share 36,408 34,170
======= ========
Pro forma basic and diluted net loss per share $ (0.16) $ (0.44)
======= ========
7
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"), which we adopted on January 1, 2001. This statement establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement also requires that changes in the derivative's fair
value be recognized in earnings unless specific hedge accounting criteria are
met. The adoption of SFAS 133 did not have a material effect on our operating
results or financial position since we currently do not invest in derivative
instruments or engage in hedging activities.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141, Business Combinations ("SFAS 141"). SFAS 141 establishes new
standards for accounting and reporting for business combinations and will
require that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Use of the pooling-of-interests
method will be prohibited. We expect to adopt this statement during the first
quarter of fiscal 2002 and we do not believe that SFAS 141 will have a material
effect on our operating results or financial position.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), which
supersedes APB Opinion No. 17, Intangible Assets. SFAS 142 establishes new
standards for goodwill, including the elimination of goodwill amortization to be
replaced with methods of periodically evaluating goodwill for impairment. We
expect to adopt this statement during the first quarter of fiscal 2002. As the
effect of this adoption is difficult to predict, we continue to assess the
impact that SFAS 142 will have on our operating results or financial position.
In October 2001, the FASB issued Statement of Financial Accounting
Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
("SFAS 144"), which is effective for fiscal periods beginning after December 15,
2001 and supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of. SFAS 144 provides a single model
for accounting and reporting the impairment and disposal of long-lived assets.
The statement also sets new criteria for the classification of assets
held-for-sale and changes the reporting of discontinued operations. We do not
believe that the adoption of SFAS 144 will have a material effect on our
operating results or financial position.
Note 2. Acquisition of Southern BioSystems, Inc.
On April 30, 2001, the Company acquired SBS, a privately held Alabama
corporation, that designs, develops, licenses and manufactures
controlled-release products, and through its wholly-owned subsidiary, Birmingham
Polymers, Inc., SBS also designs, develops and manufactures biodegradable
polymers. Under the terms of the acquisition, the Company issued 1,355,235
shares of common stock, and agreed to issue up to 720,161 additional shares of
common stock upon the exercise of outstanding SBS options and warrants, in
exchange for all of SBS's outstanding equity interests, and assumed SBS's
liabilities, including $1.7 million in debt. The total purchase price was $23.2
million. The transaction was accounted for as a purchase and is intended to
qualify as a tax-free reorganization.
At the time of the registration of these shares with the Securities and
Exchange Commission, which is expected to be in the fourth quarter of 2001, the
Company may be required to issue additional shares of common stock to former SBS
shareholders, as well as reserve additional shares for issuance upon the
exercise of outstanding SBS options and warrants, depending on the Company's
stock price at that time. Up to 4,150,854 additional shares may be issued and
reserved for issuance upon the exercise of outstanding SBS options and warrants.
The maximum total number of shares issued and shares reserved for issuance upon
the exercise of outstanding SBS options and warrants in connection with our
acquisition of SBS will be determined by dividing $24.9 million by the greater
of $4.00 or the average closing sale price of the Company's stock during a
specified time period preceding the registration of shares, subject to certain
conditions. Further information regarding the SBS acquisition is included in the
company's current Report on Form 8-K filed with the SEC on May 15, 2001.
The Company recorded $918,000 of unearned compensation related to the
intrinsic value of approximately 152,000 unvested employee options assumed in
connection with the acquisition. This amount will be expensed to stock
compensation ratably over the vesting period. Direct transaction costs related
to the acquisition were approximately $450,000.
8
The acquisition has been accounted for as a purchase and accordingly,
the accompanying financial statements include the results of operations of SBS
subsequent to the acquisition date. The purchase price has been allocated to the
tangible net assets acquired, the intangible assets acquired, and in-process
research and development based on their estimated fair values as determined by
an independent appraisal. The purchase price allocation is as follows (in
thousands):
Net tangible assets acquired $ 1,472
Intangible assets acquired:
Core technology 1,560
Developed technology 1,810
Assembled workforce 740
Acquired in-process research and development 14,030
Goodwill 2,636
Unearned compensation 918
-------
Total purchase price allocation $23,166
=======
Tangible net assets acquired include cash, accounts receivable,
inventories and fixed assets. Liabilities assumed principally include accounts
payable, accrued expenses, a line of credit, and issued bonds. For the remainder
of 2001, the intangible assets acquired and goodwill are each being amortized on
a straight-line basis over their estimated useful lives, which are 4 and 10
years, respectively. Beginning in 2002, goodwill and assembled workforce will
not be amortized but reviewed for impairment (See Note 1: Recent Accounting
Pronouncements). Acquired in-process research and development, which has not
reached technological feasibility and therefore has no alternative future use,
has been expensed during the three months ended June 30, 2001.
SBS's research and development programs are in various stages of
preclinical development. Currently, none of the products utilizing SBS's
proprietary technology is in any stage of human clinical testing nor is approved
for marketing in humans.
A valuation of the purchased assets was undertaken to assist us in
determining the fair value of each identifiable intangible asset and in
allocating the purchase price among the acquired assets, including the portion
of the purchase price attributed to in-process research and development
projects. Standard valuation procedures and techniques were utilized in
determining the fair value of the acquired in-process research and development.
To determine the value of the technology in the development stage, we
considered, among other factors, the stage of development of each project, the
time and resources needed to complete each project, expected income and
associated risks. Associated risks included the inherent difficulties and
uncertainties in completing pharmaceutical research and development and
obtaining regulatory approval to sell the resulting products. The analysis
resulted in $14.0 million of the purchase price being charged to in-process
research and development. The intangible assets, consisting of core technology,
developed technology, assembled workforce and goodwill, were assigned a value of
$6.7 million and will be amortized over their estimated useful lives of four to
ten years. Management believes that the amounts are reasonable and reflect the
fair value of the assets acquired.
Goodwill and intangible assets are generally evaluated on an individual
acquisition, market, or product basis whenever events or changes in
circumstances indicate that such assets are impaired or the estimated useful
lives are no longer appropriate. Periodically, the Company reviews its goodwill
and other intangible assets for impairment based on estimated future
undiscounted cash flows attributable to the assets. In the event such cash flows
are not expected to be sufficient to recover the recorded value of the assets,
the assets are written down to their estimated fair values. No such charges have
been recorded in 2001 related to the SBS or any other of the Company's
acquisitions.
In conjunction with our acquisition of SBS in April 2001, we assumed
Alabama State Industrial Development Bonds ("SBS Bonds") with remaining
principal payments of $1.7 million and a current interest rate of 6.35%
increasing each year up to 7.2% at maturity on November 1, 2009. As part of the
acquisition agreement, we are required to guarantee and collateralize these
bonds with a letter of credit of approximately $2.5 million that the Company
deposited with a local bank in July 2001 (See Note 4). Interest payments are due
semi-annually and principal payments increase from $150,000 to $240,000 over the
term of the bonds until the principal is fully amortized in 2009. We have an
option to call these bonds beginning in November 2001, which we may exercise.
The call premium decreases annually from 1 1/2% if we call the bonds in November
2001 to 0% in November 2004.
9
Unaudited Pro Forma Information
The following unaudited pro forma information presents the consolidated
results of operations of the Company, excluding the charge for acquired in-
process research and development, as if the acquisition of SBS had occurred at
the beginning of fiscal 2000. The pro forma 2001 and 2000 results of operations
combine the consolidated results of operations of the Company, excluding the
charge for acquired in-process research and development attributable to SBS, for
the nine months ending September 30, 2001 and 2000 with the historical results
of operations of SBS for the nine months ended September 30, 2001 and 2000,
respectively. The unaudited pro forma information does not purport to be
indicative of what would have occurred had the acquisition been made as of the
beginning of fiscal 2000 or of results which may occur in the future.
Nine months ended
(in thousands, except per share amounts)
September 30,
2001 2000
---- ----
Revenue $ 5,950 $ 5,021
Net loss attributable to common stockholders (22,014) (17,157)
Net loss per common share, basic and diluted $ (0.48) $ (2.11)
Note 3. Stockholder Rights Plan
On July 6, 2001, the Board of Directors adopted a Stockholder Rights
Plan (the "Rights Plan"). The rights issued pursuant to the Rights Plan will
initially trade with shares of the Company's common stock, unless and until they
are separated upon the occurrence of certain future events, and will have no
impact on the way in which the company's shares are traded. The distribution of
the rights were payable to stockholders of record on July 20, 2001. The rights
will expire on July 6, 2011 and are not exercisable until ten days after a
person or group announces an acquisition of 17.5 percent or more of the
Company's outstanding common stock or the commencement of a tender offer, which
would result in ownership by the person or group of 17.5 percent or more of the
Company's outstanding common stock.
Upon exercise, all rights holders except the potential acquiror will be
entitled to acquire the Company's common stock at a discount. The effect will be
to discourage acquisitions of more than 17.5 percent of the Company's common
stock without negotiations with the Company's Board of Directors. Under certain
circumstances, the Company's Board of Directors may also exchange the rights
(other than those owned by the acquiror or its affiliates) for the Company's
common stock at an exchange ratio of one share of common stock per right. The
Company is entitled to redeem the rights at any time on or before the tenth day
following acquisition by a person or group of 17.5 percent or more of the
Company's common stock. Further information regarding the Company's Stockholder
Rights Plan is included in the Company's registration statement on Form 8-A
filed with the SEC on July 10, 2001.
Note 4. Restricted Investments
In April 2001, the Company deposited $1.0 million in the form of a
certificate of deposit with a local bank as a letter of credit to secure a lease
for an office facility (see Note 5). The restriction on these funds will be
released upon termination of the lease in June 2006, but may be reduced by
$200,000 annually provided timely rental payments are made. In July 2001, the
Company also deposited $2.4 million in investment grade securities with the same
bank to guarantee the SBS Bonds. This guarantee will be released upon the sooner
of the final settlement of the bonds in 2009, or the exercise by the Company of
its option to call the bonds. The Company's option to call the bonds begins in
November 2001.
Note 5. Operating Lease
In March 2001, the company signed a noncancelable operating lease for
an office facility. This lease commenced in June 2001, expires in May 2006, and
has two options to extend the lease term for up to an additional eight years.
The monthly payments under this noncancelable operating lease increase over the
term of the lease from $102,000 to $119,000.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations as of September 30, 2001 and 2000 should be read in
conjunction with our annual report on Form 10-K filed with the Securities and
Exchange Commission and "Factors that May Affect Future Results" section
included elsewhere in this Form 10-Q. This Form 10-Q contains forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended.
