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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 March 31, 2001
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 000-31615
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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 May 10, 2001, there were 47,958,940 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 months ended March 31, 2001 and 2000 (unaudited)
Condensed Balance Sheets....................................................................... 4
As of March 31, 2001(unaudited) and December 31, 2000
Condensed Statements of Cash Flows............................................................. 5
For the three months ended March 31, 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.......... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................... 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 26
Item 2. Changes in Securities and Use of Proceeds...................................................... 26
Item 3. Defaults Upon Senior Securities................................................................ 27
Item 4. Submission of Matters to a Vote of Security Holders............................................ 27
Item 5. Other Information.............................................................................. 27
Item 6. Exhibits and Reports on Form 8-K............................................................... 27
(a) Reports on Form 8-K........................................................................ 27
Signatures.................................................................................................. 28
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
DURECT CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three months ended
March 31,
------------------
2001 2000
------- -------
Revenue, net........................................... $ 1,399 $ 83
Cost of goods sold(1).................................. 611 36
------- -------
Gross profit........................................... 788 47
------- -------
Operating expenses:
Research and development............................. 4,094 2,259
Research and development to related party............ 47 262
Selling, general and administrative.................. 1,878 970
Amortization of intangible assets.................... 274 69
Stock-based compensation(1).......................... 935 1,132
------- -------
Total operating expenses.......................... 7,228 4,692
------- -------
Loss from operations................................... (6,440) (4,645)
Other income (expense):
Interest income...................................... 1,584 287
Interest expense..................................... (62) (21)
------- -------
Net other income....................................... 1,522 266
------- -------
Net loss.......................................... (4,918) (4,379)
Accretion of cumulative dividends on Series B
convertible preferred stock........................... -- 326
------- -------
Net loss attributable to common stockholders........... $(4,918) $(4,705)
======= =======
Net loss per common share, basic and diluted........... $(0.11) $(0.71)
======= =======
Shares used in computing basic and diluted net loss 45,128 6,604
per share............................................. ======= =======
Pro forma net loss per share, basic and diluted(2)..... $(0.14)
=======
Shares used in computing pro forma net loss
per share(2).......................................... 30,653
=======
- ----------
(1) Stock-based compensation related to the following:
Cost of goods sold..................................... $ 22 $ --
Research and development............................... 680 705
Selling, general and administrative.................... 255 427
------- -------
$ 957 $ 1,132
======= =======
(2) See note 1 for a description of the calculation of pro forma amounts.
See accompanying notes.
3
DURECT CORPORATION
CONDENSED BALANCE SHEETS
(in thousands)
March 31, December 31,
2001 2000
--------- ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents........................... $ 47,562 $ 46,702
Short-term investments.............................. 37,474 57,730
Accounts receivable, net............................ 961 1,261
Inventories......................................... 2,381 2,682
Prepaid expenses and other current assets........... 1,732 938
-------- --------
Total current assets.................................. 90,110 109,313
Property and equipment, net........................... 5,724 4,472
Intangible assets, net................................ 4,901 5,175
Long-term investments................................. 17,090 1,652
-------- --------
Total assets.......................................... $117,825 $120,612
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable.................................... $ 848 $ 658
Accrued liabilities................................. 1,089 923
Accrued construction in progress.................... 1,569 1,673
Accrued contract manufacturing...................... 159 248
Accrued liabilities to related party .............. 59 54
Contract research liability......................... 1,148 290
Equipment financing obligations, current portion.... 475 407
-------- --------
Total current liabilities............................. 5,347 4,253
Equipment financing obligations, noncurrent portion... 961 1,105
Commitments and contingencies
Stockholders' equity:
Common stock........................................ 4 4
Additional paid-in capital.......................... 165,746 165,638
Notes receivable from stockholders.................. (652) (652)
Accumulated other comprehensive income.............. 247 29
Deferred compensation............................... (3,975) (4,830)
Deferred royalties and commercial rights............ (13,480) (13,480)
Accumulated deficit................................. (36,373) (31,455)
-------- --------
Stockholders' equity.................................. 111,517 115,254
-------- --------
Total liabilities and stockholders' equity............ $117,825 $120,612
======== ========
See accompanying notes.
