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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 JUNE 30, 1999
[ ] 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 000-21326
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Anika Therapeutics, Inc.
(Exact Name of Registrant as Specified in Its Charter)
MASSACHUSETTS 04-3145961
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
236 WEST CUMMINGS PARK, WOBURN, MASSACHUSETTS 01801
(Address of Principal Executive Offices) (Zip Code)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (781) 932-6616
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 and 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 last 90 days. Yes: X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
At August 11, 1999 there were issued and outstanding 9,787,236 shares of
Common Stock, par value $.01 per share.
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FORM 10-Q
ANIKA THERAPEUTICS, INC.
FOR QUARTER ENDED JUNE 30, 1999
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS. CERTAIN FACTORS THAT MIGHT
CAUSE SUCH A DIFFERENCE ARE DISCUSSED THROUGHOUT THIS FORM 10-Q AND ARE
DISCUSSED IN THE SECTION ENTITLED "RISK FACTORS AND CERTAIN FACTORS AFFECTING
FUTURE OPERATING RESULTS" ON PAGE 11 OF THIS FORM 10-Q.
2
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
ANIKA THERAPEUTICS, INC.
BALANCE SHEETS
June 30, December 31
1999 1998
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ASSETS: (Unaudited)
Current assets:
Cash and cash equivalents $ 5,218,037 $10,712,520
Short-term investments 10,158,240 12,007,503
Accounts receivable, net 2,840,423 3,032,737
Inventories 4,018,018 3,522,019
Prepaid expenses 610,502 250,023
----------- -----------
Total current assets 22,845,220 29,524,802
Property and equipment 7,157,431 6,376,405
Less: accumulated depreciation (4,160,340) (3,809,723)
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Net property and equipment 2,997,091 2,566,682
Long-term investments 5,632,881 --
Notes receivable from officers 252,000 193,000
Long-term deposits 108,500 108,500
----------- -----------
Total assets $31,835,692 $32,392,984
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $815,914 $891,493
Accrued expenses 1,418,954 1,356,586
Deferred revenue 200,000 200,000
------------ -----------
Total current liabilities 2,434,868 2,448,079
Advance rent payment 22,707 50,215
Stockholders' equity:
Redeemable convertible preferred stock;
$.01 par value: authorized 750,000 shares;
no shares issued and outstanding -- --
Undesignated preferred stock; $.01 par
value: authorized 1,250,000 shares;
no shares issued and outstanding -- --
Common stock; $.01 par value: authorized
30,000,000 shares; issued 9,991,943
shares in 1999 and 1998 99,919 99,919
Additional paid-in capital 31,986,824 34,439,676
Deferred compensation (801,614) (1,074,699)
Treasury stock, (at cost) 204,707
and 344,500 shares in 1999 and
1998, respectively (978,247) (1,889,794)
Accumulated deficit (928,765) (1,680,412)
------------ -----------
Total stockholders' equity 29,378,117 29,894,690
------------ -----------
Total liabilities and
stockholders' equity $31,835,692 $32,392,984
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SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
3
ANIKA THERAPEUTICS, INC.
INCOME STATEMENTS (UNAUDITED)
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Product revenue $3,750,275 $3,095,966 $6,974,853 $5,850,385
Licensing payments -- 1,500,000 -- 1,500,000
---------- ---------- ---------- ----------
Total revenue 3,750,275 4,595,966 6,974,853 7,350,385
Cost of sales 1,896,633 1,564,569 3,604,804 2,908,041
---------- ---------- ---------- ----------
Gross profit 1,853,642 3,031,397 3,370,049 4,442,344
Operating expenses
Research and development 924,819 388,531 1,632,676 891,510
Selling, general and administrative 807,220 704,228 1,562,171 1,240,214
---------- ---------- ---------- ----------
Total operating expenses 1,732,039 1,092,759 3,194,847 2,131,724
---------- ---------- ---------- ----------
Income from operations 121,603 1,938,638 175,202 2,310,620
Interest income, net 297,879 318,468 600,029 610,568
---------- ---------- ---------- ----------
Income before provision for income
taxes 419,482 2,257,106 775,231 2,921,188
Provision for income taxes 12,584 55,651 23,584 82,727
---------- ---------- ---------- ----------
Net income $406,898 $2,201,455 $751,647 $2,838,461
========== ========== ========== ==========
Basic earnings per share $.04 $.22 $.08 $.29
==== ==== ==== ====
Shares used for computing basic
earnings per share 9,558,024 9,948,095 9,395,390 9,895,082
Diluted earnings per share $.04 $.20 $.07 $.26
==== ==== ==== ====
Shares used for computing
diluted earnings per share 10,075,826 11,197,949 10,081,235 11,039,747
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
4
ANIKA THERAPEUTICS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended
June 30,
1999 1998
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Cash flows from operating activities:
Net income $ 751,647 $ 2,838,461
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 350,617 238,501
Amortization of unearned stock compensation 179,708 59,840
Other long-term liabilities (27,508) (26,720)
Changes in operating assets and liabilities:
Accounts receivable 192,314 (823,898)
Inventories (495,999) (240,136)
Prepaid expenses (360,479) (11,235)
Accounts payable and accrued expenses (13,211) (353,867)
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Net cash provided by operating activities 577,089 1,680,946
---------- -----------