When used in this report or elsewhere by management from time to time, the words
"believes," "anticipates," "intends," "plans," "estimates," "expects," and
similar expressions are forward-looking statements. Such forward-looking
statements contained herein are based on current expectations. Any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties. Actual events or results may differ materially from
those discussed in the forward-looking statements as a result of various
factors. For a more detailed discussion of such forward-looking statements and
the potential risks and uncertainties that may impact upon their accuracy, see
the "Factors that May Affect Future Results" and "Overview" sections of this
Management's Discussion and Analysis of Financial Condition and Results of
Operations. These forward-looking statements reflect our view only as of the
date of this report. Except as required by law, we undertake no obligations to
update any forward looking statements. You should also carefully consider the
factors set forth in other reports or documents that we file from time to time
with the Securities and Exchange Commission. Chronogesic(TM), SABER(TM),
IntraEAR(R) and ALZET(R) are trademarks of DURECT Corporation. DUROS(R) is a
trademark of ALZA Corporation, a subsidiary of Johnson & Johnson.
Overview
DURECT Corporation is pioneering the treatment of chronic diseases and
conditions by developing and commercializing pharmaceutical systems to deliver
the right drug to the right place in the right amount at the right time. These
capabilities can enable new drug therapies or optimize existing ones based on a
broad range of compounds, including small molecule pharmaceuticals as well as
biotechnology molecules such as proteins, peptides and genes.
We were founded in February 1998. During that year, we were engaged in
negotiating a licensing agreement with ALZA Corporation to gain specified rights
to its DUROS system, raising capital, recruiting scientific and management
personnel and commencing research and development activities. In late 1998, we
filed an investigational new drug application relating to our first product,
Chronogesic(TM) (which we formerly referred to as "DUROS sufentanil"), a
DUROS-based pharmaceutical system for the treatment of chronic pain. In 1999, we
began a Phase I clinical trial for Chronogesic(TM) using an external pump to
test the safety of continuous chronic infusion of this drug, initiated the
development of a spinal hydromorphone product, and initiated the research and
development of other products based on the DUROS system. In 2000, we prepared
for and initiated our Phase II clinical trial for Chronogesic(TM), which
included the development of our manufacturing process, developed a prototype of
our spinal hydromorphone product, and continued to research and develop other
products based on the DUROS system.
In the first nine months of 2001, we completed our Phase II clinical
trial for Chronogesic(TM), continued the development of our spinal hydromorphone
product, secured a long-term supply agreement for our bulk drug requirements for
Chronogesic(TM), and completed construction of our manufacturing facility. In
addition, we completed our acquisition of Southern BioSystems, Inc. ("SBS") in
the second quarter of 2001. SBS, a privately held Alabama corporation, designs,
develops, licenses and manufactures controlled-release products, and through its
wholly-owned subsidiary, Birmingham Polymers, Inc., also designs, develops and
manufactures biodegradable polymers. With this acquisition, we have added three
additional drug delivery platforms, the SABER(TM) delivery system, microspheres
and drug loaded implants, from which to develop new products.
Prior to our initial public offering in September 2000, we financed
operations primarily through the sale of convertible preferred stock, resulting
in net proceeds of $53.2 million. Our initial public offering together with the
exercise in part of our underwriters' over-allotment option in November 2000,
resulted in net proceeds of $84.0 million.
We have sustained losses since inception. As of September 30, 2001, we
had an accumulated deficit of $66.3 million. Our net losses attributable to
common stockholders were $20.8 million, $9.3 million, and $1.3 million for the
fiscal years ended December 31, 2000, 1999, and 1998 respectively.
These losses have resulted primarily from costs incurred in the
research and development of our products, and to a lesser extent, selling,
general and administrative costs associated with our operations and product
sales. Our research and development expenses consist of salaries and related
expenses for research and development personnel, contract research and
development services, supplies and a portion of overhead operating expenses. We
expense all of our research and development costs as they are incurred. We
expect our research and development expenses to increase in the future as we
expand clinical trials and research and development activities. Selling, general
and administrative expenses consist primarily of salaries and related expenses
for administrative, finance,
11
marketing and executive personnel, legal, accounting and other professional fees
and a portion of overhead operating expenses. To support our research and
development activities and the additional obligations of a public reporting
entity, we expect to increase our selling, general and administrative expenses.
We also expect to incur substantial non-cash expenses relating to stock-based
compensation and the amortization of acquired intangible assets. As a result of
these factors, we expect to incur significant losses and negative cash flows
from operations for the foreseeable future.
Under the terms of the acquisition of SBS, we issued 1,355,235 shares
of common stock, and agreed to issue up to 720,161 additional shares of common
stock upon the exercise of outstanding SBS options and warrants, in exchange for
all of SBS's outstanding equity interests, and assumed SBS's liabilities,
including $1.7 million in debt. The total purchase price was $23.2 million. The
transaction was accounted for as a purchase and is intended to qualify as a
tax-free reorganization. At the time of the registration of these shares with
the Securities and Exchange Commission, which is expected to be in the fourth
quarter of 2001, we may be required to issue additional shares of common stock
to former SBS shareholders, as well as reserve additional shares for issuance
upon the exercise of outstanding SBS options and warrants, depending on our
stock price at that time. Up to 4,150,854 additional shares may be issued and
reserved for issuance upon the exercise of outstanding SBS options and warrants.
The maximum total number of shares issued and shares reserved for issuance upon
the exercise of outstanding SBS options and warrants in connection with our
acquisition of SBS will be determined by dividing $24.9 million by the greater
of $4.00 or the average closing sale price of the Company's stock during a
specified time period preceding the registration of shares, subject to certain
conditions. Further information regarding the SBS acquisition is included in our
current Report on Form 8-K filed with the SEC on May 15, 2001. We recorded
$918,000 of unearned compensation related to the intrinsic value of
approximately 152,000 unvested employee options assumed in connection with the
acquisition. This amount will be expensed to stock compensation ratably over the
vesting period. Direct transaction costs related to the acquisition were
approximately $450,000. SBS, and its wholly owned subsidiary Birmingham
Polymers, Inc., operates as a wholly owned subsidiary of DURECT, and our
financial statements for the nine months ended September 30, 2001 include the
results of operations of SBS subsequent to the acquisition date.
We do not anticipate revenues from our pharmaceutical systems, should
they be approved, for at least several years. To date, our revenues have
resulted from:
. sales of the ALZET product line, which we acquired from ALZA in
April 2000;
. sales of polymers and contract research and development revenue
from SBS, which we acquired in April 2001; and
. sales of ear catheter products, which we acquired at the time of our
acquisition of substantially all the assets of IntraEAR, Inc. in
October 1999.
We have a limited history of operations and anticipate that our
quarterly and annual results of operations will fluctuate for the foreseeable
future. We believe that period-to-period comparisons of our operating results
should not be relied upon as predictive of future performance. Our prospects
must be considered in light of the risks, expenses and difficulties encountered
by relatively new companies, particularly companies in new and rapidly evolving
markets such as pharmaceuticals, drug delivery, and biotechnology. To address
these risks, we must, among other things, obtain regulatory approval for and
commercialize our products, which may not occur. We may not be successful in
addressing these risks and difficulties. We may require additional funds to
complete the development of our products and to fund operating losses to be
incurred in the next several years.
Results of Operations
Three and nine months ended September 30, 2001 and 2000
Revenue. Net revenues increased to $1.8 million and $4.9 million for
the three and nine months ended September 30, 2001, respectively, from $1.1
million and $2.2 million for the corresponding periods in 2000. The increase in
revenue in the three months ended September 30, 2001 compared to the
corresponding period in 2000 is attributable primarily to the acquisition of SBS
in April 2001 and its related revenues from polymer sales and contract research
and development. The increase in revenue in the nine months ended September 30,
2001 compared to the corresponding period in 2000 is attributable both to SBS
revenues and to our selling the ALZET product line over the entire nine month
period in 2001.
We consider our core business to be developing and commercializing
pharmaceutical systems; we do not expect to generate revenues from our
pharmaceutical systems, should they be approved, for at least several years. As
such, and in the near future, we do not intend to significantly increase our
investments in or efforts to sell or market any of our existing product lines or
revenue generating businesses. As a result, we do not anticipate that our
revenues will increase significantly, if it all, for several years.
Cost of goods sold. Cost of goods sold was $963,000 and $2.5 million
for the three and nine months ended September 30, 2001, respectively, and
$645,000 and $1.3 million for the three and nine months ended September 30,
2000, respectively. Cost of goods sold as a percent of net revenues was 52% and
52% for the three and nine months ended September 30, 2001, respectively, and
59% and 58% for the corresponding periods in 2000. The decrease in cost of goods
sold as a percentage of net revenues for the nine months ended September 30,
2001 compared to the corresponding period in 2000 is attributable to
manufacturing efficiencies related
12
to our ALZET product, partially offset by the introduction of relatively higher
costs from sales of polymers and contract research and development which
commenced following our acquisition of SBS.
Cost of good sold includes variances from expected costs that occur
during the manufacturing processes for the ALZET and SBS product lines, which
may be large relative to our sales. As a result, we expect cost of goods sold as
a percentage of revenues related to these products to fluctuate.
Research and Development. Research and development expenses increased
to $7.2 million and $16.7 million for the three and nine months ended September
30, 2001 respectively, from $3.6 million and $9.3 million for the corresponding
periods in 2000. The increase was attributable to increased research and
development activity, including expenses related to the company's Phase II
clinical trial for our lead product, Chronogesic(TM). A significant portion of
our research and development expenses in the first nine months of 2001 related
to the organization, enrollment, and treatment of approximately 50 patients at
10 clinical sites in this trial. The increase was also due to an increase in
research and development personnel and related expenses. As of September 30,
2001, we had 74 research and development employees compared with 37 as of the
corresponding date in 2000. We expect research and development expenses to
increase as we begin Phase III clinical trials for Chronogesic(TM), continue to
hire research and development personnel, continue to develop our spinal
hydromorphone product, and research and develop other products, including
products utilizing the SBS delivery technologies.
In addition, we expect research and development expenses to continue to
increase in order to meet minimum product funding requirements under our license
agreement with ALZA. To maintain our rights under this agreement, we must spend
minimum amounts each year on product development, with the amount and duration
of funding in each field varying over time. For our two products currently in
development, we are required to fund each in the amount of at least $3.0 million
per year until the time of commercialization. Funding requirements to maintain
rights to additional products began in 2001. The future minimum annual product
funding requirements for all fields of use are as follows:
(in thousands)
-------------
Year ended December 31,
2001 $ 8,000
2002 13,000
2003 14,000
2004* 17,000
-------
Total minimum funding required $52,000
=======
- --------
* Funding requirements after 2004 are to be mutually agreed upon by us and ALZA.