4
DURECT CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three months ended
March 31,
--------------------------
2001 2000
-------- -------
Cash flows from operating activities
Net loss........................................................................................... $ (4,918) $(4,379)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.................................................................... 211 119
Noncash charges related to stock-based compensation.............................................. 957 1,132
Amortization of certain intangible assets........................................................ 274 69
Changes in assets and liabilities:
Accounts receivable............................................................................. 300 (19)
Inventories..................................................................................... 301 19
Prepaid expenses and other assets............................................................... (794) 164
Accounts payable................................................................................ 190 (156)
Accrued liabilities............................................................................. (27) 163
Accrued liabilities to related party............................................................ 5 (60)
Contract research liability..................................................................... 858 (161)
-------- -------
Total adjustments............................................................................. 2,275 1,270
-------- -------
Net cash and cash equivalents used in operating activities.................................... (2,643) (3,109)
-------- -------
Cash flows from investing activities
Purchases of equipment............................................................................. (1,449) (416)
Purchases of investments........................................................................... (40,783) --
Proceeds from maturities of investments............................................................ 45,820 11,690
-------- -------
Net cash and cash equivalents provided by investing activities................................ 3,588 11,274
-------- -------
Cash flows from financing activities
Net proceeds from equipment financing obligations.................................................. -- 750
Payments on equipment financing obligations........................................................ (92) (55)
Net proceeds from issuances of common and preferred stock.......................................... 7 25,058
-------- -------
Net cash and cash equivalents provided by (used in) financing activities...................... (85) 25,753
-------- -------
Net increase in cash and cash equivalents.......................................................... 860 33,918
Cash and cash equivalents, beginning of the period................................................. 46,702 3,863
-------- -------
Cash and cash equivalents, end of the period....................................................... $ 47,562 $37,781
======== =======
Supplemental disclosure of cash flow information
Cash paid during the period for interest........................................................... $ 48 $ 12
======== =======
Notes receivable issued in connection with exercise of stock options............................... $ -- $ 231
======== =======
Issuance of warrants to equipment lessor........................................................... $ -- $ 190
======== =======
See accompanying notes.
5
DURECT CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
March 31, 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.
Basis of Presentation
The accompanying unaudited condensed 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 March 31, 2001, the operating results for the three months ended
March 31, 2001 and 2000, and cash flows for the three months ended March 31,
2001 and 2000. The condensed 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):
March 31, December 31,
2001 2000
---------- -------------
(unaudited)
Raw materials................................................................... $ 160 $ 191
Work in process................................................................. 1,047 1,278
Finished Goods.................................................................. 1,174 1,213
------ ------
Total inventories............................................................ $2,381 $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.
Comprehensive Loss
The Company has adopted Statement of Financial Accounting Standards No.130,
"Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for
reporting comprehensive loss and its components in the
6
DURECT CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS--(Continued)
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
March 31, 2001 and 2000, were $4,700,000 and $4,399,000, respectively, compared
to its net losses of $4,918,000 and 4,379,000, respectively.
Reclassifications
Certain prior period amounts have been reclassified to conform with current
period presentation.
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 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
March 31,
-------------------------
2001 2000
--------- ----------
Net loss.................................................................... $(4,918) $(4,379)
Less: accumulated dividend on Series B preferred stock.................... -- 326
------- -------
Net loss available to common stockholders................................... $(4,918) $(4,705)
======= =======
Basic and diluted weighted average shares:
Weighted-average shares of common stock outstanding....................... 46,566 9,302
Less: weighted-average shares subject to repurchase....................... (1,438) (2,698)
------- -------
Weighted-average shares used in computing basic and diluted
net loss per share...................................................... 45,128 6,604
======= =======
Basic and diluted net loss per share........................................ $ (0.11) $ (0.71)
======= =======
Pro forma:
Net loss.................................................................. $(4,379)
=======
Shares used above......................................................... 6,604
Pro forma adjustment to reflect weighted effect of assumed
conversion of convertible preferred stock............................... 24,049
-------
Shares used in computing pro forma basic and diluted net loss
per share............................................................... 30,653
=======
Pro forma net loss per share, basic and diluted............................. $ (0.14)
=======
The Company has excluded the impact of all outstanding warrants and stock
options from the calculation of diluted net loss per share because all such
securities are antidilutive for all periods presented. The total number of
shares, including options and warrants to purchase shares, excluded from the
calculations of diluted net loss per share was 1,141,163 for the three months
ended March 31, 2001 and 64,600 for the three months ended March 31, 2000.