Cash flows from investing activities:
Long-term deposits -- (84,895)
Decrease in short-term investments, 1,849,263 --
Increase in long-term investments, net (5,632,881) --
Purchase of property and equipment (781,026) (1,630,207)
Notes receivable from officers (59,000) --
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Net cash used in investing activities (4,623,644) (1,715,102)
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Cash flows from financing activities:
Expenses from issuance of common stock -- (64,919)
Purchase of 394,800 shares of treasury stock (1,948,980) --
Proceeds from exercise of stock options and warrants 501,052 927,104
---------- -----------
Net cash (used in) provided by financing activities (1,447,928) 862,185
---------- -----------
Decrease increase in cash and cash equivalents (5,494,483) 828,029
Cash and cash equivalents at beginning of period 10,712,520 22,679,820
---------- -----------
Cash and cash equivalents at end of period $5,218,037 $23,507,849
========== ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
5
ITEM 1. FINANCIAL STATEMENTS
ANIKA THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS
Anika Therapeutics, Inc. ("Anika" or the "Company") develops,
manufactures and commercializes therapeutic products and devices intended to
promote the repair, protection and healing of bone, cartilage and soft
tissue. These products are based on hyaluronic acid ("HA"), a
naturally-occurring, biocompatible polymer found throughout the body. Due to
its unique biophysical and biochemical properties, HA plays an important role
in a number of physiological functions such as the protection and lubrication
of soft tissues and joints, the maintenance of the structural integrity of
tissues, and the transport of molecules to and within cells. The Company's
currently marketed products consist of ORTHOVISC(R), which is an HA product
used in the treatment of some forms of osteoarthritis ("OA") in humans and
HYVISC(R), which is an HA product used in the treatment of equine
osteoarthritis. ORTHOVISC is currently approved for sale and marketed in
Canada, Europe, Turkey, Israel and Iceland. In the U.S. ORTHOVISC is
currently limited to investigational use only and the Company commenced a
clinical study in the U.S. and Canada in late April 1999. The Company
manufactures AMVISC(R) and AMVISC(R) Plus, which are HA products used as
viscoelastic supplements in ophthalmic surgery, for Bausch & Lomb Surgical, a
subsidiary of Bausch & Lomb. The Company is currently developing INCERT(R),
which is an HA based product designed for use in the prevention of
post-surgical adhesions. In collaboration with Orquest, Inc., Anika also has
exclusive rights to produce Ossigel-TM-; an injectable formulation of basic
fibroblast growth factor combined with HA designed to accelerate the healing
of bone fractures.
(2) BASIS OF PRESENTATION
The accompanying financial statements have been prepared by the Company
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, these financial statements
contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position of the Company as of June
30, 1999, the results of operations for the three and six months ended June
30, 1999 and 1998 and the cash flows for the six months ended June 30, 1999
and 1998.
The accompanying financial statements and related notes should be read in
conjunction with the Company's annual financial statements filed with the Annual
Report on Form 10-K for the year ended December 31, 1998. The results of
operations for the six months ended June 30, 1999 are not necessarily indicative
of the results to be expected for the full year.
(3) EARNINGS PER SHARE
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, Earnings per Share, which establishes standards for
computing and presenting earnings per share, simplifying previous standards and
making them comparable to international earnings per share standards. Basic
earnings per share is computed by dividing net income by the weighted average
number of common shares outstanding during the period. Diluted earnings per
share is computed by dividing net income by the weighted average number of
common shares and dilutive potential common shares outstanding during the period
6
The following illustrates a reconciliation of the number of shares used in
the calculation of basic and diluted earnings per share for the three and six
months ended June 30, 1999 and 1998:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Basic weighted average common shares
outstanding 9,558,024 9,948,095 9,395,390 9,895,082
Dilutive effect of assumed exercise
of stock options and warrants 517,802 1,249,854 685,845 1,144,665
---------- ---------- ---------- ----------
Weighted average common shares
outstanding assuming conversion 10,075,826 11,197,949 10,081,235 11,039,747
========== ========== ========== ==========
(4) SIGNIFICANT CUSTOMERS
Sales of AMVISC products to Bausch & Lomb Surgical, accounted for 52.0% and
71.3% of total product revenue for the three months ended June 30, 1999 and
1998, respectively. Sales of AMVISC products to Bausch & Lomb Surgical,
accounted for 59.7% and 76.4% of total product revenue for the six months ended
June 30, 1999 and 1998, respectively.
Sales of ORTHOVISC products to one customer accounted for 30.3% and 21.9%
of total product revenue for the three months ended June 30, 1999 and 1998,
respectively. Sales of ORTHOVISC products to one customer accounted for 27.9%
and 17.4% of total product revenue for the six months ended June 30, 1999 and
1998, respectively.