Selling, General and Administrative. Selling, general and
administrative expenses increased to $2.3 million and $6.3 million for the three
and nine months ended September 30, 2001 respectively, from $1.4 million and
$3.4 million for the corresponding periods in 2000. The increase was primarily
due to an increase in general and administrative personnel and related expenses
necessary to support our growth. Selling expenses increased following the
acquisition of the ALZET product line in April 2000. As of September 30, 2001,
we had 35 general and administrative employees and 8 sales and marketing
employees compared to 16 and 5, respectively, as of the corresponding date in
2000. We expect selling, general and administrative expenses to continue to
increase as we increase the number of personnel and related resources required
to meet the obligations of a public company and support our growth.
Amortization of Intangible Assets. In connection with our acquisitions
of IntraEAR, Inc., the ALZET product line and SBS, we acquired goodwill of $4.5
million and other intangible assets of $8.3 million. Goodwill is amortized over
the estimated useful life of 6 to 10 years; other intangible assets are
amortized over their estimated useful lives, which are between 4 and 7 years.
Amortization of intangible assets increased to $555,000 and $1.3 million for the
three and nine months ended September 30, 2001, respectively, from $206,000 and
$508,000 for the corresponding periods in 2000. Amortization of intangible
assets in the three months and nine months ended September 30, 2000 resulted
from the acquisition of the ALZET product line in April 2000 and IntraEAR, Inc.
in October 1999. Amortization of intangible assets in the three months and nine
months ended September 30, 2001 resulted from the these two acquisitions and,
commencing in April 2001, from the acquisition of SBS.
The remaining goodwill and assembled workforce for these three
acquisitions at September 30, 2001 was $3.9 million and $930,000, respectively,
of which we will amortize $145,000 and $74,000, respectively, in the three
months ending December 31, 2001. In subsequent periods, goodwill and assembled
workforce will not be amortized, but will be periodically evaluated for
impairment or obsolescence. An impairment would be deemed to have occurred when
estimated undiscounted future cash flows expected to result from the use of the
asset and its eventual disposition is less than the carrying amount. Impairment,
if any, is assessed using the discounted cash flow method, which determines the
present value of the future cash flows expected to be generated from the use and
13
eventual disposition of the impaired asset. Should the intangible assets become
impaired, we may amortize them on an accelerated schedule or write them down to
their estimated fair market value. Through September 30, 2001, there have been
no such impairments.
The remaining other intangible assets for these three acquisitions at
September 30, 2001 was $5.8 million, which will be amortized as follows:
$335,000 for the three months ending December 31, 2001, $1.3 million for each of
the years ending December 31, 2002 and 2003, $1.2 million for each of the years
ending December 31, 2004 and 2005, and $393,000 for the year ending December 31,
2006. We periodically evaluate acquired other intangible assets for impairment
or obsolescence. Should the other intangible assets become impaired, we may
amortize them on an accelerated schedule or write them down to their estimated
fair market value.
Stock-Based Compensation. We have recorded aggregate deferred
compensation charges of $11.2 million in connection with stock options granted
to employees and directors, including $918,000 that we recorded at the time of
our acquisition of SBS in April 2001 for the assumption of outstanding stock
options granted to employees and directors of that company. We have amortized
$7.9 million through September 30, 2001. For the three months and nine months
ended September 30, 2001, we recorded $771,000 and $2.5 million of stock-based
compensation, respectively, compared with $1.2 million and $3.4 million for the
corresponding periods of 2000. Of these amounts, employee stock compensation
related to the following: cost of goods sold of $31,000 and $118,000 for the
three and nine months ended September 30, 2001, respectively, and $22,000 and
$43,000 for the corresponding periods in 2000; research and development expenses
of $499,000 and $1.6 million for the three and nine months ended September 30,
2001, respectively, and $860,000 and $2.3 million in the corresponding periods
in 2000; and selling, general and administrative expenses of $241,000 and
$763,000 in the three and nine months ended September 30, 2001, respectively,
and $366,000 and $1.0 million in the corresponding periods of 2000.
Non-employee stock compensation related to research and development
expenses was $4,000 and $214,000 for the three and nine months ended September
30, 2001, respectively, and $159,000 and $373,000 for the corresponding periods
of 2000. Non-employee stock compensation related to selling, general and
administrative expenses was $6,000 and $45,000 for the three months and nine
months ended September 30, 2001, respectively, and $47,000 and $237,000 for the
corresponding periods in 2000. Expenses for non-employee stock options are
recorded over the vesting period of the options, with the amount determined by
the Black-Scholes option valuation method and remeasured over the vesting term.
The remaining employee deferred stock compensation at September 30,
2001 was $3.2 million, which will be amortized as follows: $661,000 for the
three months ending December 31, 2001, $1.7 million for the year ending December
31, 2002, $724,000 for the year ending December 31, 2003, $108,000 for the year
ending December 31, 2004, $18,000 for the year ending December 31, 2005, and
$2,000 for the year ending December 31, 2006. Termination of employment of
option holders could cause stock-based compensation in future years to be less
than indicated.
Acquired in-process research and development. Acquired in-process
research and development was $0 and $14.0 million for the three and nine months
ended September 30, 2001 compared to $0 for the corresponding periods in 2000.
This charge resulted from the acquisition of SBS in April 2001. Actions and
comments from the Securities and Exchange Commission have indicated that they
are reviewing the current valuation methodology of purchased in-process
technology relating to acquisitions. The Commission is concerned that some
companies are writing off more of the value of an acquisition than is
appropriate. We believe that we are in compliance with all of the rules and
related guidance as they currently exist. However, the Commission may seek to
reduce the amount of purchased in-process technology previously expensed by us.
This would result in the restatement of previously filed financial statements of
DURECT and could have a material adverse impact on the financial results for the
periods subsequent to the acquisition.
Other Income (Expense). Interest income increased to $1.1 million and
$4.0 million for the three and nine months ended September 30, 2001,
respectively, from $495,000 and $1.3 million for the corresponding periods in
2000. The increase in interest income was primarily attributable to higher
average outstanding balances of cash and investments resulting from our initial
public offering in September 2000. We expect our interest income to decline as
our average outstanding balances of cash and investments decline; should yields
on our investments decline with interest rates in general, our interest income
will also decrease. Interest expense was $92,000 and $238,000 for the three and
nine months ended September 30, 2001, respectively, and $34,000 and $88,000 for
the corresponding periods in 2000. The increase in interest expense was
primarily due to an increase in debt obligations from equipment financings and
the assumption of $1.7 million of debt as part of our acquisition of SBS. We
expect interest expense to increase due to the structure of the payment schedule
on our equipment loan and as we record interest on the debt assumed from SBS
over an entire period.
Liquidity and Capital Resources
From inception through the time of our initial public offering in
September 2000, we raised $53.2 million, net of issuance costs, through
convertible preferred stock financings. On September 28, 2000 we raised $76.2
million, net of issuance costs, through an initial public offering of our
common stock, and in November 2000, we raised $7.8 million from the exercise in
part of our
14
underwriters' over-allotment option. At September 30, 2001, we had cash,
cash equivalents and investments totaling $88.2 million compared to $106.1
million at December 31, 2000. Working capital was $67.6 million at September 30,
2001 compared to $105.1 million at December 31, 2000.
We used $14.1 million of cash for operations for the nine months ended
September 30, 2001 and $12.1 million in the corresponding period in 2000. The
increase in cash used for operations was primarily due to an increase in net
loss, partially offset by a $14.0 non-cash charge for acquired in process
research and development.
We used $9.4 million of cash from investing activities for the nine
months ended September 30, 2001 compared to a receipt of $3.0 million for the
corresponding period in 2000. The change was primarily due to an increase in
purchases of investments as well as property, plant and equipment, offset by an
increase in proceeds from sales and maturities of investments.
We used $2.3 million of cash in financing activities for the nine
months ended September 30, 2001 compared to a receipt of $24.6 million for the
corresponding period in 2000. The decrease was primarily due to the purchase of
a restricted investment in 2001 and the receipt of proceeds from the issuance of
preferred stock and an equipment financing received in 2000.
We anticipate that cash used in operating and investing activities will
increase significantly in the future as we research, develop, and manufacture
our products, and, as discussed above, meet our product funding requirements
under our agreement with ALZA. We anticipate incurring capital expenditures of
at least $1.0 million over the next 6 months to construct, equip and validate
our DUROS manufacturing facility, and at least $2.0 million to support the
continued growth in our corporate and research and development infrastructure.
The amount and timing of these capital expenditures will depend on the success
of clinical trials for our products. Assets relating to our manufacturing
facilities will be depreciated over their estimated useful lives.
In March 2001, we signed a noncancelable operating lease for an office
facility. This lease commenced in June 2001, expires in May 2006, and has two
options to extend the lease term for up to an additional eight years. The
monthly payments under this noncancelable operating lease increase over the term
of the lease from $102,000 to $119,000.
In conjunction with our acquisition of SBS in April 2001, we assumed
the SBS Bonds with remaining principal payments of $1.7 million and current
interest rate of 6.35%, increasing each year up to 7.2% at maturity on November
1, 2009. These bonds are guaranteed and collateralized by a letter of credit of
approximately $2.5 million that the Company maintains with a local bank.
Interest payments are due semi-annually and principal payments increase from
$150,000 to $240,000 over the term of the bonds until the principal is fully
amortized in 2009. We have an option to call these bonds beginning in November
2001, which we may exercise. The call premium decreases annually from 1 1/2% if
we call the bonds in November 2001 to 0% in November 2004.
We believe that our existing cash, cash equivalents and investments will
be sufficient to finance our planned operations and capital expenditures through
at least the next 18 months. We may consume available resources more rapidly
than currently anticipated, resulting in the need for additional funding.
Accordingly, we may be required to raise additional capital through a variety of
sources, including:
. the public equity market;
. private equity financing;
. collaborative arrangements; and
. public or private debt.
There can be no assurance that additional capital will be available on
favorable terms, if at all. If adequate funds are not available, we may be
required to significantly reduce or refocus our operations or to obtain funds
through arrangements that may require us to relinquish rights to certain of our
products, technologies or potential markets, either of which could have a
material adverse effect on our business, financial condition and results of
operations. To the extent that additional capital is raised through the sale of
equity or convertible debt securities, the issuance of such securities would
result in ownership dilution to our existing stockholders.
Our cash and investments policy emphasizes liquidity and preservation
of principal over other portfolio considerations. We select investments that
maximize interest income to the extent possible given these two constraints. We
satisfy liquidity requirements by investing excess cash in securities with
different maturities to match projected cash needs and limit concentration of
credit risk by diversifying our investments among a variety of high
credit-quality issuers.