Recent Accounting Pronouncements
7
In June 1998, the FASB issued Statement of Financial Accounting Standard
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which will be effective for the year ending December 31, 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 Company believes the adoption of SFAS 133 will
not have a material effect on the financial statements since it does not
currently invest in derivative instruments or engage in hedging activities.
Note 2. Subsequent Events (unaudited)
Acquisition of Southern BioSystems Inc.
On April 30, 2001, the Company closed its acquisition of Southern
BioSystems, Inc. ("SBS") a privately held Alabama corporation. SBS develops,
manufactures and sells biodegradable polymer and non-polymer drug delivery
systems. Under the terms of the acquisition, the Company issued 1,350,560 shares
of common stock, and agreed to issue up to 724,856 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 approximately $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, 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 the time. The total number of shares
issued and shares reserved for issuance upon the exercise of outstanding SBS
options and warrants will be determined by dividing $24.9 million by the
Company's stock price at the time, subject to certain conditions. Up to
4,150,843 additional shares may be issued and reserved for issuance upon the
exercise of outstanding SBS options and warrants. The transaction is intended to
qualify as a tax-free reorganization and is being accounted for using the
purchase method of accounting. Upon consummation of the acquisition, SBS became
a wholly owned subsidiary of the Company.
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 March 31, 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," 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.
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
8
investigational new drug application relating to our first product, DUROS
sufentanil, a DUROS-based pharmaceutical system for the treatment of chronic
pain. In 1999, we began a Phase I clinical trial for DUROS sufentanil 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 DUROS sufentanil,
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 three months of
2001, we completed patient enrollment for our Phase II clinical trial for DUROS
sufentanil, secured the long-term supplier of our bulk drug requirements for
DUROS sufentanil, and continued to construct our manufacturing facility.
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 March 31, 2001, we had an
accumulated deficit of $36.4 million. Our net losses attributable to common
stockholders were $20.8, $9.3, 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, 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. As a result of these factors, we expect to incur
significant losses and negative cash flow for the foreseeable future.
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,
and, to a lesser extent, from sales of ear catheter products, which we acquired
from 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 months ended March 31, 2001 and 2000
Revenue. Net revenues were $1.4 million and $83,000 for the three months
ended March 31, 2001 and 2000, respectively. Sales for the three months ended
March 31, 2001 resulted primarily from the ALZET product line, which we acquired
in April 2000. In the corresponding period in 2000, our sales were derived
solely from our ear catheter products. In the near future, we do not intend to
significantly increase our efforts to sell and market either of these product
lines and as such do not anticipate that revenues from them will increase
significantly.
Cost of goods sold. Cost of goods sold was $611,000 or 44% of revenues and
$36,000 or 43% of revenues for the three months ended March 31, 2001 and 2000,
respectively. The increase in cost of goods sold as a percentage of
9
revenues was attributable to higher proportions of sales of the relatively
higher cost ALZET minipumps. Cost of goods sold includes manufacturing cost
variances that result from the completion of batches of the ALZET product line,
which may be large relative to our sales. As a result, we expect cost of goods
sold as a percentage of revenue related to this product to fluctuate.
Research and Development. Research and development expenses were $4.1
million and $2.5 million for the three months ended March 31, 2001 and 2000,
respectively. The increase was attributable to increased research and
development activity, especially related to the company's Phase II clinical
trial for its lead product, DUROS sufentanil. As a result of the early
completion of patient enrollment for this trial, we accelerated related expenses
in the first quarter of 2001. As of March 31, 2001, we had 46 research and
development employees compared with 28 as of the corresponding date in 2000. We
expect research and development expenses to increase as we begin Phase III
clinical trials for DUROS sufentanil, continue to hire research and development
personnel, continue to develop our spinal hydromorphone product, and research
and develop other products.
