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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File number 000-19809
DURA PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3645543
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7475 LUSK BLVD., SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE IS (858)457-2553
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.
[ X ] Yes [ ] No
The number of shares of the Registrant's Common Stock outstanding as of July 30,
1999 was 44,133,367.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
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DURA PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS, EXCEPT SHARE AMOUNTS
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JUNE 30, DECEMBER 31,
1999 1998
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ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 61,945 $ 31,113
Short-term investments 208,333 238,299
Accounts and other receivables 32,474 24,627
Inventory 14,574 9,006
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Total current assets 317,326 303,045
License agreements and product rights 383,173 377,250
Property 93,316 85,374
Other assets 66,382 59,790
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Total $ 860,197 $ 825,459
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,263 $ 8,893
Accrued liabilities 64,355 46,557
Current portion of long-term obligations 4,896 6,798
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Total current liabilities 82,514 62,248
Convertible subordinated notes 287,500 287,500
Other long-term obligations 64,212 65,339
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Total liabilities 434,226 415,087
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Shareholders' equity:
Preferred stock, par value $.001, shares authorized - 5,000,000; no
shares issued or outstanding
Common stock, par value $.001, shares authorized - 200,000,000;
issued and outstanding - 44,131,169 and 44,083,652, respectively 44 44
Additional paid-in capital 608,142 607,436
Accumulated other comprehensive income (loss) (642) 454
Warrant subscriptions receivable (7,914) (9,385)
Accumulated deficit (145,602) (160,951)
Treasury stock, at cost; 2,402,500 and 2,327,500 shares, respectively (28,057) (27,226)
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Total shareholders' equity 425,971 410,372
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Total $ 860,197 $ 825,459
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See accompanying notes to consolidated financial statements.
2
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DURA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Revenues:
Sales $ 51,321 $ 34,912 $ 106,402 $ 70,798
Contract 16,685 17,026 32,850 29,906
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Total revenues 68,006 51,938 139,252 100,704
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Operating costs and expenses:
Cost of sales 10,379 7,457 20,870 15,550
Clinical, development and regulatory 12,474 11,488 23,965 21,077
Selling, general and administrative 33,587 22,946 70,877 45,461
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Total operating costs and expenses 56,440 41,891 115,712 82,088
--------- --------- --------- ---------
Operating income 11,566 10,047 23,540 18,616
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Other:
Interest income 4,249 5,937 8,552 11,354
Interest expense (4,308) (3,069) (8,372) (6,210)
Other - net (19) (519) (247) (506)
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Total other (78) 2,349 (67) 4,638
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Income before income taxes 11,488 12,396 23,473 23,254
Provision for income taxes 3,905 4,219 8,125 7,913
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Net income $ 7,583 $ 8,177 $ 15,348 $ 15,341
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Net income per share:
Basic $ 0.17 $ 0.18 $ 0.35 $ 0.33
Diluted $ 0.17 $ 0.17 $ 0.34 $ 0.32
Weighted average number of common shares:
Basic 44,085 46,302 44,092 46,139
Diluted 45,085 48,073 45,328 48,321
See accompanying notes to consolidated financial statements.
3
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DURA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
(UNAUDITED)
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SIX MONTHS ENDED
JUNE 30,
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1999 1998
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Net cash provided by operating activities $ 43,283 $ 43,633
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Investing activities:
Sales and maturities of short-term investments 189,435 201,454
Purchases of short-term investments (161,565) (179,606)
Product acquisitions (24,024) (5,000)
Capital expenditures (12,249) (18,582)
Other (4,393) (363)
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Net cash used for investing activities (12,796) (2,097)
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Financing activities:
Issuance of common stock and warrants - net 2,176 5,537
Principal payments on long-term obligations (1,000)
Repurchase of common stock (831)
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Net cash provided by financing activities 345 5,537
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Net increase in cash and cash equivalents 30,832 47,073
Cash and cash equivalents at beginning of period 31,113 72,003
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Cash and cash equivalents at end of period $ 61,945 $ 119,076
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Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest (net of amounts capitalized) $ 8,585 $ 5,832
Income taxes $ 1,436 $ 3,479
See accompanying notes to consolidated financial statements.
4
DURA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by Dura Pharmaceuticals, Inc. ("Dura" or the "Company") in accordance with the
instructions to Form 10-Q. The consolidated financial statements reflect all
adjustments, consisting of only normal recurring accruals, which are, in the
opinion of management, necessary for a fair statement of the results of the
interim periods presented. These consolidated financial statements and notes
thereto should be read in conjunction with the audited financial statements and
notes thereto included in the Company's annual report on Form 10-K for the year
ended December 31, 1998. The results of operations for the interim periods are
not necessarily indicative of results to be expected for any other interim
period or for the year as a whole.