15
Factors that May Affect Future Results
In addition to the other information in this Form 10-Q, the following
factors should be considered carefully in evaluating our business and prospects:
We have not completed development of any of our pharmaceutical systems, and we
cannot be certain that our pharmaceutical systems will be able to be
commercialized
To be profitable, we must successfully research, develop, obtain regulatory
approval for, manufacture, introduce, market and distribute our pharmaceutical
systems under development. For each pharmaceutical system that we intend to
commercialize, we must successfully meet a number of critical developmental
milestones for each disease or medical condition that we target, including:
. selecting and developing drug delivery platform technology to deliver the
proper dose of drug over the desired period of time;
. selecting and developing catheter technology, if appropriate, to deliver
the drug to a specific location within the body;
. determining the appropriate drug dosage for use in the pharmaceutical
system;
. developing drug compound formulations that will be tolerated, safe and
effective and that will be compatible with the system; and
. demonstrating the drug formulation will be stable for commercially
reasonable time periods.
The time frame necessary to achieve these developmental milestones for any
individual product is long and uncertain, and we may not successfully complete
these milestones for any of our products in development. We have not yet
completed development of any pharmaceutical systems, and DURECT has limited
experience in developing such products. We have selected the drug dosages we
intend to commercialize for our lead product, Chronogesic(TM), but have not
selected the drug dosages we intend to commercialize for our second product,
DUROS hydromorphone. We have not finalized the commercial design for
Chronogesic(TM) or our second product, DUROS hydromorphone. We are continuing
testing of these products and exploring possible design changes to address
issues of safety, manufacturing efficiency and performance. We may not be able
to complete the design of these products. In addition, we may not be able to
develop dosages that will be safe and effective or compatible with the
pharmaceutical system for a commercially reasonable treatment and storage
period. If we are unable to complete development of these or other products, we
will not be able to earn revenue from them, which would materially harm our
business.
We must conduct and satisfactorily complete clinical trials for our
pharmaceutical systems
Before we can obtain government approval to sell any of our
pharmaceutical systems, we must demonstrate through preclinical (animal) studies
and clinical (human) trials that each system is safe and effective for human use
for each targeted disease. As of September 30, 2001, we have completed an
initial Phase I clinical trial using an external pump to test the safety of
continuous chronic infusion of sufentanil and a Phase II clinical trial for our
lead product, Chronogesic(TM). We are conducting pre-clinical studies on our
second product, DUROS hydromorphone. We plan to continue extensive and costly
clinical trials to assess the safety and effectiveness of Chronogesic(TM), DUROS
hydromorphone and our other potential products. We may not be permitted to begin
or continue our planned clinical trials for our potential products or, if our
trials are permitted, our potential products may not prove to be safe or produce
their intended effects. In addition, we may be required by regulatory agencies
to conduct additional animal or human studies regarding the safety and efficacy
of our products, including Chronogesic(TM), which could delay commercialization
of such products.
The length of our clinical trials will depend upon, among other
factors, the rate of trial site and patient enrollment. We may fail to obtain
adequate levels of patient enrollment in our clinical trials. Delays in planned
patient enrollment may result in increased costs, delays or termination of
clinical trials, which could have a material adverse effect on us. In addition,
even if we enroll the number of patients we expect in the time frame we expect,
our clinical trials may not provide the data necessary for their successful
completion. Additionally, we may fail to effectively oversee and monitor these
clinical trials, which would result in increased costs or delays of our clinical
trials. Even if these clinical trials are completed, we may fail to complete and
submit a new drug application as scheduled. Even if we are able to submit a new
drug application as scheduled, the Food and Drug Administration may not clear
our application in a timely manner or may deny the application entirely.
Data already obtained from preclinical studies and clinical trials of
our pharmaceutical systems do not necessarily predict the results that will be
obtained from later preclinical studies and clinical trials. Moreover,
preclinical and clinical data such as ours is susceptible to varying
interpretations, which could delay, limit or prevent regulatory approval. A
number of companies in the pharmaceutical industry have suffered significant
setbacks in advanced clinical trials, even after promising results in earlier
trials. The
16
failure to adequately demonstrate the safety and effectiveness of a product
under development could delay or prevent regulatory clearance of the potential
product, resulting in delays to the commercialization of our products,
and could materially harm our business. Our clinical trials may not demonstrate
the sufficient levels of safety and efficacy necessary to obtain the requisite
regulatory approvals for our products, and thus our products may not be approved
for marketing.
Failure to obtain product approvals or comply with ongoing governmental
regulations could delay or limit introduction of our new products and result in
failure to achieve anticipated revenues
The manufacture and marketing of our products and our research and
development activities are subject to extensive regulation for safety, efficacy
and quality by numerous government authorities in the United States and abroad.
We must obtain clearance or approval from applicable regulatory authorities
before we can market or sell our products in the U.S or abroad. Before receiving
clearance to market a product in the U.S. or in any other country, we will have
to demonstrate to the satisfaction of applicable regulatory agency that the
product is safe and effective on the patient population and for the diseases
that will be treated. Clinical trials, manufacturing and marketing of products
are subject to the rigorous testing and approval process of the FDA and
equivalent foreign regulatory authorities. The Federal Food, Drug and Cosmetic
Act and other federal, state and foreign statutes and regulations govern and
influence the testing, manufacture, labeling, advertising, distribution and
promotion of drugs and medical devices. These laws and regulations are complex
and subject to change. Furthermore, these laws and regulations may be subject to
varying interpretations, and we may not be able to predict how an applicable
regulatory body or agency may choose to interpret or apply any law or
regulation. As a result, clinical trials and regulatory approval can take a
number of years to accomplish and require the expenditure of substantial
resources. We may encounter delays or rejections based upon administrative
action or interpretations of current rules and regulations. We may also
encounter delays or rejections based upon additional government regulation from
future legislation, administrative action or changes in FDA policy during the
period of product development, clinical trials and FDA regulatory review. We may
encounter similar delays in foreign countries. Sales of our products outside the
U.S. are subject to foreign regulatory approvals that vary from country to
country. The time required to obtain approvals from foreign countries may be
shorter or longer than that required for FDA approval, and requirements for
foreign licensing may differ from FDA requirements. We may be unable to obtain
requisite approvals from the FDA and foreign regulatory authorities, and even if
obtained, such approvals may not be on a timely basis, or they may not cover the
clinical uses that we specify. If we fail to obtain timely clearance or approval
for our products, we will not be able to market and sell our products, which
will limit our ability to generate revenue.
In addition, data obtained from clinical trials are susceptible to
varying interpretations, which could delay, limit or prevent regulatory
clearances. As of September 30, 2001, we have completed an initial Phase I
clinical trial using an external pump to test the safety of continuous chronic
infusion of sufentanil and a Phase II clinical trial for our Chronogesic(TM)
product, but have not begun our Phase III trial of this product, or initiated
clinical trials for any other products. We are currently conducting prelinical
studies on our second product, DUROS hydromorphone.
Marketing or promoting a drug for an unapproved use is subject to very
strict controls. Furthermore, clearance may entail ongoing requirements for
post-marketing studies. The manufacture and marketing of drugs are subject to
continuing FDA and foreign regulatory review and requirements that we update our
regulatory filings. Later discovery of previously unknown problems with a
product, manufacturer or facility, or our failure to update regulatory files,
may result in restrictions, including withdrawal of the product from the market.
Any of the following events, if they were to occur, could delay or preclude us
from further developing, marketing or realizing full commercial use of our
products, which in turn would materially harm our business, financial condition
and results of operations:
. failure to obtain or maintain requisite governmental approvals;
. failure to obtain approvals for clinically intended uses of our
products under development; or
. identification of serious and unanticipated adverse side effects in
our products under development.
Manufacturers of drugs also must comply with the applicable FDA good
manufacturing practice regulations, which include production design controls,
testing, quality control and quality assurance requirements as well as the
corresponding maintenance of records and documentation. Compliance with current
good manufacturing practices regulations is difficult and costly. Manufacturing
facilities are subject to ongoing periodic inspection by the FDA and
corresponding state agencies, including unannounced inspections, and must be
licensed before they can be used for the commercial manufacture of our products.
We or our present or future suppliers may be unable to comply with the
applicable good manufacturing practice regulations and other FDA regulatory
requirements. We have not been subject to a good manufacturing regulation
inspection by the FDA relating to our pharmaceutical systems. If we do not
achieve compliance for the products we manufacture, the FDA may withdraw
marketing clearance or require product recall, which may cause interruptions or
delays in the manufacture and sale of our products.
We may not be able to manufacture sufficient quantities of our products to
support our clinical and commercial requirements at an
17
acceptable cost, and we have limited manufacturing experience
We must manufacture our products in clinical and commercial quantities,
either directly or through third parties, in compliance with regulatory
requirements and at an acceptable cost. We have not yet completed development of
the manufacturing process for any of our pharmaceutical systems, and DURECT has
limited experience in developing such manufacturing processes. We are still
optimizing our manufacturing process and exploring possible changes to increase
efficiencies and lower costs. If we fail to develop manufacturing processes to
permit us to manufacture our pharmaceutical systems at an acceptable cost, then
we may not be able to commercialize our pharmaceutical systems.
To date, we do not own manufacturing facilities capable of supplying
clinical and commercial quantities of our products. Our current manufacturing
facilities are only capable of manufacturing sub-assemblies of our DUROS-based
pharmaceutical systems and cannot perform the final fill steps of our
manufacturing process. We completed construction of a manufacturing facility for
your DUROS-based pharmaceutical systems in May 2001 in accordance with our
initial plans, and we anticipate that this facility, once it is ready for
production, will be capable of manufacturing supplies for our Phase III clinical
trial and commercial launch of our Chronogesic(TM) product and for clinical
trials of our DUROS hydromorphone product as well as other products on a pilot
scale. However, in order for the facility to be ready to produce clinical and
anticipated commercial supplies of our products, we must still do work to ensure
that the facility is compatible with the manufacturing process for our DUROS
systems and meets all applicable regulatory standards, and we must complete
validation and qualification of our facility. The manufacture of our DUROS-based
pharmaceutical systems is a complex process, and federal, state and foreign
regulatory standards relating to manufacture of pharmaceutical products are
rigorous, complex and subject to varying interpretations. We may need to alter
our facility design, install additional equipment or do additional construction
or testing in order to adapt our facility to our current DUROS manufacturing
process, meet regulatory requirements, optimize the production process, increase
efficiencies or production capacity or for other reasons, which may result in
additional cost to us or delay production of product needed for our clinical
trials and commercial launch. We have commenced validating and qualifying the
manufacturing facility but have not completed these processes. DURECT has no
experience validating and qualifying manufacturing facilities. Furthermore, our
new facility will be subject to government audits to determine compliance with
good manufacturing practices regulations, and we may be unable to attain and
maintain compliance with these regulations. If we are unable to ready our
manufacturing facility for production in a timely manner or at an acceptable
cost and attain and maintain compliance with applicable regulations, we could
experience a delay in our clinical trials and the commercial sale of our
DUROS-based pharmaceutical systems. We may also be required or choose to
subcontract with third party contractors to perform the final manufacturing
steps of our DUROS-based pharmaceutical systems in which case we will be subject
to the schedule, expertise and performance of third parties as well as incur
significant additional costs. See "We rely heavily on third parties to support
development, clinical testing and manufacturing of our products." Under our
development and commercialization agreement with ALZA, we cannot subcontract the
manufacture of subassemblies of the DUROS system without approval from ALZA. If
we cannot manufacture product in time to meet our clinical or commercial
requirements or at an acceptable cost, our operating results will be harmed.