(5) COMPREHENSIVE INCOME
The Company follows the provisions of SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in financial statements. Comprehensive
income is the total of net income and all other nonowner changes in equity
including items such as unrealized holding gains/losses on securities classified
as available for sale, foreign currency translation adjustments and minimum
pension liability adjustments. The Company had no such items for the six months
ended June 30, 1999 and 1998 and therefore comprehensive income and net income
are the same.
(6) INVENTORIES
Inventories consist of the following:
June 30, December 31,
1999 1998
---------- ----------
Raw materials $ 801,686 $ 432,255
Work in-process 3,094,004 3,013,930
Finished goods 122,328 75,834
---------- ----------
Totals $4,018,018 $3,522,019
========== ==========
(7) NOTES RECEIVABLE FROM OFFICERS
Notes receivable from officers consists of four loans made to three
officers of the Company. The loan amounts are due at the earlier of the end of
five years from the date of the note or at the termination of the officers'
employment. Interest accrues at the annual rates between 4.42% to 6.00% and is
payable monthly over the term of the loans.
7
(8) STOCK REPURCHASE PLAN
In October 1998, the Board of Directors approved a stock repurchase plan
under which the Company is authorized to purchase up to $4,000,000 of Anika
common stock, with the total number of shares purchased not to exceed 9.9
percent of the total issued and outstanding shares. Under the plan, shares may
be repurchased from time to time and in such amounts as market conditions
warrant and subject to regulatory considerations. As of June 30, 1999, the
Company had repurchased a total of 762,100 shares at a net cost of approximately
$3,873,000. A total of 557,393 of the shares repurchased have been reissued to
employees upon the exercise of stock options.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company develops, manufactures and commercializes therapeutic products
and devices intended to promote the repair, protection and healing of bone,
cartilage and soft tissue. These products are based on hyaluronic acid ("HA"), a
naturally-occurring, biocompatible polymer found throughout the body. Due to its
unique biophysical and biochemical properties, HA plays an important role in a
number of physiological functions such as the protection and lubrication of soft
tissues and joints, the maintenance of the structural integrity of tissues, and
the transport of molecules to and within cells. The Company's currently marketed
products consist of ORTHOVISC(R), which is an HA product used in the treatment
of some forms of osteoarthritis ("OA") in humans and HYVISC(R), which is an HA
product used in the treatment of equine osteoarthritis. ORTHOVISC is currently
approved for sale and marketed in Canada, Europe, Turkey, Israel and Iceland. In
the U.S. ORTHOVISC is currently limited to investigational use only and the
Company commenced a clinical trial in The U.S and Canada in late April 1999. The
Company manufactures AMVISC(R) and AMVISC(R) Plus, which are HA products used as
viscoelastic supplements in ophthalmic surgery, for Bausch & Lomb Surgical, a
subsidiary of Bausch & Lomb. The Company is currently developing INCERT(R),
which is an HA based product designed for use in the prevention of post-surgical
adhesions. In collaboration with Orquest, Inc., Anika also has exclusive rights
to produce OSSIGEL-TM-; an injectable formulation of basic fibroblast growth
factor combined with HA designed to accelerate the healing of bone fractures.
The Company receives a substantial portion of its revenue from the sale of
AMVISC and AMVISC Plus to Bausch & Lomb Surgical. For the three months ended
June 30, 1999 and 1998, AMVISC sales accounted for 52.0% and 71.3% of total
product revenue, respectively. For the six months ended June 30, 1999 and 1998,
AMVISC sales accounted for 59.7% and 76.4% of total product revenue,
respectively.
RESULTS OF OPERATIONS
PRODUCT REVENUE. Product revenue for the three months ended June 30, 1999 was
$3,750,000 an increase of $654,000, or 21.1%, over the $3,096,000 recorded in
the comparable prior period Product revenue for the six months ended June 30,
1999 was $6,975,000 an increase of $1,125,000, or 19.2%, over the $5,850,000
recorded in the comparable prior period. The increase for the three and six
months ended June 30, 1999 were attributable to increases in sales of ORTHOVISC.
GROSS PROFIT. The Company's gross profit as a percentage of product revenue was
49.4% for the three months ended June 30, 1999 versus 49.5% for the comparable
prior period. The Company's gross profit as a percentage of product revenue was
48.3% for the six months ended June 30, 1999 versus 50.2% for the comparable
prior period. Although the Company realizes higher gross margins from ORTHOVISC
versus AMVISC and ORTHOVISC sales increased over the comparable periods in the
prior year, gross margins as a percentage of sales have not increased over the
prior year due to an increase in costs incurred to expand the Company's
manufacturing capacity.
RESEARCH AND DEVELOPMENT. Research and development expenses for the three months
ended June 30, 1999 increased $536,000 to $925,000 from $389,000 recorded in the
comparable prior period, primarily as a result of a costs for the ORTHOVISC
clinical trial. Research and development expenses for the six months ended June
30, 1999 increased $741,000 to $1,633,000 from $892,000 recorded in the
comparable prior period, primarily as a result of a costs for the ORTHOVISC
clinical trial. The Company expects that research and development expenses will
increase substantially during 1999 due to
8
the estimated expenditure of $2,500,000 for the ORTHOVISC clinical trial.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the three months ended June 30, 1999, increased $103,000, or 14.6%,
to $807,000 from $704,000 in the comparable prior period. Selling, general and
administrative expenses for the six months ended June 30, 1999, increased
$322,000, or 25.9%, to $1,562,000 from $1,240,000 in the comparable prior
period. The increases for the three and six months ended June 30, 1999, were
primarily attributable to increases in ORTHOVISC selling and marketing costs,
additional staffing and the amortization of deferred compensation expenses
resulting from the issuance of stock options.