The consolidated financial statements include the accounts of Dura and its
wholly owned subsidiaries. All intercompany transactions and balances are
eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported in the consolidated financial statements and related
notes. Changes in those estimates may affect amounts reported in future periods.
2. REPORTING COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130") requires reporting and displaying comprehensive income
and its components which, for Dura, includes net income and unrealized gains
and losses on investments. In accordance with SFAS 130, the accumulated
balance of other comprehensive income (loss) is disclosed as a separate
component of shareholders' equity.
For the three months and six months ended June 30, 1999 and 1998, comprehensive
income consisted of (in thousands):
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
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Net income $ 7,583 $ 8,177 $ 15,348 $ 15,341
Other comprehensive loss:
Unrealized loss on
investments (869) (167) (1,096) (83)
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Comprehensive income $ 6,714 $ 8,010 $ 14,525 $ 15,258
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-------- -------- -------- --------
5
3. COMMITMENTS AND CONTINGENCIES
TERMINATION OF MERGER AGREEMENT WITH SCANDIPHARM, INC. - On December 1, 1997,
the Company terminated a merger agreement with Scandipharm, Inc. entered into
on October 20, 1997. On January 16, 1998, Scandipharm filed suit against the
Company for breach of contract. On January 20, 1998, the Company filed suit
against Scandipharm seeking a declaratory judgment that Dura's termination of
the merger agreement did not breach the agreement and for damages against
Scandipharm. The Company believes that it had the right to terminate the
merger agreement, that Scandipharm's claims in its lawsuit and its claims for
damages are without merit and intends to defend against them vigorously. The
Company also believes that the outcome of this matter will not have a
material adverse effect on the Company's financial condition or operations.
SHAREHOLDER CLASS ACTION LITIGATION - Commencing on January 27, 1999, several
class action suits were filed against the Company, various current or former
officers and directors of the Company, and one of the Company's investment
bankers in the United States District Court for the Southern District of
California. The lawsuits allege violations of the federal securities laws,
and purport to seek damages on behalf of a class of shareholders who
purchased Dura common stock during a defined period. The Company believes
that the claims in the lawsuits are without merit and intends to defend
against them vigorously.
4. SEGMENT INFORMATION
The Company operates in two business segments: (1) Pharmaceutical Products
and (2) Research and Development. The Pharmaceutical Products segment markets
prescription pharmaceutical products for the treatment of allergies, asthma,
pneumonia, and related respiratory conditions. The Research and Development
segment manages the development of Spiros-Registered Trademark-, the
Company's proprietary dry powder delivery technology. Each of the Company's
segments operates solely within the United States. Four wholesale customers
accounted for 15%, 14%, 11%, and 11% of pharmaceutical product sales,
respectively, for the first half of 1999, while one wholesale customer
accounted for 13% of pharmaceutical product sales for the first half of 1998.
The following table summarizes information about the Company's operating
segments (in thousands) for:
Three months ended Six months ended
June 30, June 30,
-------------------------------------------------- -------------------------------------------------
Pharmaceutical Research and Pharmaceutical Research and
Products Development Consolidated Products Development Consolidated
Total revenues 1999 $ 51,588 $ 16,418 $ 68,006 $107,255 $ 31,997 $139,252
1998 $ 35,086 $ 16,852 $ 51,938 $ 71,277 $ 29,427 $100,704
Operating income 1999 $ 8,408 $ 3,158 $ 11,566 $ 17,806 $ 5,734 $ 23,540
1998 $ 4,687 $ 5,360 $ 10,047 $ 11,147 $ 7,469 $ 18,616
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and the accompanying notes included in Item 1 of this
quarterly report, as well as the audited financial statements and
accompanying notes and Management's Discussion and Analysis of Financial
Condition and Results of Operations for the year ended December 31, 1998
contained in our 1998 annual report on Form 10-K. See "Risks and
Uncertainties" below for trends and uncertainties known to us that could
cause reported financial information not to be necessarily indicative of
future results.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Pharmaceutical sales for the three months ended June 30, 1999 increased $16.4
million, or 47%, over 1998. This increase is due primarily to sales of
Maxipime-Registered Trademark-, Azactam-Registered Trademark- and
Myambutol-Registered Trademark- which we acquired in the second half of 1998.