In April 2000, we acquired the ALZET product and related assets from
ALZA. We manufacture subassemblies of the ALZET product at our Vacaville
facility. We currently rely on ALZA to perform the coating process for the
manufacture of the ALZET product, but we will be required to perform this
process ourselves starting April 2003. We have limited experience manufacturing
this product, and we may not be able to successfully or consistently manufacture
this product at an acceptable cost, if at all.
Our agreement with ALZA limits our fields of operation for our DUROS-based
pharmaceutical systems, requires us to spend significant funds on product
development and gives ALZA a first right to distribute selected products
for us, including Chronogesic(TM)
In April 1998, we entered into a development and commercialization
agreement with ALZA Corporation, which was amended and restated in April 1999
and April 2000. ALZA was acquired by Johnson & Johnson in June 2001 and has
since operated as a wholly owned subsidiary. This agreement gives us exclusive
rights to develop, commercialize and manufacture products using ALZA's DUROS
technology to deliver by catheter:
. drugs to the central nervous system to treat select nervous system
disorders;
. drugs to the middle and inner ear;
. drugs to the pericardial sac of the heart; and
. select drugs into vascular grafts.
We also have the right to use the DUROS technology to deliver
systemically and by catheter:
18
. sufentanil to treat chronic pain; and
. select cancer antigens.
We may not develop, manufacture or commercialize DUROS-based
pharmaceutical systems outside of these specific fields without ALZA's prior
approval. In addition, if we develop or commercialize any drug delivery
technology for use in a manner similar to the DUROS technology in a field
covered in our license agreement with ALZA, then we may lose our exclusive
rights to use the DUROS technology in such field as well as the right to develop
new products using DUROS technology in such field. Furthermore, to maintain our
rights under this license agreement, we must meet annual minimum development
spending requirements totaling $52.0 million to develop products in some or all
of these fields through 2004 and fund development of a minimum number of
products per year up to a total of eight products through 2004. In order to
maintain commercialization rights for our products in the U.S. and any foreign
countries, we must diligently develop our products, procure required regulatory
approvals and commercialize the products in these countries. If we fail to meet
the various diligence requirements, we may:
. lose our rights to develop, commercialize and manufacture some of our
DUROS-based pharmaceutical systems;
. lose rights for products in some or all countries, including the U.S.;
or
. lose rights in some fields of use.
These rights would revert to ALZA, which could then develop DUROS-based
pharmaceutical products in such countries or fields of use itself or license
others to do so. In addition, in the event that our rights terminate with
respect to any product or country, or this agreement terminates or expires in
its entirety (except for termination by us due to a breach by ALZA), ALZA will
have the exclusive right to use all of our data, rights and information relating
to the products developed under the agreement as necessary for ALZA to
commercialize these products, subject to the payment of a royalty to us based on
the net sales of the products by ALZA.
Our agreement with ALZA gives us the right to develop and manufacture the
DUROS pump component of our pharmaceutical systems in the fields described
above. In the event of a change in our corporate control, including an
acquisition of us, our right to manufacture and develop the DUROS pump would
terminate and ALZA would have the right to manufacture and develop DUROS systems
for us so long as ALZA can meet our specification and supply requirements
following such change in control.
Under the ALZA agreement, we must pay ALZA royalties on sales of DUROS-
based pharmaceutical systems we commercialize and a percentage of any up-front
license fees, milestone or special fees, payments or other consideration we
receive, excluding research and development funding. In addition, commencing
upon the commercial sale of a product developed under the agreement, we are
obligated to make minimum product payments to ALZA on a quarterly basis based on
our good faith projections of our net product sales of the product. These
minimum payments will be fully credited against the product royalty payments we
must pay to ALZA.
ALZA also has an exclusive option to distribute our Chronogesic(TM)
product in the U.S. and Canada and any DUROS-based pharmaceutical system we
develop to deliver non-proprietary cancer antigens worldwide. The terms of any
distribution arrangement have not been set and are to be negotiated in good
faith between ALZA and ourselves. If ALZA chooses not to exercise its option to
distribute our Chronogesic(TM) product, this may be interpreted as a negative
factor, resulting in a decline in our stock price. ALZA's option to acquire
distribution rights limits our ability to negotiate with other distributors for
these products and may result in lower payments to us than if these rights were
subject to competitive negotiations. We must allow ALZA an opportunity to
negotiate in good faith for commercialization rights to our products developed
under the agreement prior to granting these rights to a third party. These
rights do not apply to products that are subject to ALZA's option or products
for which we have obtained funding or access to a proprietary drug from a third
party to whom we have granted commercialization rights prior to the commencement
of human clinical trials.
ALZA has the right to terminate the agreement in the event that we breach
a material obligation under the agreement and do not cure the breach in a timely
manner. In addition, ALZA has the right to terminate the agreement if, at any
time prior to July 2002, we solicit for employment or hire, without ALZA's
consent, a person who is or within the previous 180 days has been an employee of
ALZA, or if at any time prior to July 2006, we solicit for employment or hire,
without ALZA's consent, a person who is or within the previous 180 days has been
an employee of ALZA in the DUROS technology group.
Technologies and businesses which we have acquired may be difficult to
integrate, disrupt our business, dilute stockholder value or divert management
attention. We may also acquire additional businesses or technologies in the
future, which could have these same effects
We may acquire technologies, products or businesses to broaden the
scope of our existing and planned product lines and
19
technologies. For example, in October 1999, we acquired substantially all of the
assets of IntraEAR, Inc., in April 2000 we acquired the ALZET product and
related assets from ALZA and in April 2001, we completed the acquisition of SBS.
These and our future acquisitions expose us to:
. increased costs associated with the acquisition and operation of
the new businesses or technologies and the management of
geographically dispersed operations;
. the risks associated with the assimilation of new technologies,
operations, sites and personnel;
. the diversion of resources from our existing business and
technologies;
. the inability to generate revenues to offset associated acquisition
costs;
. the requirement to maintain uniform standards, controls, and
procedures; and
. the impairment of relationships with employees and customers as a
result of any integration of new management personnel.
Acquisitions may also result in the issuance of dilutive equity
securities, the incurrence or assumption of debt or additional expenses
associated with the amortization of acquired intangible assets or potential
businesses. Past acquisitions, such as our acquisitions of IntraEAR, ALZET and
SBS, as well future acquisitions, may not generate any additional revenue or
provide any benefit to our business.
Our products contain controlled substances, the making, use, sale, importation
and distribution of which are subject to regulation by state, federal and
foreign law enforcement and other regulatory agencies
Our products currently under development contain, and our products in
the future may contain, controlled substances which are subject to state,
federal and foreign laws and regulations regarding their manufacture, use, sale,
importation and distribution. Our first two products under development contain
opioids which are classified as Schedule II controlled substances under the
regulations of the U.S. Drug Enforcement Agency. For our products containing
controlled substances, we and our suppliers, manufacturers, contractors,
customers and distributors are required to obtain and maintain applicable
registrations from state, federal and foreign law enforcement and regulatory
agencies and comply with state, federal and foreign laws and regulations
regarding the manufacture, use, sale, importation and distribution of controlled
substances. These regulations are extensive and include regulations governing
manufacturing, labeling, packaging, testing, dispensing, production and
procurement quotas, record keeping, reporting, handling, shipment and disposal.
Failure to obtain and maintain required registrations or comply with any
applicable regulations could delay or preclude us from developing and
commercializing our products containing controlled substances and subject us to
enforcement action. In addition, because of their restrictive nature, these
regulations could limit our commercialization of our products containing
controlled substances.
Our limited operating history makes evaluating our stock difficult
Investors can only evaluate our business based on a limited operating
history. We were incorporated in February 1998 and have engaged primarily in
research and development, licensing technology, raising capital and recruiting
scientific and management personnel. This short history may not be adequate to
enable investors to fully assess our ability to successfully develop our
products, achieve market acceptance of our products and respond to competition.
Acceptance of our products in the marketplace is uncertain, and failure to
achieve market acceptance will delay our ability to generate or grow revenues
Our future financial performance will depend upon the successful
introduction and customer acceptance of our future products, including
Chronogesic(TM). Even if approved for marketing, our products may not achieve
market acceptance. The degree of market acceptance will depend upon a number of
factors, including:
. the receipt of regulatory clearance of marketing claims for the uses
that we are developing;
. the establishment and demonstration in the medical community of the
safety and clinical efficacy of our products and their potential
advantages over existing therapeutic products, including oral
medication, transdermal drug delivery products such as drug patches,
or external or implantable drug delivery products; and
. pricing and reimbursement policies of government and third-party
payors such as insurance companies, health maintenance organizations
and other health plan administrators.
20
Physicians, patients, payors or the medical community in general may be
unwilling to accept, utilize or recommend any of our products. If we are unable
to obtain regulatory approval, commercialize and market our future products when
planned and achieve market acceptance, we will not achieve anticipated revenues.
If users of our products are unable to obtain adequate reimbursement from third-
party payors, or if new restrictive legislation is adopted, market acceptance of
our products may be limited and we may not achieve anticipated revenues
The continuing efforts of government and insurance companies, health
maintenance organizations and other payors of healthcare costs to contain or
reduce costs of health care may affect our future revenues and profitability,
and the future revenues and profitability of our potential customers, suppliers
and collaborative partners and the availability of capital. For example, in
certain foreign markets, pricing or profitability of prescription
pharmaceuticals is subject to government control. In the United States, recent
federal and state government initiatives have been directed at lowering the
total cost of health care, and the U.S. Congress and state legislatures will
likely continue to focus on health care reform, the cost of prescription
pharmaceuticals and on the reform of the Medicare and Medicaid systems. While we
cannot predict whether any such legislative or regulatory proposals will be
adopted, the announcement or adoption of such proposals could materially harm
our business, financial condition and results of operations.