INCOME TAXES. The Company's effective tax rate was 3.0% for 1999 versus 2.8% for
the comparable prior period. The Company's effective tax rate was significantly
lower than the statutory rate as a result of the utilization of net operating
loss and tax credit carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had cash, cash equivalents, and investments
of $21.0 million and working capital of $20.4 million versus cash, cash
equivalents and investments of $22.7 million and working capital of $27.1
million at December 31, 1998.
The Company spent $781,000 in the first six months of 1999 for capital
expenditures primarily related to expanding manufacturing capacity. The Company
expects to spend an additional $1,219,000 during the balance of 1999, primarily
to complete the expansion of its manufacturing facility. The Company expects
that after this expansion it will have adequate capacity to meet demand through
at least the end of the year 2003 based upon its current expectations.
In October 1998, the Board of Directors approved a stock repurchase plan
under which the Company is authorized to repurchase up to $4 million of Anika
Common Stock with the total number of shares purchased under the plan not to
exceed 9.9% of the total issued and outstanding shares. Through June 30, 1999,
the Company had repurchased a total of 762,100 shares at an average cost per
share of $5.08 for a total cash purchase price of $3,873,000. A total of 557,393
of these shares repurchased have been re-issued to employees upon the
exercise of stock options.
The Company believes that its cash and investments on hand will be
sufficient to meet its operating requirements for at least the next 24 months.
The estimated $2.5 million cost for the ORTHOVISC clinical trial incurred during
1999 will adversely impact the Company's financial results. The Company believes
that the combination of revenues from its international ORTHOVISC business and
the AMVISC product line should be sufficient to fund its operations for the
balance of 1999 including expenses related to the clinical trial. In the future,
the Company may require additional financing to fund its operations and for the
construction of a new manufacturing facility.
The Company's future capital requirements and the adequacy of available
funds will depend, however, on numerous factors, including market acceptance of
its existing and future products, the successful commercialization of products
in development, progress in its product development efforts, the magnitude and
scope of such efforts, progress with preclinical studies, clinical trials and
product clearances by the FDA and other agencies, the cost and timing of its
efforts to expand its manufacturing capabilities, the cost of filing,
prosecuting, defending and enforcing patent claims and other intellectual
property rights, competing technological and market developments, and the
development of strategic alliances for the marketing of certain of its products.
Although the Company achieved profitability for the six months ended June 30,
1999, and for the years ended 1998 and 1997 there can be no assurance that the
Company will continue to record profits in future periods. For 1998 and 1997,
the Company's unit sales of AMVISC substantially exceeded the minimum annual
obligations under the AMVISC Supply Agreement. The Company can provide no
assurance that unit sales of AMVISC for 1999 will continue to exceed minimum
annual purchase obligations.
The terms of any future equity financings may be dilutive to the Company's
stockholders and the terms of any debt financings may contain restrictive
covenants which limit the Company's ability to pursue certain courses of action.
The ability of the Company to obtain financing is dependent on the status of the
Company's future business prospects as well as conditions prevailing in the
relevant capital markets. No assurance can be given that any additional
financing will be made available to the Company or will be available on
acceptable terms should such a need arise. The Company's estimate of the
9
time period for which cash and cash equivalents, will be adequate to fund
operations is a forward looking statement within the meaning of the Private
Securities Litigation Reform Act of 1995 and is subject to risks and
uncertainties. Actual results may differ materially from those contemplated in
such forward-looking statements. In addition to those described above, factors
which may cause such a difference are set forth under the caption "Risk Factors
and Certain Factors Affecting Future Operating Results" as well as in this 10-Q
generally.
YEAR 2000 READINESS DISCLOSURE
The statements in the following section include "Year 2000 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act of 1998.
The Company has completed an assessment of its information systems to
verify Year 2000 readiness. The Company currently relies upon personal computers
running commercially available software applications and a mainframe computer
that runs financial applications only. The Company's manufacturing operations
are currently controlled by manual processes. The Company has recently put into
service a local area network with applications software that is Year 2000
compliant. The Company has performed an assessment of all of its applications
software running on personal computers and is in the process of upgrading all
software that is not compliant. The Company has purchased upgraded hardware and
software to run financial and manufacturing applications. The Company has
completed the installation of the upgraded hardware and will complete the
installation of the financial applications by the end of 1999 and the
manufacturing applications will be fully installed by the end of 2000.
The Company has conducted Year 2000 readiness surveys with its material
supply and service vendors. To date, those vendors and suppliers that have been
contacted have indicated that their hardware and software will be Year 2000
compliant in time frames that meet the Company's requirements. However, the
Company intends to continue to assess its exposure to Year 2000 noncompliance on
the part of any of its material vendors and suppliers.