Gross profit (pharmaceutical sales less cost of sales) for the three months
ended June 30, 1999 increased $13.5 million, or 49%, over 1998 due to the
increase in pharmaceutical sales. Gross profit as a percentage of sales
increased slightly to 80% in 1999 compared to 79% in 1998.
Contract revenue relates primarily to amounts received by us for the
development of our Spiros-Registered Trademark- pulmonary drug delivery
system. Under agreements with multiple companies, we conduct feasibility
testing and development work on various compounds for use with Spiros.
Contract revenues include payment for feasibility and development work
performed by us as well as milestone and technology access payments. Contract
revenues for the three months ended June 30, 1999 were $16.7 million, a
decrease of 2% from the same period in 1998. Contract revenues from Spiros
Development Corporation II, Inc. totaled $12.7 million for the three months
ended June 30, 1999, consistent with the same period in 1998. Contract
revenues may fluctuate from period to period based on the level of research
funding received as well as the achievement of milestones and receipt of
technology access payments from our partners.
Clinical, development and regulatory expenses for the three months ended June
30, 1999 increased $1 million, or 9%, over 1998 due to additional expenses
incurred under feasibility and development agreements covering the use of
various compounds with Spiros as discussed above.
Selling, general and administrative expenses for the three months ended June
30, 1999 increased $10.6 million, or 46%, over 1998, and increased as a
percentage of total revenues from 44% in 1998 to 49% in 1999. The dollar and
percentage increases are primarily due to costs incurred to expand our field
sales force from approximately 313 representatives in the second quarter of
1998 to approximately 397 representatives in the second quarter of 1999 as
well as to promote our recently acquired products, Maxipime and Azactam, and
an increase in the amortization of our recently acquired product rights.
7
Interest income for the three months ended June 30, 1999 decreased $1.7
million, or 28%, from 1998 due to lower balances of cash and short-term
investments resulting from the acquisition of product rights and the
repurchase of shares of our common stock in the second half of 1998.
Interest expense for the three months ended June 30, 1999 increased $1.2
million, or 40%, over 1998 due to interest expense on obligations incurred in
connection with the acquisition of product rights completed in the second
half of 1998.
We record interim provisions for income taxes based on the estimated
effective combined tax rate to be applicable for the fiscal year. We
reevaluate this estimate each quarter based on forecasts of pre-tax income
for the year as well as anticipated adjustments from statutory federal and
state tax rates. Our effective tax rate was 34% for the three months ended
June 30, 1999 and 1998.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Pharmaceutical sales for the six months ended June 30, 1999 increased $35.6
million, or 50%, over 1998. This increase is due primarily to sales of
Maxipime, Azactam, and Myambutol (acquired in the second half of 1998) and
growth in prescription demand for Ceclor-Registered Trademark- CD and
Nasarel-Registered Trademark-, partially offset by a decline in sales of
certain of our cough, cold and allergy products resulting from lower
prescription volume for those products. Gross profit for the six months ended
June 30, 1999 increased $30.3 million, or 55%, over 1998 due to the increase
in pharmaceutical sales. Gross profit as a percentage of sales increased from
78% in 1998 to 80% in 1999 due primarily to changes in product mix.
Contract revenue for the six months ended June 30, 1999 increased $2.9
million, or 10%, over 1998 due to increased development activity covering the
use of various compounds with Spiros, conducted on behalf of Spiros Corp. II
and Eli Lilly and Company. Contract revenue from Spiros Corp. II for the six
months ended June 30, 1999 was $24.9 million compared to $23 million for the
same period in 1998.
Clinical, development and regulatory expenses for the six months ended June
30, 1999 increased $2.9 million, or 14%, over 1998 due to additional expenses
incurred under feasibility and development agreements covering the use of
various compounds with Spiros as discussed above.
Selling, general and administrative expenses for the six months ended June
30, 1999 increased $25.4 million, or 56%, over 1998, and increased as a
percentage of total revenues from 45% in 1998 to 51% in 1999. The dollar and
percentage increases are primarily due to costs incurred to expand the number
of our field sales force from 314 representatives in the first half of 1998
to 394 representatives in the first half of 1999 as well as to promote our
recently acquired products, Maxipime and Azactam, and an increase in the
amortization of our recently acquired product rights.
Interest income for the six months ended June 30, 1999 decreased $2.8
million, or 25%, from 1998 due to lower balances of cash and short-term
investments resulting from the acquisition of product rights and the
repurchase of shares of our common stock in the second half of 1998.