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 begin 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 were $1.9 million and $1.0 million for the three months ended March 31,
2001 and 2000, respectively. 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 March 31, 2001, we had 24 sales and
administrative personnel compared with 13 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. and the ALZET product line, we acquired goodwill of $1.9 million
and other intangible assets of $4.2 million. Goodwill is amortized over the
estimated useful life of 6 years; other intangible assets are amortized over
their estimated useful lives, which are between 4 and 7 years. Amortization of
intangible assets increased to $274,000 for the three months ended March 31,
2001 from $69,000 for the corresponding period in 2000. Amortization of
intangibles assets in the three months ended March 31, 2000 resulted from the
acquisition of IntraEAR, Inc. in October 1999. The increase in amortization of
goodwill and other intangibles in the three months ended March 31, 2001 resulted
from the acquisition of the ALZET product line in April 2000 and the
amortization of goodwill and other intangibles associated with the IntraEAR
acquisition.
The remaining goodwill for both acquisitions at March 31, 2001 was $1.5
million, which will be amortized as follows: $238,000 for nine months ending
December 31, 2001, $317,000 for each of the years ending December 31, 2002, 2003
and 2004, $289,000 for the year ending December 31, 2005, and $59,000 for the
year ending December 31, 2006. The remaining other intangible assets for both
acquisitions at March 31, 2001 was $3.4 million, which will be amortized as
follows: $584,000 for the nine months ending December 31, 2001, $779,000 for
each of the years ending December 31, 2002, $762,000 for the year ending
December 31, 2003, $567,000 for the year ending December 31, 2004, $505,000 for
the year ending December 31, 2005, and $167,000 for the year ending December 31,
2006. We periodically evaluate acquired intangible assets for impairment or
obsolescence. Should the intangible assets become impaired or obsolete, we may
amortize them on an accelerated schedule or write them off.
10
Stock-Based Compensation. We have recorded aggregate deferred compensation
charges of $10.3 million in connection with stock options granted to employees
and directors. Of this amount, we have amortized $6.3 million through March 31,
2001. For the three months ended March 31, 2001, we recorded $855,000 of stock-
based compensation, compared with $886,000 for the corresponding period of 2000.
Of these amounts, employee stock compensation related to the following: cost of
goods sold of $22,000 for the three months ended March 31, 2001, and $0 for the
corresponding period in 2000; research and development expenses of $591,000 for
the three months ended March 31, 2001 and $605,000 in the corresponding period
in 2000; and selling, general and administrative expenses of $242,000 in the
three months ended March 31, 2001 and $281,000 in the corresponding period of
2000.
Non-employee stock compensation related to research and development
expenses was $89,000 for the three months ended March 31, 2001 and $100,000 for
the corresponding period of 2000. Non-employee stock compensation related to
selling, general and administrative expenses was $13,000 for the three months
ended March 31, 2001 and $146,000 for the corresponding period 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 March 31, 2001 was
$4.0 million, which will be amortized as follows: $1.9 million for the nine
months ending December 31, 2001, $1.4 million for the year ending December 31,
2002, $600,000 for the year ending December 31, 2003, and $51,000 for the year
ending December 31, 2004. Termination of employment of option holders could
cause stock-based compensation in future years to be less than indicated.
Other Income (Expense). Interest income increased to $1.6 million for the
three months ended March 31, 2001, from $287,000 for the corresponding period in
2001. The increase in interest income was primarily attributable to higher
average outstanding balances of cash and investments resulting from the sale of
convertible preferred stock in March 2000 and our initial public offering in
September 2000. Interest expense was $62,000 for the three months ended March
31, 2001, and $21,000 for the corresponding period in 2000. The increase in
interest expense was primarily due to increased debt obligations from equipment
financings. We expect interest expense to increase due to the structure of the
payment schedule on our equipment loan.
Liquidity and Capital Resources
For the three months ended March 31, 2001, cash expenditures for operating
activities and additions to capital equipment were $4.1 million. We anticipate
that these expenditures will increase in future periods.
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
underwriters' over-allotment option. At March 31, 2001, we had cash, cash
equivalents and investments totaling $102.1 million compared to $106.1 million
at December 31, 2000.
Working capital at March 31, 2001 was $84.8 million compared to $105.1
million at December 31, 2000. The decrease was primarily attributable to the
purchases of long-term investments, operating losses of $6.4 million, and an
increase in accrued and other current liabilities of $1.0 million.
We used $2.6 million of cash for operations for the three months ended
March 31, 2001 compared to $3.1 million for the corresponding period in 2000.