Our ability to commercialize our products successfully will depend in
part on the extent to which appropriate reimbursement levels for the cost of our
products and related treatment are obtained by governmental authorities, private
health insurers and other organizations, such as HMOs. Third-party payors are
increasingly limiting payments or reimbursement for medical products and
services. Also, the trend toward managed health care in the United States and
the concurrent growth of organizations such as HMOs, which could control or
significantly influence the purchase of health care services and products, as
well as legislative proposals to reform health care or reduce government
insurance programs, may limit reimbursement or payment for our products. The
cost containment measures that health care payors and providers are instituting
and the effect of any health care reform could materially harm our ability to
operate profitably.
We have a history of operating losses, expect to continue to have losses in the
future and may never achieve or maintain profitability
We have incurred significant operating losses since our inception in
1998 and, as of September 30, 2001, had an accumulated deficit of approximately
$66.3 million. We expect to continue to incur significant operating losses over
the next several years as we continue to incur increasing costs for research and
development, clinical trials and manufacturing. Our ability to achieve
profitability depends upon our ability, alone or with others, to successfully
complete the development of our proposed products, obtain the required
regulatory clearances and manufacture and market our proposed products.
Development of pharmaceutical systems is costly and requires significant
investment. In addition, we may choose to license either additional drug
delivery platform technology or rights to particular drugs for use in our
pharmaceutical systems. The license fees for these technologies or rights would
increase the costs of our pharmaceutical systems.
To date, we have not generated significant revenue from the commercial
sale of our products and do not expect to receive significant revenue in the
near future. All revenues to date are from the sale of products we acquired in
October 1999 in connection with the acquisition of substantially all of the
assets of IntraEAR, Inc., the ALZET product we acquired in April 2000 from ALZA
and the sale of biodegradable polymers and contract research and development
revenues from our SBS subsidiary. We do not expect these revenues to increase
significantly in future periods. We do not anticipate commercialization and
marketing of our products in development in the near future, and therefore do
not expect to generate sufficient revenues to cover expenses or achieve
profitability in the near future.
We do not control ALZA's ability to develop and commercialize DUROS technology
outside of fields licensed to us, and problems encountered by ALZA could result
in negative publicity, loss of sales and delays in market acceptance of our
DUROS-based pharmaceutical systems
ALZA retains complete rights to the DUROS technology for fields outside
the specific fields licensed to us. Accordingly, ALZA may develop and
commercialize DUROS-based products or license others to do so, so long as there
is no conflict with the rights granted to us. ALZA recently received FDA
approval to market its first DUROS-based product, Viadur (leuprolide acetate
implants) for the palliative treatment of advanced prostate cancer. If ALZA
fails to commercialize this product successfully, or encounters problems
associated with this product, negative publicity could be created about all
DUROS-based products, which could result in harm to our reputation and cause
reduced sales of our products. In addition, if any third-party that may be
licensed by ALZA fails to develop and commercialize DUROS-based products
successfully, the success of all DUROS-based systems could be impeded, including
ours, resulting in delay or loss of revenue or damage to our reputation, any one
of which could harm our business.
We do not own the trademark "DUROS" and any competitive advantage we derive from
the name may be impaired by third-party use
21
ALZA owns the trademark "DUROS." Because ALZA is also developing and
marketing DUROS-based systems, and may license third parties to do so, there may
be confusion in the market between ALZA, its potential licensees and us, and
this confusion could impair the competitive advantage, if any, we derive from
use of the DUROS name. In addition, any actions taken by ALZA or its potential
licensees that negatively impact the trademark "DUROS" could negatively impact
our reputation and result in reduced sales of our DUROS-based pharmaceutical
systems.
We may be sued by third parties which claim that our products infringe on their
intellectual property rights, particularly because there is substantial
uncertainty about the validity and breadth of medical patents
We may be exposed to future litigation by third parties based on claims
that our products or activities infringe the intellectual property rights of
others or that we have misappropriated the trade secrets of others. This risk is
exacerbated by the fact that the validity and breadth of claims covered in
medical technology patents and the breadth and scope of trade secret protection
involve complex legal and factual questions for which important legal principles
are unresolved. Any litigation or claims against us, whether or not valid, could
result in substantial costs, could place a significant strain on our financial
resources and could harm our reputation. In addition, intellectual property
litigation or claims could force us to do one or more of the following:
. cease selling, incorporating or using any of our products that
incorporate the challenged intellectual property, which would
adversely affect our revenue;
. obtain a license from the holder of the infringed intellectual
property right, which license may be costly or may not be available
on reasonable terms, if at all; or
. redesign our products, which would be costly and time-consuming.
If we are unable to adequately protect or enforce our intellectual property
rights or secure rights to third-party patents, we may lose valuable assets,
experience reduced market share or incur costly litigation to protect our rights
Our success will depend in part on our ability to obtain patents,
maintain trade secret protection and operate without infringing the proprietary
rights of others. As of September 30, 2001, we held four issued U.S. patents and
one issued foreign patent. In addition, we have 24 pending U.S. patent
applications and have filed 13 patent applications under the Patent Cooperation
Treaty, from which 14 national phase applications are currently pending in
Europe, Australia and Canada. As of September 30, 2001, our subsidiary SBS held
4 issued U.S. patents, 1 issued foreign patent and 5 pending U.S. patent
applications and has filed 6 patent applications under the Patent Cooperation
Treaty. To maintain the license rights to ALZA intellectual property granted to
us under our development and commercialization agreement with ALZA, we must meet
annual minimum development spending requirements and fund development of a
minimum number of products. If we do not meet these diligence requirements, we
may lose rights to one or more of our licensed fields. Also, under our agreement
with ALZA, we must assign to ALZA any intellectual property rights relating to
the DUROS system and its manufacture and any combination of the DUROS system
with other components, active agents, features or processes. In addition, ALZA
retains the right to enforce and defend against infringement actions relating to
the DUROS system, and if ALZA exercises these rights, it will be entitled to the
proceeds of these infringement actions.
The patent positions of pharmaceutical companies, including ours, are
uncertain and involve complex legal and factual questions. In addition, the
coverage claimed in a patent application can be significantly reduced before the
patent is issued. Consequently, our patent applications or those of ALZA that
are licensed to us may not issue into patents, and any issued patents may not
provide protection against competitive technologies or may be held invalid if
challenged or circumvented. Our competitors may also independently develop
products similar to ours or design around or otherwise circumvent patents issued
to us or licensed by us. In addition, the laws of some foreign countries may not
protect our proprietary rights to the same extent as U.S. law.
We also rely upon trade secrets, technical know-how and continuing
technological innovation to develop and maintain our competitive position. We
require our employees, consultants, advisors and collaborators to execute
appropriate confidentiality and assignment-of-inventions agreements with us.
These agreements typically provide that all materials and confidential
information developed or made known to the individual during the course of the
individual's relationship with us is to be kept confidential and not disclosed
to third parties except in specific circumstances, and that all inventions
arising out of the individual's relationship with us shall be our exclusive
property. These agreements may be breached, and in some instances, we may not
have an appropriate remedy available for breach of the agreements. Furthermore,
our competitors may independently develop substantially equivalent proprietary
information and techniques, reverse engineer our information and techniques, or
otherwise gain access to our proprietary technology.
We may be unable to meaningfully protect our rights in trade secrets,
technical know-how and other non-patented technology. We may have to resort to
litigation to protect our intellectual property rights, or to determine their
scope, validity or enforceability. Enforcing or defending our proprietary rights
is expensive, could cause diversion of our resources and may not prove
successful. Any failure to enforce or protect our rights could cause us to lose
the ability to exclude others from using our technology to develop or sell
competing products.
22
We rely heavily on third parties to support development, clinical testing and
manufacturing of our products
We rely on third party contract research organizations, service
providers and suppliers to provide critical services to support development,
clinical testing, and manufacturing of our pharmaceutical systems. For example,
we currently depend on MDS Pharma, Inc. to perform blood plasma assays in
connection with our clinical trials for Chronogesic(TM), Nelson Laboratories,
Inc. to perform quality control services related to components of our
DUROS-based pharmaceutical systems, and Da / Pro Rubber Inc. to supply us with
molded rubber components of our DUROS-based pharmaceutical systems. In the past,
we relied on Chesapeake Biological Labs, Inc. to perform the final manufacturing
steps of our Chronogesic(TM) product, and we may need to rely on a third party
manufacturer again if we encounter delays in readying our manufacturing facility
for production. See "We may not be able to manufacture sufficient quantities of
our products to support our clinical and commercial requirements at an
acceptable cost, and we have limited manufacturing experience." We anticipate
that we will continue to rely on these and other third party contractors to
support development, clinical testing, and manufacturing of our pharmaceutical
systems. Failure of these contractors to provide the required services in a
timely manner or on reasonable commercial terms could materially delay the
development and approval of our products, increase our expenses and materially
harm our business, financial condition and results of operations.
Key components of our DUROS-based pharmaceutical systems are provided by limited
numbers of suppliers, and supply shortages or loss of these suppliers could
result in interruptions in supply or increased costs
Certain components and drug substances used in our DUROS-based
pharmaceutical systems are currently purchased from a single or a limited number
of outside sources. The reliance on a sole or limited number of suppliers could
result in:
. delays associated with redesigning a product due to a failure to
obtain a single source component;
. an inability to obtain an adequate supply of required components; and
. reduced control over pricing, quality and time delivery.
We have a supply agreement with Mallinckrodt, Inc. for our sufentanil
requirements for our Chronogesic(TM) product, which expires in September 2004.
Additionally, we have a supply agreement with RMS Company under which RMS has
agreed to supply us with titanium components of our DUROS-based pharmaceutical
systems until April 2004. Other that these agreements, we do not have long-term
agreements with any of our suppliers, and therefore the supply of a particular
component could be terminated at any time without penalty to the supplier. Any
interruption in the supply of single source components could cause us to seek
alternative sources of supply or manufacture these components internally. If the
supply of any components for our pharmaceutical systems is interrupted,
components from alternative suppliers may not be available in sufficient volumes
within required timeframes, if at all, to meet our needs. This could delay our
ability to complete clinical trials and obtain approval for commercialization
and marketing of our products, causing us to lose sales, incur additional costs
and delay new product introductions and could harm our reputation.
We lack marketing, sales and distribution experience for pharmaceutical systems
and we may not be able to sell our products if we do not enter into
relationships with third parties or develop a direct sales organization
We have yet to establish marketing, sales or distribution capabilities
for our pharmaceutical systems. We intend to enter into agreements with third
parties to sell our products or to develop our own sales and marketing force. We
may be unable to establish or maintain third-party relationships on a
commercially reasonable basis, if at all. In addition, these third parties may
have similar or more established relationships with our competitors.