8
Interest expense for the six months ended June 30, 1999 increased $2.2
million, or 35%, over 1998 due to interest expense on obligations incurred in
connection with the acquisition of product rights completed in the second
half of 1998.
We record interim provisions for income taxes based on the estimated
effective combined tax rate to be applicable for the fiscal year. We
reevaluate this estimate each quarter based on forecasts of pre-tax income
for the year as well as anticipated adjustments from statutory federal and
state tax rates. Our effective tax rate was 35% for the six months ended June
30, 1999 as compared to 34% for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments totaled $270.3 million at
June 30, 1999 as compared to $269.4 million at December 31, 1998. Working
capital decreased by $6 million from $240.8 million at December 31, 1998 to
$234.8 million at June 30, 1999.
We have issued $287.5 million principal amount of notes due July 15, 2002
with interest payable semiannually at a coupon rate of 3.5%. The notes are
convertible, at the option of the holder, into shares of common stock at any
time prior to maturity or redemption at a conversion price of $50.635 per
share.
In addition to the notes, as of June 30, 1999, we had outstanding an
aggregate of $69.1 million in current and other long-term obligations, of
which $4.9 million is to be paid during the next 12 months. As of June 30,
1999, additional future contingent obligations existed relating to product
acquisitions. Payments totaling approximately $128 million, estimated based
on historical sales levels of the related products, are contingent upon the
amount of future sales of certain products, and approximately $68 million are
contingent upon the continued absence of competing formulations of certain
products as defined in the respective agreements. Such contingent amounts are
payable through 2004, including approximately $38 million contingently due
within the next 12 months.
We anticipate that our existing capital resources and cash generated from
operations will be sufficient to finance our operations through at least the
next 12 months. Product or company acquisitions or in-licensing
opportunities, however, may require significant additional resources. Such
additional resources may not be available when needed or on terms acceptable
to us. We are actively pursuing the acquisition of rights to products and/or
companies which may require the use of substantial capital resources;
however, there are no present agreements or commitments for such acquisitions.
YEAR 2000
We utilize computer systems throughout our business to carry out our
day-to-day operations. Beginning in 1997, we implemented a program designed
to enable our computer operating systems to process data having dates on or
after January 1, 2000. The program assesses our
9
information technology systems as well as technology systems embedded in our
facilities and equipment.
The first phase in our year 2000 program was to identify the systems with
year 2000 exposure. This phase was completed during 1998. Substantially all
the hardware and software comprising our information technology systems were
replaced in 1997 with systems that we believe are year 2000 compliant.
Accordingly, no further evaluation or testing of these systems has been
undertaken. We are also currently upgrading and testing other systems to make
them year 2000 compliant.
We have contacted our significant suppliers, customers, and key business
partners to determine if our business may be affected if these parties fail
to address their year 2000 issues. We intend to monitor the progress made by
these parties and to address any risks arising from their failure to
adequately prepare for the year 2000. In addition, we will test key
interfacing data systems with our business partners to ensure that all
measures taken to become year 2000 compliant are effective.
We are developing a contingency plan to address any year 2000 exposures from
internal and third-party systems that may not be adequately remediated or
replaced. While it is difficult to identify all potential year 2000
exposures, the greatest risks to us are our inability to receive and process
orders from our customers and our vendors' inability to supply product
inventory. If necessary, our contingency plan will address these risks by
identifying alternative suppliers, stocking additional inventory, and
developing back-up systems to process sales orders.
We expect to complete our year 2000 evaluation, testing and contingency
planning by September 30, 1999. We estimate that the aggregate costs of our
year 2000 program will be less than $1 million, including costs incurred to
date. This estimate excludes the cost of the information technology systems
implemented in 1997 as the implementation was not in response to the year
2000 issue. The majority of the costs are not expected to be incremental
expenses but rather an allocation of existing resources. The estimated
impact, cost, and timing of our year 2000 program are based on our best
estimates using information currently available. These estimates may not be
achieved, and actual results could differ materially from our plans.
RISKS AND UNCERTAINTIES
FORWARD-LOOKING STATEMENTS. We caution readers that the statements in this
quarterly report that are not descriptions of historical facts may be
forward-looking statements that are subject to risks and uncertainties.
Actual results could differ materially from those currently anticipated due
to a number of factors, including those identified below.