The Company believes that the current personal computer software
applications and the upgrade of its financial applications will be made to allow
Year 2000 compliance in a timely manner. The Company does not anticipate that it
will incur material expenses to make the internal computer system Year 2000
compliant and believes that the Year 2000 issue will not pose significant
operational problems for the Company's system. There can be no assurance,
however, that the Company's internal systems or those of third parties will be
compliant in a timely manner. The failure of internal systems or third parties
to be Year 2000 compliant in a timely manner could have a material adverse
effect on the Company's business, financial conditions, and results of
operations. The Company currently does not have any contingency plan in the
event Year 2000 compliance cannot be achieved in a timely manner.
The preceding "Year 2000 Readiness Disclosure" contains various
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Section 27A Securities Act of 1933. These
forward-looking statements represent the Company's beliefs or expectations
regarding future events. When used in the "Year 2000 Readiness Disclosure", the
words "believes," "expects," "estimates" and similar expressions are intended to
identify forward looking statements. Forward looking statements include, without
limitation, the Company's expectations as to when it will complete the
installation and testing of its internal systems; its estimated cost of
achieving Year 2000 readiness; and the Company's belief that its internal
systems will be Year 2000 compliant in a timely manner. All forward-looking
statements involve a number of risks and uncertainties that could cause the
actual results to differ materially from the projected results.
Factors that may cause these differences include, but are not limited to,
the availability of qualified personnel and other information technology
resources; the ability to identify and remediate all date sensitive lines of
computer code or to replace embedded computer chips in affected systems or
equipment; and the actions of third parties with respect to Year 2000 problems.
10
RISK FACTORS AND CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS. CERTAIN FACTORS THAT MIGHT
CAUSE SUCH A DIFFERENCE INCLUDE, AMONG OTHER FACTORS NOTED HEREIN, THE
FOLLOWING:
COMPREHENSIVE GOVERNMENT REGULATION; NO ASSURANCE OF FDA APPROVAL. The Company's
products, product development activities, manufacturing processes, and current
and future sales and marketing are subject to extensive and rigorous regulation
by the FDA and comparable agencies in foreign countries. In the United States,
the FDA regulates the marketing, advertising, promotion, and distribution of
medical devices, drugs, and biologics, as well as testing, manufacturing,
labeling, recordkeeping, and reporting activities for such products.
Medical products regulated by the FDA are generally classified as devices
and/or drugs and/or biologics. Product development and approval within the FDA
framework takes a number of years and involves the expenditure of substantial
resources. There can be no assurance that the FDA will grant approval for the
Company's new products on a timely basis if at all, or that FDA review will not
involve delays that will adversely affect the Company's ability to commercialize
additional products or expand permitted uses of existing products, or that the
regulatory framework will not change, or that additional regulation will not
arise at any stage of the Company's product development process which may
adversely affect approval of or delay an application or require additional
expenditures by the Company. In the event the Company's future products are
regulated as human drugs or biologics, the FDA's review process typically would
be substantially longer and more expensive than the review process for devices.
The Company's ORTHOVISC product is currently regulated as a Class III
device by the FDA. Class III devices are those that generally must receive
pre-market approval by the FDA to ensure their safety and effectiveness (e.g.
life-sustaining, life-supporting and implantable or new devices which have not
been found to be substantially equivalent to legally marketed devices) and
require clinical testing to ensure safety and effectiveness and FDA approval
prior to marketing and distribution. In order for the Company to commercially
distribute ORTHOVISC in the U.S., it must obtain FDA approval of a PMA. The PMA
approval process can be expensive, uncertain and lengthy. A number of devices
for which pre-market approval has been sought have never been approved for
marketing. The review of an application often occurs over a protracted time
period and may take two years or more from the filing date to complete. The
Company submitted a PMA for ORTHOVISC in December 1997. In October 1998, the
Company was notified by the FDA that the Company's PMA application for ORTHOVISC
was not approvable and that additional clinical data would be required to
demonstrate the effectiveness of ORTHOVISC. The Company submitted an IDE to the
FDA in February 1999 and received approval in late March 1999 to commence a
second Phase III clinical study. The ORTHOVISC clinical trial commenced in late
April 1999. There can be no assurance that the FDA will approve a PMA
application for ORTHOVISC on a timely basis, if at all, or that the FDA review
will not involve delays that will affect the Company's ability to commercialize
additional products or expand permitted uses of existing products. Furthermore,
even if granted, the approval may include significant limitations on the
indications for use for which the product may be marketed.
The Company's developmental HA products, including INCERT, has not obtained
regulatory approval in the U.S. for investigational use and/or commercial
marketing and sale. The Company believes that INCERT will be regulated as a
Class III medical device or biologic, although there can be no assurance that
such products will not be otherwise classified. Before undertaking clinical
trials in the U.S. to support a PMA, the Company must apply for and obtain FDA
and/or institutional review board ("IRB") approval of an IDE. There can be no
assurance that the Company will be permitted to undertake clinical trials of
these or other future products in the U.S. or that clinical trials will
demonstrate that the products are safe and effective or otherwise satisfy the
FDA's pre-market approval requirements. Orquest has not received regulatory
approval in the U.S. for the commercial marketing and sale of OSSIGEL. OSSIGEL
will be regulated as a Class III medical device with the FDA's Center of
Biologics Research and Review as the lead review center. There can be no
assurance that Orquest will be permitted to undertake clinical trials of OSSIGEL
or, if clinical trials are permitted, that such clinical trials will demonstrate
that OSSIGEL is safe and effective or otherwise satisfy FDA requirements.