If we do not enter into relationships with third parties for the sales
and marketing of our products, we will need to develop our own sales and
marketing capabilities. DURECT has only limited experience in developing,
training or managing a sales force. If we choose to establish a direct sales
force, we will incur substantial additional expenses in developing, training and
managing such an organization. We may be unable to build a sales force, the cost
of establishing such a sales force may exceed our product revenues, or our
direct marketing and sales efforts may be unsuccessful. In addition, we compete
with many other companies that currently have extensive and well- funded
marketing and sales operations. Our marketing and sales efforts may be unable to
compete successfully against these other companies. We may be unable to
establish a sufficient sales and marketing organization on a timely basis, if at
all. We may be unable to engage qualified distributors. Even if engaged, these
distributors may:
. fail to satisfy financial or contractual obligations to us;
23
. fail to adequately market our products;
. cease operations with little or no notice to us; or
. offer, design, manufacture or promote competing product lines.
If we fail to develop sales, marketing and distribution channels, we
would experience delays in product sales and incur increased costs, which would
harm our financial results.
If we are unable to train physicians to use our pharmaceutical systems to treat
patients' diseases or medical conditions, we may incur delays in market
acceptance of our products
Broad use of our pharmaceutical systems will require extensive training
of numerous physicians. The time required to begin and complete training of
physicians could delay introduction of our products and adversely affect market
acceptance of our products. We may be unable to rapidly train physicians in
numbers sufficient to generate adequate demand for our pharmaceutical systems.
Any delay in training would materially delay the demand for our systems. In
addition, we may expend significant funds towards such training before any
orders are placed for our products.
Investors may experience substantial dilution of their investment
In the past, we have issued options to acquire common stock at prices
below the initial public offering price. To the extent these outstanding options
are ultimately exercised, there will be dilution to investors.
In connection with our acquisition of SBS we issued 1,355,235 shares of
common stock, and agreed to issue up to 720,161 additional shares of common
stock upon the exercise of outstanding SBS options and warrants, in exchange for
all of SBS's outstanding equity interests, and assumed SBS's liabilities,
including $1.7 million in debt. At the time of the registration of these shares
with the Securities and Exchange Commission, which is expected to be in the
fourth quarter of 2001, we may be required to issue additional shares of common
stock to former SBS shareholders, as well as reserve additional shares for
issuance upon the exercise of outstanding SBS options and warrants, depending on
our stock price at that time. Up to 4,150,854 additional shares may be issued
and reserved for issuance upon the exercise of outstanding SBS options and
warrants. The maximum total number of shares issued and shares reserved for
issuance upon the exercise of outstanding SBS options and warrants in connection
with our acquisition of SBS will be determined by dividing $24.9 million by the
greater of $4.00 or the average closing sale price of the Company's stock during
a specified time period preceding the registration of shares, subject to certain
conditions. If we are obligated to issue additional shares to the former SBS
shareholders and reserve additional shares for issuance upon the exercise of
outstanding SBS options and warrants, there will be additional dilution to our
investors. Further information regarding the SBS acquisition is included in the
company's current Report on Form 8-K filed with the SEC on May 15, 2001.
We may have difficulty raising needed capital in the future
Our business currently does not generate sufficient revenues to meet
our capital requirements and we do not expect that it will do so in the near
future. We have expended and will continue to expend substantial funds to
complete the research, development and clinical testing of our products. We will
require additional funds for these purposes, to establish additional clinical-
and commercial-scale manufacturing arrangements and facilities and to provide
for the marketing and distribution of our products. Additional funds may not be
available on acceptable terms, if at all. If adequate funds are unavailable from
operations or additional sources of financing, we may have to delay, reduce the
scope of or eliminate one or more of our research or development programs which
would materially harm our business, financial condition and results of
operations.
We believe that our cash, cash equivalents and investments, will be
adequate to satisfy our capital needs for at least the next 18 months. However,
our actual capital requirements will depend on many factors, including:
. continued progress and cost of our research and development
programs;
. progress with preclinical studies and clinical trials;
. the time and costs involved in obtaining regulatory clearance;
. costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims;
. costs of developing sales, marketing and distribution channels and
our ability to sell our products;
24
. costs involved in establishing manufacturing capabilities for
commercial quantities of our products;
. competing technological and market developments;
. market acceptance of our products; and
. costs for recruiting and retaining employees and consultants.
We may consume available resources more rapidly than currently
anticipated, resulting in the need for additional funding. We may seek to raise
any necessary additional funds through equity or debt financings, collaborative
arrangements with corporate partners or other sources, which may be dilutive to
existing stockholders. In addition, in the event that additional funds are
obtained through arrangements with collaborative partners or other sources, we
may have to relinquish rights to some of our technologies, product candidates or
products under development that we would otherwise seek to develop or
commercialize ourselves. If adequate funds are not available, we may be required
to significantly reduce or refocus our product development efforts, or
relinquish to ALZA rights to develop DUROS products in certain fields, resulting
in loss of sales, increased costs, and reduced revenues.
Future deferred compensation expenses and non-cash charges may adversely impact
or delay our profitability
To date, we have recorded deferred compensation expenses related to
stock options grants, including stock options assumed in our acquisition of SBS,
which will be amortized as follows: $661,000 for the three months ending
December 31, 2001, $1.7 million for the year ending December 31, 2002, $724,000
for the year ending December 31, 2003, $108,000 for the year ending December 31,
2004, $18,000 for the year ending December 31, 2005, and $2,000 for the year
ending December 31, 2006. In addition, deferred compensation expense related to
option awards to non-employees will be calculated during the vesting period of
the option based on the then-current price of our common stock, which could
result in significant charges that adversely impact or delay our profitability.
Furthermore, we have issued a warrant to ALZA with a value of approximately $6.5
million, which will be amortized over time based on sales of our products and
which will also adversely impact or delay our profitability.
We depend upon key personnel who may terminate their employment with us at any
time, and we need to hire additional qualified personnel
Our success will depend to a significant degree upon the continued
services of key management, technical, and scientific personnel, including Felix
Theeuwes, our Chairman and Chief Scientific Officer, James E. Brown, our
President and Chief Executive Officer and Thomas A. Schreck, our Chief Financial
Officer. Although we have obtained key man life insurance policies for each of
Messrs. Theeuwes, Brown and Schreck in the amount of $1 million, this insurance
may not adequately compensate us for the loss of their services. In addition,
our success will depend on our ability to attract and retain other highly
skilled personnel. Competition for qualified personnel is intense, and the
process of hiring and integrating such qualified personnel is often lengthy. We
may be unable to recruit such personnel on a timely basis, if at all. Our
management and other employees may voluntarily terminate their employment with
us at any time. The loss of the services of key personnel, or the inability to
attract and retain additional qualified personnel, could result in delays to
product development or approval, loss of sales and diversion of management
resources.
We may not successfully manage our growth
Our success will depend on the expansion of our operations and the
effective management of growth, which will place a significant strain on our
management and on our administrative, operational and financial resources. To
manage such growth, we must expand our facilities, augment our operational,
financial and management systems and hire and train additional qualified
personnel. If we are unable to manage growth effectively our business would be
harmed.
The market for our products is new, rapidly changing and competitive, and new
products or technologies developed by others could impair our ability to grow
our business and remain competitive
The pharmaceutical industry is subject to rapid and substantial
technological change. Developments by others may render our products under
development or technologies noncompetitive or obsolete, or we may be unable to
keep pace with technological developments or other market factors. Technological
competition in the industry from pharmaceutical and biotechnology companies,
universities, governmental entities and others diversifying into the field is
intense and is expected to increase. Many of these entities have significantly
greater research and development capabilities than we do, as well as
substantially more marketing, manufacturing, financial and managerial resources.
These entities represent significant competition for us. Acquisitions of, or
investments in, competing pharmaceutical or biotechnology companies by large
corporations could increase such competitors' financial, marketing,
manufacturing and other resources.
We are a new enterprise and are engaged in the development of novel
therapeutic technologies. As a result, our resources are
25
limited and we may experience technical challenges inherent in such novel
technologies. Competitors have developed or are in the process of developing
technologies that are, or in the future may be, the basis for competitive
products. Some of these products may have an entirely different approach or
means of accomplishing similar therapeutic effects than our products. Our
competitors may develop products that are safer, more effective or less costly
than our products and, therefore, present a serious competitive threat to our
product offerings.
The widespread acceptance of therapies that are alternatives to ours may
limit market acceptance of our products even if commercialized. Chronic pain can
also be treated by oral medication, transdermal drug delivery systems, such as
drug patches, or with other implantable drug delivery devices. These treatments
are widely accepted in the medical community and have a long history of use. The
established use of these competitive products may limit the potential for our
products to receive widespread acceptance if commercialized.
We could be exposed to significant product liability claims which could be time
consuming and costly to defend, divert management attention and adversely impact
our ability to obtain and maintain insurance coverage
The testing, manufacture, marketing and sale of our products involve an
inherent risk that product liability claims will be asserted against us.
Although we are insured against such risks up to a $5 million annual aggregate
limit in connection with clinical trials and commercial sales of our products,
our present product liability insurance may be inadequate and may not fully
cover the costs of any claim or any ultimate damages we might be required to
pay. Product liability claims or other claims related to our products,
regardless of their outcome, could require us to spend significant time and
money in litigation or to pay significant damages. Any successful product
liability claim may prevent us from obtaining adequate product liability
insurance in the future on commercially desirable or reasonable terms. In
addition, product liability coverage may cease to be available in sufficient
amounts or at an acceptable cost. An inability to obtain sufficient insurance
coverage at an acceptable cost or otherwise to protect against potential product
liability claims could prevent or inhibit the commercialization of our
pharmaceutical systems. A product liability claim could also significantly harm
our reputation and delay market acceptance of our products.
Our business involves environmental risks and risks related to handling
regulated substances
In connection with our research and development activities and our
manufacture of materials and products, we are subject to federal, state and
local laws, rules, regulations and policies governing the use, generation,
manufacture, storage, air emission, effluent discharge, handling and disposal of
certain materials, biological specimens and wastes. Although we believe that we
have complied with the applicable laws, regulations and policies in all material
respects and have not been required to correct any material noncompliance, we
may be required to incur significant costs to comply with environmental and
health and safety regulations in the future. Our research and development
involves the use, generation and disposal of hazardous materials, including but
not limited to certain hazardous chemicals, solvents, agents and biohazardous
materials. The extent of our use, generation and disposal of such substances has
increased substantially since our acquisition of SBS, which, through its
subsidiary Birmingham Polymers, Inc., is engaged in the business of
manufacturing and selling biodegradable polymers. Although we believe that our
safety procedures for storing, handling and disposing of such materials comply
with the standards prescribed by state and federal regulations, we cannot
completely eliminate the risk of accidental contamination or injury from these
materials. We currently contract with third parties to dispose of these
substances generated by us, and we rely on these third parties to properly
dispose of these substances in compliance with applicable laws and regulations.