SPIROS-REGISTERED TRADEMARK- REQUIRES SIGNIFICANT ADDITIONAL DEVELOPMENT
WHICH IS COSTLY, TIME-CONSUMING AND MAY NEVER BE COMMERCIALLY SUCCESSFUL.
Spiros, our proprietary dry powder pulmonary drug delivery system, will
require significant additional development efforts as well as clinical
testing. This work is very costly and time consuming. Even after spending
significant amounts of money and time, the development and commercialization,
if any, of any Spiros product may not be successful.
10
BEFORE WE CAN MARKET ANY SPIROS PRODUCT, WE WILL HAVE TO OBTAIN REQUIRED
GOVERNMENTAL APPROVALS, WHICH IS NOT ASSURED. The development, testing,
manufacturing and marketing of pharmaceutical products are subject to
extensive regulation by governmental authorities, including the FDA. The FDA
must approve each Spiros product before that product can be manufactured or
marketed for commercial sale. Failure to obtain such approvals would have an
adverse effect on our business and results of operations. The review and
approval process mandated by the FDA is very rigorous, requiring extensive
preclinical and clinical testing as well as determining manufacturing
capability and product performance. None of the products currently in
development by Dura or in collaboration with third parties may ever be
approved by the FDA.
OUR REGULATORY APPLICATION SUBMITTED TO THE FDA FOR ALBUTEROL SPIROSTM WILL
NOT BE APPROVED WITHOUT ADDITIONAL CLINICAL TRIALS, WHICH WILL DELAY THE
COMMERCIALIZATION OF ALBUTEROL SPIROS. On November 4, 1998 Dura and Spiros
Corp. II announced the receipt of a complete response letter from the FDA.
The letter indicated that the new drug application submitted by Dura on
behalf of Spiros Corp. II for Albuterol Spiros will not be approved unless
certain deficiencies are addressed. The FDA requested that additional
clinical trials on the Spiros inhaler be completed to ensure the inhaler is
reliable and to replicate clinical outcomes of the initial trials. The FDA
also requested that several chemistry, manufacturing and control issues, as
well as certain electromechanical reliability issues be resolved. As a result
of a series of meetings with the FDA, Dura and Spiros Corp. II have
determined the requirements that they believe will address these issues to
support the resubmission of the new drug application for Albuterol Spiros.
Dura, on behalf of Spiros Corp. II, expects to initiate clinical trials for
Albuterol Spiros in the fourth quarter of 1999 and to commercialize these
products in 2001, pending successful development and FDA approval. We cannot,
however, assure the successful outcome of the additional trials to support
the submission of the new drug application or if the FDA will ever approve
the new drug application for this product.
WE WILL NEED TO SIGNIFICANTLY EXPAND OUR MANUFACTURING CAPABILITY AND COMPLY
WITH GOVERNMENT REGULATIONS BEFORE WE CAN MANUFACTURE ANY SPIROS PRODUCTS. We
will need to significantly expand our current manufacturing operations and
comply with regulations prescribed by various regulatory agencies to achieve
the quality and required levels of production of our products to obtain
marketing approval. In addition, our manufacturing facility must be
registered with and licensed by various regulatory authorities and must
comply with current good manufacturing practice requirements prescribed by
the FDA and the State of California. We intend to utilize third parties to
produce components of and assemble the Spiros inhaler. Such third parties
have only produced limited quantities of components and assembled limited
numbers of inhalers. These third parties will be required to significantly
scale up their activities and to produce components which meet applicable
specifications on a timely and consistent basis. Such third parties may not
be successful in attaining acceptable service levels or meeting regulatory
requirements which would have an adverse effect on our ability to
commercialize the Spiros products.
11
WE INTEND TO CONTINUE TO PURSUE OUR STRATEGY OF ACQUIRING COMPLEMENTARY
PRODUCTS AND TECHNOLOGIES WHICH COULD RESULT IN SIGNIFICANT CHARGES TO
EARNINGS AND REQUIRE THE USE OF CAPITAL RESOURCES. As part of our business
strategy, we intend to continue to pursue the acquisition of complementary
product rights and technologies. Such acquisitions could result in
significant charges to earnings in the related period as well as require the
use of a large amount of our available capital resources. Depending on the
acquisition opportunities available and our use of existing funds to satisfy
existing capital and operating needs, we may need to raise additional funds
to finance such transactions. If adequate funds are not available when needed
on terms acceptable to us, our ability to complete acquisitions could be
limited. We may not have sufficient funds to develop any technologies we may
acquire, any development we conduct may not be successful and any funds we
spend on product development may reduce our earnings below the levels
expected by securities analysts. Further, reimbursement may not be available
to enable us to achieve market acceptance of any products we may acquire or
develop or to maintain price levels sufficient to realize an appropriate
return on our investment in these products.