11
Once obtained, marketing clearance can be withdrawn by the FDA due to
failure to comply with regulatory standards or the occurrence of unforeseen
problems following initial clearance. The Company may be required to make
further filings with the FDA under certain circumstances. The FDA's regulations
require agency approval of a PMA supplement for certain changes if they affect
the safety and effectiveness of an approved device, including, but not limited
to, new indications for use, labeling changes, the use of a different facility
to manufacture, process or package the device, changes in manufacturing methods
or quality control systems and changes in performance or design specifications.
Failure by the Company to receive approval of a PMA supplement regarding the use
of a different manufacturing facility or any other change affecting the safety
or effectiveness of an approved device on a timely basis, or at all, would have
a material adverse effect on the Company's business, financial condition and
results of operations. The FDA could also limit or prevent the manufacture or
distribution of the Company's products and has the power to require the recall
of such products. Significant delay or cost in obtaining, or failure to obtain
FDA clearance to market products, any FDA limitations on the use of the
Company's products, or any withdrawal or suspension of clearance by the FDA
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In addition, all FDA-approved products manufactured by the Company must be
manufactured in compliance with FDA's Good Manufacturing Practices ("GMP")
regulations or, for medical devices, FDA's Quality System Regulations ("QSR").
Ongoing compliance with GMP, QSR and other applicable regulatory requirements is
monitored through periodic inspection by state and federal agencies, including
the FDA. The FDA may inspect the Company and its facilities from time to time to
determine whether the Company is in compliance with regulations relating to
medical device and manufacturing companies, including regulations concerning
manufacturing, testing, quality control and product labeling practices. There
can be no assurance that the Company will be able to comply with current or
future FDA requirements applicable to the manufacture of products.
FDA regulations depend heavily on administrative interpretation and there
can be no assurance that the future interpretations made by the FDA or other
regulatory bodies, with possible retroactive effect, will not adversely affect
the Company. In addition, changes in the existing regulations or adoption of new
governmental regulations or policies could prevent or delay regulatory approval
of the Company's products.
Failure to comply with applicable regulatory requirements could result in,
among other things, warning letters, fines, injunctions, civil penalties, recall
or seizure of products, total or partial suspension of production, refusal of
the FDA to grant pre-market clearance or pre-market approval for devices,
withdrawal of approvals and criminal prosecution.
In addition to regulations enforced by the FDA, the Company is subject to
other existing and potential future federal, state, local and foreign
regulations. International regulatory bodies often establish regulations
governing product standards, packing requirements, labeling requirements, import
restrictions, tariff regulations, duties and tax requirements. To enable the
Company to market its products in Europe, the Company was required to receive a
"CE" marking certification, an international symbol of quality and compliance
with the applicable European medical device directive. In October 1996, the
Company received an EC Design Examination and an EC Quality System Certificate
from a European Notified Body, which entitles the Company to affix a CE marking
on ORTHOVISC for the treatment of osteoarthritis in synovial joints. There can
be no assurance that the Company will be able to achieve and/or maintain
compliance required for CE marking or other foreign regulatory approvals for any
or all of its products or that it will be able to produce its products in a
timely and profitable manner while complying with applicable requirements.
Federal, state, local and foreign regulations regarding the manufacture and sale
of medical products are subject to change. The Company cannot predict what
impact, if any, such changes might have on its business. The requirements
relating to the conduct of clinical trials, product licensing, pricing and
reimbursement also vary widely from country to country.
The process of obtaining approvals from the FDA and other regulatory
authorities can be costly, time consuming, and subject to unanticipated delays.
There can be no assurance that approvals of the Company's products will be
granted or that the Company will have the necessary funds to develop certain of
such products. Any failure to obtain, or delay in obtaining, such approvals
could adversely affect the ability of the Company to market its products.
12
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY. From its inception up
until December 31, 1996, the Company had incurred annual operating losses. As of
June 30, 1999, the Company had an accumulated deficit of approximately $929,000.
The continued development of the Company's products will require the commitment
of substantial resources to conduct research and preclinical and clinical
development programs, and to establish sales and marketing capabilities. The
Company incurred substantial and increasing operating losses through December
31, 1996 and, although the Company had net income of $4,349,000 and $3,344,000
for the years ended December 31, 1998 and 1997, respectively, the ability of the
Company to reach sustained profitability is highly uncertain. To achieve
sustained profitability the Company must, among other things, successfully
complete development of certain of its products, obtain regulatory approvals and
establish sales and marketing capabilities for certain of its products. There
can be no assurance that the Company will be able to achieve sustained
profitability.