If these third parties do not properly dispose of these substance in compliance
with applicable laws and regulations, we may be subject to legal action by
governmental agencies or private parties for improper disposal of these
substances. The costs of defending such actions and the potential liability
resulting from such actions are often very large. In the event we are subject to
such legal action or we otherwise fail to comply with applicable laws and
regulations governing the use, generation and disposal of hazardous materials
and chemicals, we could be held liable for any damages that result, and any such
liability could exceed our resources.
Our stock price may fluctuate, and your investment in our stock could decline in
value
The average daily trading volume of our common stock for the nine months
ending September 30, 2001, was 123,795 shares. The limited trading volume of our
stock may contribute to its volatility, and an active trading market in our
stock might not develop or continue. The market price of our common stock may
fluctuate significantly in response to factors which are beyond our control. The
stock market in general has recently experienced extreme price and volume
fluctuations. In addition, the market prices of securities of technology and
pharmaceutical companies have also been extremely volatile, and have experienced
fluctuations that often have been unrelated or disproportionate to the operating
performance of these companies. These broad market fluctuations could result in
extreme fluctuations in the price of our common stock, which could cause a
decline in the value of our investors' stock.
Future sales of our common stock may depress our stock price
Commencing on March 27, 2001, which was 180 days after the date of our
initial public offering, as many as 34,173,026
26
shares of our common stock became available for sale in the public market,
subject to applicable securities laws. Additionally, in connection with our
acquisition of SBS, we are obligated to use our reasonable best efforts to
prepare and file with the SEC a registration statement on Form S-3 (or such
successor or other appropriate form) under the Securities Act with respect to
the common stock issued to the former SBS shareholders on or before November 30,
2001. The common stock issued in connection with this acquisition shall become
freely tradable in the public market after the registration statement has been
declared effective by the Securities and Exchange Commission. Further
information regarding the SBS acquisition is included in the company's current
report on Form 8-K filed with the SEC on May 15, 2001. If substantial amounts of
our common stock were to be sold in the public market, the market price of our
common stock could fall. In addition, these sales could create the perception to
the public of difficulties or problems in our business. As a result, these sales
also might make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem appropriate.
We have broad discretion over the use of our cash and investments, and their
investment may not yield a favorable return
Our management has broad discretion over how our cash and investments
are used and may invest in ways with which our stockholders may not agree and
that do not yield favorable returns.
Executive officers, directors and entities affiliated with them have
substantial control over us, which could delay or prevent a change in our
corporate control favored by our other stockholders
Our directors, executive officers and principal stockholders, together
with their affiliates have substantial control over us. The interests of these
stockholders may differ from the interests of other stockholders. As a result,
these stockholders, if acting together, would have the ability to exercise
control over all corporate actions requiring stockholder approval irrespective
of how our other stockholders may vote, including:
. the election of directors;
. the amendment of charter documents;
. the approval of certain mergers and other significant corporate
transactions, including a sale of substantially all of our
assets; or
. the defeat of any non-negotiated takeover attempt that might
otherwise benefit the public stockholders.
Our certificate of incorporation, our bylaws, Delaware law and our stockholder
rights plan contain provisions that could discourage another company from
acquiring us
Provisions of Delaware law, our certificate of incorporation, bylaws
and stockholder rights plan may discourage, delay or prevent a merger or
acquisition that stockholders may consider favorable, including transactions in
which you might otherwise receive a premium for your shares. These provisions
include:
. authorizing the issuance of "blank check" preferred stock without
any need for action by stockholders;
. providing for a dividend on our common stock, commonly referred to
as a "poison pill", which can be triggered after a person or group
acquires 17.5% or more of common stock;
. providing for a classified board of directors with staggered terms;
. requiring supermajority stockholder voting to effect certain
amendments to our certificate of incorporation and by-laws;
. eliminating the ability of stockholders to call special meetings of
stockholders;
. prohibiting stockholder action by written consent; and
. establishing advance notice requirements for nominations for
election to the board of directors or for proposing matters that can be acted on
by stockholders at stockholder meetings.
27
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
Our exposure to market risk for changes in interest rates relates
primarily to our investment portfolio and long-term debt obligations. Our
primary investment objective is to preserve principal while at the same time
maximizing yields without significantly increasing risk. Our portfolio includes
money markets funds, commercial paper, medium-term notes, corporate notes,
government securities, auction rate securities, corporate bonds and market
auction preferreds. The diversity of our portfolio helps us to achieve our
investment objective. As of September 30, 2001, approximately 80% of our
investment portfolio is composed of investments with original maturities of one
year or less and approximately 24% of our investment portfolio matures less than
90 days from the date of purchase.
In October 1998, the Company financed the purchase of certain equipment
through a bank loan with a variable interest rate. The average interest rates
were 7.57% and 10.75% during 3 months ended September 30, 2001 and September 30,
2000, respectively. At September 30, 2001 and September 30, 2000, the Company
had loans outstanding in the amounts of $89,000 and $222,000, respectively.
The following table presents the amounts of our cash equivalents and
investments that may be subject to interest rate risk and the average interest
rates as of September 30, 2001 by year of maturity (dollars in thousands):
2001 2002 2003 Total
---- ---- ---- -----
Cash equivalents:
Fixed rate $ 8,773 -- -- $ 8,773
Average fixed rate 3.59% -- -- 3.59%
Variable rate. $11,948 -- -- $11,948
Average variable rate 3.58% -- -- 3.58%
Short-term investments:
Fixed rate $ 8,028 $36,899 -- $44,927
Average fixed rate 6.07% 5.39% -- 5.56%
Variable rate. $ 4,500 -- -- $ 4,500
Average variable rate 2.80% -- -- 2.80%
Long-term investments:
Fixed rate $ -- $17,839 $17,839
Average fixed rate -- 6.40% 6.40%
-- ------- -------
Total investment securities $33,249 $36,899 $17,839 $87,987
------- ------- ------- -------
Average rate. 4.14% 5.39% 6.40% 5.12%
------- ------- ------- -------
28
The following table presents the amounts of our cash equivalents and
investments that may be subject to interest rate risk and the average interest
rates as of December 31, 2000 by year of maturity (dollars in thousands):
2001 2002 Total
---- ---- -----
Cash equivalents:
Fixed rate $ 21,610 -- $ 21,610
Average fixed rate 6.58% -- 6.58%
Variable rate $ 25,280 -- $ 25,280
Average variable rate 6.82% -- 6.82%
Short-term investments:
Fixed rate $ 52,830 -- $ 52,830
Average fixed rate 6.58% -- 6.58%
Variable rate $ 4,900 -- $ 4,900
Average variable rate 6.75% -- 6.75%
Long-term investments:
Fixed rate $ -- $1,652 $ 1,652
Average fixed rate -- 7.26% 7.26%
-------- ------ --------
Total investment securities. $104,620 $1,652 $106,272
-------- ------ --------
Average rate 6.63% 7.26% 6.65%
-------- ------ --------
PART II--OTHER INFORMATION
ITEM 1. Legal Proceedings
None
ITEM 2. Changes in Securities and Use of Proceeds
On September 27, 2000, in connection with our initial public offering,
a Registration Statement on Form S-1 (No. 333-35316) was declared effective by
the Securities and Exchange Commission, pursuant to which 7,000,000 shares of
our common stock were offered and sold for our account at a price of $12.00 per
share, generating gross offering proceeds of $84 million. The managing
underwriters were Morgan Stanley Dean Witter, Chase H&Q, and CIBC World Markets.
Our initial public offering closed on October 3, 2000. After deducting
underwriters' discounts and commissions and other offering expenses, the net
proceeds were approximately $76.2 million. On November 1, 2000, the underwriters
exercised in part their over-allotment option in part and purchased an
additional 700,000 shares at the initial public offering price of $12.00 per
share. The net proceeds of the over-allotment option, after deducting
underwriters' discounts and other offering expenses, were approximately $7.8
million. After giving effect to the sale of the over-allotment shares, a total
of 7,700,000 shares of common stock were offered and sold in the initial public
offering with total net proceeds of $84.0 million. None of the payments for
underwriting discounts and commissions and other transaction expenses
represented direct or indirect payments to directors, officers or other
affiliates of the Company. As of September 30, 2001, we used $27.9 million for
development expenses related to our products, including the allocation of
certain general and administrative costs, $5.4 million for the construction and
validation our new manufacturing facility, and, under the terms of our agreement
to purchase the ALZET product line from ALZA Corporation, we were required to
make our final payment for inventory following the completion of our initial
public offering, in the amount of $805,000. We invested the remainder of the net
proceeds in investment grade securities.
We intend to use the net proceeds of the initial public offering as
follows:
. approximately $40-$60 million to fund development expenses related
to our products, including clinical trial expenses;
. approximately an additional $1.0-$2.0 million to fund the
development, construction and validation of our manufacturing
facility;
29
. to fund the commercialization of our products, once approved; and
. for working capital and general corporate purposes.
We may use a portion of the net proceeds to fund, acquire or invest in
complementary businesses or technologies. The amount of cash that we actually
expend for any of the described purposes will vary significantly based on a
number of factors, including the progress of our research and development and
clinical trials, the establishment of collaborative relationships, the cost and
pace of establishing and expanding our manufacturing capabilities, the
development of sales and marketing activities if undertaken by us and competing
technological and market developments. Our management will have significant
discretion in applying the net proceeds of this offering.
On May 11, 2001, in connection with an Exclusive Trademark License and
Assignment Agreement with Daniel Carr dated May 11, 2001, we issued to Daniel
Carr a warrant to purchase 770 shares of our common stock at an exercise price
of $8.50 per share, which represented the closing sale price of our common stock
on May 11, 2001. This issuance was deemed exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act as transactions
by an issuer not involving a public offering.
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit: 10.26 Lease between Sobrato Development Companies #850 and
DURECT Corporation
(b) No reports on From 8-K have been filed during the three months ended
September 30, 2001.
30
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.
DURECT CORPORATION
By: /S/ THOMAS A. SCHRECK
------------------------------------
Thomas A. Schreck
Chief Financial Officer
(Principal Financial Officer)
Date: November 13, 2001
By: /S/ JIAN LI
------------------------------------
Jian Li
Controller
Date: November 13, 2001
31