THE PHARMACEUTICAL INDUSTRY IS EXTREMELY COMPETITIVE. Many companies,
including large pharmaceutical firms with financial and marketing resources
and development capabilities substantially greater than ours, are engaged in
developing, marketing and selling products that compete with those that we
offer or plan to offer. Our failure to effectively respond to the competitive
pressures of our industry would have an adverse effect on our business and
results of operations. The selling prices of such products typically decline
as competition increases. Further, other products now in use or under
development by others may be more effective than our current or future
products. The industry is characterized by rapid technological change, and
competitors may develop their products more rapidly than us. Competitors may
also be able to complete the regulatory process sooner, and therefore, may
begin to market their products in advance of our products.
WE NEED TO BUILD A HOSPITAL-BASED FIELD SALES FORCE BY THE END OF 1999 TO BE
ABLE TO EFFECTIVELY MARKET OUR RECENTLY ACQUIRED PRODUCTS, MAXIPIME AND
AZACTAM. Effective January 1, 1999, we acquired the rights to two
hospital-based products, Maxipime (cefepime hydrochloride) for Injection and
Azactam (aztreonam) for Injection. Under a co-promotion agreement with
Bristol-Myers Squibb, the BMS hospital field sales force will continue to
promote the products through the end of 1999, at which point we will assume
full responsibility for promoting these products. In the first quarter of
1999 we built our acute care sales and marketing management team, and by the
end of 1999 we expect to have approximately 100 field sales representatives
and associated field management who will primarily focus on promoting our
hospital-based products. We may not be able to hire qualified field sales
representatives with the necessary experience selling to hospitals. Even if
we are successful in identifying and hiring such representatives, we may not
be able to hire the numbers needed in the appropriate time frame. Our success
with these products is dependent upon effectively building this sales and
marketing capability by the end of 1999.
A PROPOSED NEW ACCOUNTING STANDARD MAY REQUIRE US TO CONSOLIDATE SPIROS CORP.
II WHICH WOULD HAVE AN ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS. In
February 1999, the Financial Accounting Standards Board issued an exposure
draft of a proposed new statement of financial accounting standards entitled
"Consolidated Financial Statements: Purpose and Policy." This proposed
standard, if adopted, would modify existing standards which govern when the
assets, liabilities,
12
and operating results of special purpose research and development entities,
like Spiros Corp. II, should be consolidated. The exposure period for
interested parties to comment on the proposed changes ended in May 1999, and
these comments will be considered prior to issuing the standard in its final
form, if one is issued at all. If adopted as initially proposed, this
standard may require us to consolidate the assets, liabilities, and operating
results of Spiros Corp. II into our financial statements. Such consolidation
would have an adverse effect on our results of operations and may have an
adverse effect on the market price of our common stock.
WE COMPETE WITH MANY COMPANIES FOR THE ACQUISITION OF RIGHTS TO NEW PRODUCTS
AND TECHNOLOGIES. Our strategy for growth is dependent, in part, on our
ability to continue to acquire rights to new products and technologies. The
failure to successfully acquire, develop or market new products or
technologies would have an adverse effect on our business, including our
ability to achieve our targeted growth rates. Other companies, including
those with substantially greater resources, are competing with us for the
rights to such products. We may not be able to acquire additional products or
technologies on acceptable terms, or at all.
GROSS MARGINS ON PHARMACEUTICAL PRODUCTS MAY DECREASE AS A RESULT OF A NUMBER
OF FACTORS OUTSIDE OUR CONTROL, WHICH WOULD HAVE AN ADVERSE EFFECT ON OUR
BUSINESS. We do not have proprietary protection for several of the products
we sell and substitutes for such products are sold by other pharmaceutical
companies. In addition, the average selling prices for many of our products
may decline over time due to competitive and reimbursement pressures. We may
not be successful in any efforts we take to mitigate the effect of a decline
in average selling prices. Our commercial success will depend in part on the
price that third-party healthcare payors, such as government and private
health insurers and managed care organizations, are willing to pay for our
products. Third-party payors continually challenge the pricing of medical
products and services. Many managed care organizations limit the number of
pharmaceutical products they approve for reimbursement. The competition
between pharmaceutical companies to get their products approved for
reimbursement may also result in downward pricing pressure in the industry.