The decrease was primarily attributable to an increase in contract research
liabilities, offset by increased operating losses and a decrease in prepaid
expenses.
We received $3.6 million of cash from investing activities for the three
months ended March 31, 2001 compared to $11.3 million for the corresponding
period in 2000. The decrease in receipts of investing cash was primarily due to
a decrease in proceeds from maturities of short-term investments and an increase
in purchases of investments and equipment.
We used $85,000 of cash in financing activities for the three months ended
March 31, 2001 compared to a receipt of $25.8 million for the corresponding
period in 2000. The decrease was primarily due to decreases in proceeds from the
issuance of preferred stock and an equipment loan, offset by an increase in
payments on equipment financings.
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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 $4.0 million over the next 12 months to construct, equip and validate
our DUROS manufacturing facility. 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 commences 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 and are between $102,000 and $119,000.
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.
Factors that May Affect Future Results
In addition to the other information in this Form on 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
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. 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. For our lead product, DUROS sufentanil
and our second product, DUROS hydromorphone, we have not yet determined the drug
dosages we intend to use for commercialization nor finalized the commercial
design. 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, 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. We have completed an initial Phase I clinical trial for our
lead product, DUROS sufentanil, using an external pump to test the safety of
continuous chronic infusion of the drug, and we initiated a Phase II clinical
trial for this product in December 2000. 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 DUROS
sufentanil, 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.
The length of our clinical trials depends 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 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.
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
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. 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
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. select drugs into vascular grafts.
We also have the right to use the DUROS technology to deliver systemically
and by catheter:
. 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 DUROS
sufentanil 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. 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
14
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.
We may acquire technologies and businesses which may be difficult to integrate,
disrupt our business, dilute stockholder value or divert management attention
We may acquire technologies, products or businesses to broaden the scope of
our existing and planned product lines and 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 Southern BioSystems, Inc. These and other
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 Southern
BioSystems, as well future acquisitions, may not generate any additional revenue
or provide any benefit to our business.
We have limited manufacturing experience and may not be able to manufacture
sufficient quantities of our products at an acceptable cost
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. 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
necessary to provide clinical and commercial quantities of our products. We
currently manufacture sub-assemblies of our DUROS-based pharmaceutical systems.
We intend to complete the final steps of the manufacturing of our DUROS-based
pharmaceutical systems at our manufacturing facility once it is completed. If we
are unable to build or qualify our manufacturing facility, or are unable to do
so in a timely manner, we may be required to rely on third party contractors to
perform the final manufacturing steps of our DUROS-based pharmaceutical systems.
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.
We are currently building a manufacturing facility, and we expect that this
facility, once built, will allow us to manufacture product for our Phase III
clinical trial and commercial launch of our DUROS sufentanil product and for
clinical trials of our DUROS hydromorphone product as well as other products on
a pilot scale. The manufacture of our DUROS-based pharmaceutical systems is a
complex process, and any facility that we build must comply with federal and
state good manufacturing practices regulations. DURECT has no experience
building facilities, and we may not be able to build a facility that would
support our requirements of product, or complete construction in a timely manner
or at currently anticipated costs. If the costs of building a new manufacturing
facility significantly exceed our expectations, our operating results will be
harmed.
15
Our new facility will be subject to government audits to determine
compliance with good manufacturing practices regulations, and we may be unable
to obtain and maintain certifications for complying with these regulations. If
we fail to build and qualify a manufacturing facility in time to meet our
product requirements or at currently anticipated costs, or fail to obtain and
maintain certification for compliance with good manufacturing practices
regulation, we could experience a delay in our clinical trials and the
commercial sale of our DUROS-based pharmaceutical systems.
In April 2000, we acquired the ALZET product and related assets from ALZA.
We manufacture the ALZET product at a leased facility. 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.
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.
Before receiving FDA clearance to market a product, we will have to demonstrate
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. As a result, clinical trials and
regulatory approval can take a number of years to accomplish and require the
expenditure of substantial resources.
Data obtained from clinical trials are susceptible to varying
interpretations, which could delay, limit or prevent regulatory clearances. As
of March 31, 2000, we have completed an initial Phase I clinical trial for our
DUROS sufentanil product using an external pump to test the safety of continuous
chronic infusion of the drug, and have initiated a Phase II clinical trial, 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. 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, we may encounter delays or rejections based upon additional
government regulation from future legislation or 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.