Any of these factors causing a decline in average selling prices would also
reduce the gross margins we achieve and negatively impact our business.
ALTERNATIVE SUPPLIERS TO OUR THIRD-PARTY MANUFACTURERS MAY NOT BE AVAILABLE
ON A TIMELY BASIS WHICH WOULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS. We do
not have the capability to manufacture the pharmaceutical products we
currently sell. As a result, we are dependent on third-party contract
manufacturers for the supply of all of our products. These products are
supplied under short-term and long-term supply agreements. If these
manufacturers were unable to supply product, it could be difficult for us to
secure alternative sources of supply in a timely manner. This would impair
our ability to ship product to our customers and could have an adverse effect
on our business and results of operations.
OUR EXERCISE OF THE SPIROS CORP. II STOCK PURCHASE OPTION MAY HAVE AN ADVERSE
EFFECT ON OUR BUSINESS. We have an option to purchase the outstanding shares
of callable common stock of Spiros Corp. II that expires on the earlier of
(i) December 31, 2002 or (ii) the 90th day after the date we provide Dura
with our quarterly financial statements showing cash and cash equivalents of
less than $5 million. We may or may not exercise this option. If we exercise
the option, we will be required to make a substantial cash payment or to
issue shares of our common stock, or both. A payment in cash would reduce our
capital resources. A payment in shares of our common stock would result in a
decrease in the percentage ownership of our
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shareholders at that time and have a dilutive effect on future earnings per
share. If we exercise the option, it will likely require us to record a
significant charge to earnings in the related period. If we do not exercise
our stock purchase option prior to its expiration, our rights to Spiros with
respect to certain compounds (including beclomethasone, budesonide and
albuterol) will terminate.
WE ALSO HOLD OPTIONS TO PURCHASE FROM SPIROS CORP. II CERTAIN RIGHTS TO
ALBUTEROL SPIROS AND RIGHTS TO USE SPIROS WITH AN ADDITIONAL PRODUCT OTHER
THAN ALBUTEROL. We may or may not exercise either of these options. If we
exercise either of our product options, we will need to make a significant
cash payment which could have an adverse effect on our capital resources. Any
such cash payment also may result in a significant charge to our earnings in
the period we exercise the option. We may not have sufficient capital
resources to exercise the product options, which may result in our loss of
valuable rights, unless we exercise our Spiro Corp. II stock purchase option
as discussed above.
OUR ABILITY TO OBTAIN PATENTS AND PROTECT OUR PROPRIETARY RIGHTS IS UNCERTAIN
AND COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS. Our ability to obtain
patents on current or future products or technologies, defend our patents,
maintain trade secrets and operate without infringing upon the proprietary
rights of others both in the U.S. and abroad is uncertain. Patents may never
issue. Even if issued or licensed to us, patents may not be enforceable,
provide substantial protection from competition or be of commercial benefit
to us. Even if all these are true, we may not possess the financial resources
necessary to enforce or defend any patent rights we obtain. Our commercial
success will also depend upon avoiding the infringement of patents issued to
competitors and upon maintaining the technology licenses upon which certain
of our products are based. Litigation, which is costly, may be necessary to
enforce our patent and license rights or to determine the scope and validity
of proprietary rights of third parties. If any of our products or
technologies are found to infringe upon patents or other rights owned by
third parties, we could be required to obtain a license to continue to
manufacture or market such products or technologies. Licenses to such patent
rights may not be available to us on commercially reasonable terms, if at
all. If we do not obtain such licenses, we could encounter delays in
marketing affected products or technologies or we could find that the
development, manufacture or sale of products requiring such licenses is not
possible.
OUR STOCK PRICE IS VOLATILE. The market prices for securities of emerging
companies, including ours, have historically been highly volatile. Future
announcements concerning us or our competitors may have a significant impact on
the market price of our common stock. Such announcements might include:
- - financial results,
- - the results of clinical testing of our or our competitors' products,
- - regulatory developments,
- - technological innovations,
- - new commercial products,
- - changes to government regulations,
- - regulatory decisions on commercialization of products,
- - developments concerning proprietary rights,
- - litigation or public concern as to safety of our products, or
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- - our failure to achieve securities analysts' expectations concerning our
earnings per share or revenues.
WE ARE INVOLVED IN CERTAIN LAWSUITS AND CANNOT PREDICT THEIR OUTCOME. We are
involved in certain lawsuits as described in note 3 of the notes to consolidated
financial statements. The outcome of these lawsuits and any other suits we may
become involved in cannot be predicted. An adverse outcome in any of these
actions could have an adverse effect on our business or results of operations.
SEASONALITY AND THE TIMING AND SEVERITY OF THE WINTER COLD AND FLU SEASON CAN
HAVE AN ADVERSE EFFECT ON OUR OPERATING RESULTS. Historically, as a result of
the winter cold and flu season, industry-wide demand for respiratory products
has been stronger in the first and fourth quarters than in the second and third
quarters of the year. In addition, variations in the timing and severity of the
winter cold and flu season have influenced our results of operations in the
past.
OUR PRODUCTS MAY CAUSE PRODUCT LIABILITY CLAIMS OR MAY NEED TO BE RECALLED,
EITHER OF WHICH WOULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS. We face an
inherent business risk of exposure to product liability claims in the event that
the use of our products or technologies is alleged to have resulted in adverse
effects. The level or breadth of any insurance coverage we currently maintain
may not be sufficient to fully cover potential claims. Adequate insurance
coverage may not be available in the future at acceptable costs, if at all.
CERTAIN OF OUR CHARTER AND OTHER CONTRACTUAL PROVISIONS MAY PREVENT A CHANGE OF
CONTROL WHICH COULD BE BENEFICIAL TO OUR SHAREHOLDERS. Certain provisions of our
charter documents, outstanding securities, including certain warrants, options
and our notes, and our shareholder rights plan may have the effect of delaying,
deferring or preventing a change in control. This could deprive you of an
opportunity to receive a premium for your shares of common stock.
WE MAY NOT ADEQUATELY ADDRESS YEAR 2000 ISSUES WHICH COULD HAVE AN ADVERSE
EFFECT ON OUR BUSINESS. We have evaluated our systems to assess their year 2000
compliance, and we are currently upgrading and testing those systems. We are
also completing our audits of the compliance efforts of our significant
suppliers, customers and key business partners to determine the extent to which
our business may be affected if these parties fail to address their year 2000
issues. We estimate that the aggregate costs of our year 2000 program will be
less than $1 million, including costs incurred to date. There can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans. Our failure to adequately address our year 2000
risks would have an adverse effect on our business and results of operations.
For a more complete description of the initiatives we have implemented with
respect to the year 2000 issue, please see "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Year 2000."
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest our excess cash and short-term investments in U.S. government and
corporate debt securities with high quality credit ratings and maturities of
less than two years. These investments are not held for trading or other
speculative purposes. Changes in interest rates
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affect the investment income we earn on our investments and, therefore,
impact our cash flows and results of operations. At June 30, 1999, we had
outstanding subordinated notes totaling $287.5 million which mature in July
2002. The notes have a fixed interest rate of 3 1/2 percent. Accordingly,
while changes in interest rates may affect the fair market value of the
notes, they do not impact our cash flows or results of operations. As of June
30, 1999, the notes had a fair market value of $218.5 million. We are not
exposed to risks for changes in foreign currency exchange rates, commodity
prices, or any other market rates.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See note 3 to the consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 20, 1999, the Company's Annual Meeting of Stockholders was held at the
offices of the Company for the following purposes:
(a) The following three directors were elected to serve two-year terms to
expire at the 2001 Annual Meeting of Stockholders:
For Withheld
--- --------
Herbert J. Conrad 37,631,969 1,137,396
Gordon V. Ramseier 38,104,794 664,571
Charles G. Smith 38,108,864 660,501
The following directors were elected at the May 21, 1998 Annual Meeting
of Stockholders and are currently serving terms that will expire in
2000.
James C. Blair
Joseph C. Cook, Jr.
Cam L. Garner
David F. Hale
David S. Kabakoff
(b) The Stockholders approved the amendment to the Company's 1992 Stock
Option Plan to increase the number of authorized shares of Common Stock
available for issuance and to adjust the automatic grant provisions of
the Plan. The total number of votes cast for, against and abstained was
22,915,618, 15,739,370 and 131,377, respectively.
(c) The Stockholders ratified the appointment of Deloitte & Touche LLP as
the Company's independent public accountants for the year ending
December 31, 1999. The total number of votes cast for, against and
abstained was 38,611,403, 93,234, and 64,728, respectively.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No.
10.1 1992 Stock Option Plan, as amended and restated
11 Statements re Computations of Net Income Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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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.
DURA PHARMACEUTICALS, INC.
Date August 10, 1999 /s/ Michael T. Borer
- --------------------- --------------------
(Michael T. Borer)
------------------
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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