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
16
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 or any state agency 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.
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
You 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 you 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 DUROS
sufentanil. 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.
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.
17
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 March 31, 2001, had an accumulated deficit of approximately $36.4
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. and the ALZET product we acquired in April 2000 from
ALZA. 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
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:
18
. 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 April 30, 2001, we held four issued U.S. patents and one issued
foreign patent. In addition, we have 15 pending U.S. patent applications and
have filed 12 patent applications under the Patent Cooperation Treaty, from
which 8 national phase applications are currently pending in Europe, Australia
and Canada. As of April 30, 2001, our subsidiary Southern BioSystems, Inc. held
3 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.
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 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
19
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 sole or
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 timely delivery.
We have a supply agreement with Mallinckrodt, Inc. for our sufentanil
requirements, which expires in September 2004. We do not have long-term
agreements with many 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;
. 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.
20
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.
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 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;
. 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
We recorded deferred compensation expenses related to stock option grants
made through December 31, 2000, which will be amortized as follows: $1.9 million
for the nine months ending December 31, 2001; $1.4 million for the year ending
December 31, 2002; $600,000 for the year ending December 31, 2003; and $51,000
for the year
21
ending December 31, 2004. 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 deemed 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 and James E. Brown, our
President and Chief Executive Officer. Although we have obtained key man life
insurance policies for each of Drs. Theeuwes and Brown 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 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.
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
22
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, given
recent federal and state government initiatives directed at lowering the total
cost of health care, 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 challenging the prices charged 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 all result in lower prices for or rejection of 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 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 controlled use of hazardous materials, including but not limited to
certain hazardous chemicals and narcotics. 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.
In the event of such an occurrence, 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
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. In addition, the stock market in general
has recently experienced extreme price and volume fluctuations. In addition, the
market prices of securities
23
of technology and pharmaceutical companies have 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 your shares.
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 shares of our common stock became
available for sale in the public market, subject to applicable securities laws.
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 and Delaware law contain provisions
that could discourage another company from acquiring us
Provisions of Delaware law, our certificate of incorporation and by-laws
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 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
24
. 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.
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.
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 March 31, 2001, approximately 83% of our investment portfolio
was composed of investments with original maturities of one year or less and
approximately 46% 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 9.65% and 9.56% during 3 months ended March 31, 2001 and March 31, 2000,
respectively. At March 31, 2001 and March 31, 2000, the Company had loans
outstanding in the amounts of $156,000 and $289,000, 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 March 31, 2001 by year of maturity (dollars in thousands):
2001 2002 2003 Total
--------- -------- --------- ---------
Cash equivalents:
Fixed rate.................................... $ 28,823 -- -- $ 28,823
Average fixed rate............................ 5.19% -- -- 5.19%
Variable rate................................. $ 16,961 -- -- $ 16,961
Average variable rate......................... 5.47% -- -- 5.47%
Short-term investments:
Fixed rate.................................... $ 19,655 $ 9,119 -- $ 28,774
Average fixed rate............................ 6.23% 6.33% -- 6.25%
Variable rate................................. $ 8,700 -- -- $ 8,700
Average variable rate......................... 5.01% -- -- 5.01%
Long-term investments:
Fixed rate.................................... $ -- $ 12,958 $ 4,132 $ 17,090
Average fixed rate............................ -- 6.42% 5.41% 6.25%
---------- ---------- -------- ----------
Total investment securities....................... $ 74,139 $ 22,077 $ 4,132 $ 100,348
---------- ---------- -------- ----------
Average rate...................................... 5.61% 6.39% 5.41% 5.78%
---------- ---------- -------- ----------
25
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' discount 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 March 31, 2001, we used $11.6 million for
development expenses related to our products including the allocation of certain
general and administrative costs, $1.9 million for the construction of 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 $3.5-$6.5 million to fund the development and
construction of our manufacturing facility;
. to fund the commercialization of our products, once approved; and
26
. 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.
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) No reports on Form 8-K have been filed during the three months ended
March 31, 2001.
27
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: May 11, 2001
By: /s/ Jon W. Kawaja
---------------------------------------------
Jon W. Kawaja
Sr. Director of Finance and
Controller
Date: May 11, 2001
28