COMPETITION. The Company competes with many companies, including large
pharmaceutical companies and specialized medical products companies. Many of
these companies have substantially greater financial and other resources, larger
research and development staffs, more extensive marketing and manufacturing
organizations and more experience in the regulatory process than the Company.
The Company also competes with academic institutions, governmental agencies and
other research organizations which may be involved in research, development and
commercialization of products. Because a number of companies are developing HA
products for similar applications, the successful commercialization of a
particular product will depend in part upon the ability of the Company to
complete clinical studies and obtain FDA marketing and foreign regulatory
approvals prior to its competitors. There can be no assurance that the Company
will be able to compete against current or future competitors or that
competition will not have a material adverse effect on the Company's business,
financial condition and results of operations.
UNCERTAINTY REGARDING SUCCESS OF CLINICAL TRIALS. Several of the Company's
products, including ORTHOVISC and INCERT, as well as the products of the
Company's collaborative partners, including OSSIGEL, will require clinical
trials to determine their safety and efficacy in humans for various conditions.
There can be no assurance that the Company or its collaborative partners will
not encounter problems that will cause it to delay or suspend clinical trials of
any of these products. In addition, there can be no assurance that such clinical
trials, if completed, will ultimately demonstrate these products to be safe and
efficacious.
DEPENDENCE UPON MARKETING PARTNERS. The Company does not plan to directly market
and sell its current products to customers. Therefore, the Company's success
will be dependent upon the efforts of its marketing partners and the terms and
conditions of the Company's relationships with such marketing partners. The
Company currently manufactures AMVISC and AMVISC Plus for Bausch & Lomb Surgical
under a non-exclusive fixed price, five-year supply agreement which contains
stated minimum annual purchase obligations and terminates on December 31, 2001.
Since January 1, 1997, Bausch & Lomb Surgical has purchased AMVISC and AMVISC
Plus in amounts substantially in excess of the minimum purchase obligations set
forth in the AMVISC supply contract. There can be no assurance that Bausch &
Lomb, Inc. will continue to purchase AMVISC and AMVISC Plus at levels beyond the
stated minimum annual purchase obligations. Any such decrease in orders under
the AMVISC supply contract could have a material adverse effect on the Company's
business, financial condition and results of operations. For the period ended
June 30, 1999 and 1998, sales of AMVISC products to Bausch & Lomb Surgical
accounted for 52.0% and 71.3% of product revenues. For the six months ended June
30, 1999 and 1998, sales of AMVISC products to Bausch & Lomb Surgical accounted
for 59.7% and 76.4% of product revenues.
In November 1997, the Company entered into a long-term distribution
agreement with Zimmer, Inc., a subsidiary of Bristol-Myers Squibb Company, that
was subsequently amended in June 1998, (the "Zimmer Distribution Contract"). The
Zimmer Distribution Contract provides Zimmer with exclusive marketing and
distribution rights to ORTHOVISC in the United States, Canada, Latin America,
Asia and most of Europe. To date the Company has received up-front
non-refundable licensing payments totaling $4.0 million. In addition, under the
Zimmer Distribution Contract the Company has the potential to receive payments
aggregating up to an additional $19.5 million upon the achievement of certain
regulatory approvals and enumerated sales milestones. As an alternative to a
$2.5 million milestone payment, Zimmer has the right to elect to acquire shares
of the Company's Common Stock equal to the greater of $2.5 million or 9.9% of
the then outstanding Common Stock (but not to exceed 19.9% of the then
outstanding Common Stock) at a 25% premium to the then current market price.
There can be no assurance that any of such milestones will be met on a timely
basis or at all. In addition, Zimmer has the right to terminate the agreement if
ORTHOVISC is not approved by the FDA by January 1, 2001 and if Zimmer sales of
13
ORTHOVISC fail to meet the minimums specified in the contract for two
consecutive years beginning in 1998. There can be no assurance that any of these
events will not occur, or, if any such event does not occur, that Zimmer will
not elect to terminate the agreement. Any such termination is likely to have a
material adverse effect on the Company's ability to market ORTHOVISC, which may
have a material adverse effect on the Company's future operation results.
The Company will need to obtain the assistance of additional marketing
partners for new products which are brought to market and existing products
brought to new markets. There can be no assurance that such additional partners
will be available or that such partners will agree to market the Company's
products on acceptable terms. The failure to establish strategic partnerships
for the marketing and distribution of the Company's products on acceptable terms
would have a material adverse effect on the Company's business, financial
condition and results of operations.
UNCERTAINTY OF MARKET ACCEPTANCE OF NEW PRODUCTS. The Company's success will
depend in part upon the acceptance of the Company's new products by the medical
community, hospitals and physicians and other health care providers, and
third-party payors. Such acceptance may depend upon the extent to which the
medical community perceives the Company's products as safer, more effective or
cost-competitive than other similar products. Ultimately, for the Company's new
products to gain general market acceptance, it will also be necessary for the
Company to develop marketing partners for the distribution of its products.
There can be no assurance that the Company's new products will achieve
significant market acceptance on a timely basis, or at all. Failure of some or
all of the Company's new products to achieve significant market acceptance could
have a material adverse effect on the Company's business, financial condition
and results of operations.
DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY. The Company's success will
depend, in part, on its ability to obtain and enforce patents, protect trade
secrets, obtain licenses to technology owned by third parties when necessary,
and conduct its business without infringing the proprietary rights of others.
The patent positions of pharmaceutical, medical products and biotechnology
firms, including the Company, can be uncertain and involve complex legal and
factual questions. There can be no assurance that any patent applications will
result in the issuance of patents or, if any patents are issued, whether they
will provide significant proprietary protection or commercial advantage, or will
not be circumvented by others. In the event a third party has also filed one or
more patent applications for any of its inventions, the Company may have to
participate in interference proceedings declared by the U.S. Patent and
Trademark Office ("PTO") to determine priority of invention (see below), which
could result in failure to obtain or the loss of patent protection for the
inventions and the loss of any right to use the inventions. Even if the eventual
outcome is favorable to the Company, such interference proceedings could result
in substantial cost to the Company. Filing and prosecution of patent
applications, litigation to establish the validity and scope of patents,
assertion of patent infringement claims against others and the defense of patent
infringement claims by others can be expensive and time consuming. There can be
no assurance that in the event that any claims with respect to any of the
Company's patents, if issued, are challenged by one or more third parties, that
any court or patent authority ruling on such challenge will determine that such
patent claims are valid and enforceable. An adverse outcome in such litigation
could cause the Company to lose exclusivity covered by the disputed rights. If a
third party is found to have rights covering products or processes used by the
Company, the Company could be forced to cease using the technologies or
marketing the products covered by such rights, could be subject to significant
liabilities to such third party, and could be required to license technologies
from such third party. Furthermore, even if the Company's patents are determined
to be valid, enforceable, and broad in scope, there can be no assurance that
competitors will not be able to design around such patents and compete with the
Company using the resulting alternative technology.
The Company has a policy of seeking patent protection for patentable
aspects of its proprietary technology. The Company co-owns certain United States
patents and a patent application which claim certain adhesion prevention uses
and certain drug delivery uses of HA, and solely owns patents directed to
certain manufacturing processes. The Company also holds an exclusive license
from Tufts University to use technologies claimed in a United States patent
application which has been granted a Notice of Allowance from the U.S. Patent
Office for the anti-metastasis applications of HA oligosaccharides. The
Company's issued patents expire between 2007 and 2015 and the license expires
upon expiration of all related patents. The Company intends to seek patent
protection with respect to products and processes developed in the course of its
activities when it believes such protection is in its best interest and when the
cost of seeking such protection is not inordinate. However, no assurance can be
given that any patent application will be filed, that any filed applications
will result in issued patents or that any issued patents will provide the
Company with a competitive advantage or will not be successfully challenged by
third parties. The protections afforded by patents will depend upon their scope
and validity, and others may be able to design around the Company's patents. The
Company's issued patents and any patents which arise from
14
the Company's licensed application would provide competitive protection, if at
all, only in the United States. The Company has not, to date, pursued foreign
patents equivalent to those issued or applied for in the United States.
Other entities have filed patent applications for or have been issued
patents concerning various aspects of HA-related products or processes. There
can be no assurance that the products or processes developed by the Company will
not infringe the patent rights of others in the future. Any such infringement
may have a material adverse effect on the Company's business, financial
condition and results of operations. In particular, the Company has received
notice from the PTO that a third party is attempting to provoke a patent
interference with respect to one of the Company's co-owned patents covering the
use of INCERT for post-surgical adhesion prevention. Although the Company
believes that an interference may be declared by the PTO, it is too early to
determine the merits of the interference or the effect, if any, the interference
will have on the Company's marketing of INCERT for this use. The existence of
the interference proceeding may have a negative impact on the marketing of the
INCERT product, and no assurance can be given that the Company would be
successful in any such interference proceeding. If the third-party interference
were to be decided adversely to the Company, involved claims of the Company's
patent would be cancelled, the Company's marketing of the INCERT product may be
materially and adversely affected and the third party may enforce patent rights
against the Company which could prohibit the sale and use of the INCERT
products, which could have a material adverse effect on the Company's future
operating results.
The Company also relies upon trade secrets and proprietary know-how for
certain unpatented aspects of its technology. To protect such information, the
Company requires all employees, consultants and licensees to enter into
confidentiality agreements limiting the disclosure and use of such information.
There can be no assurance that these agreements provide meaningful protection or
that they will not be breached, that the Company would have adequate remedies
for any such breach, or that the Company's trade secrets, proprietary know-how,
and technological advances will not otherwise become known to others. In
addition, there can be no assurance that, despite precautions taken by the
Company, others have not and will not obtain access to the Company's proprietary
technology. Further, there can be no assurance that third parties will not
independently develop substantially equivalent or better technology.
Pursuant to the AMVISC supply contract the Company has agreed to grant
Bausch & Lomb Surgical a royalty-free, worldwide, exclusive license to the
Company's manufacturing and product inventions which relate to AMVISC products,
effective on December 31, 2001, the termination date of the AMVISC supply
contract which became effective on January 1, 1997. Upon expiration of the
AMVISC supply contract, there can be no assurance that Bausch & Lomb Surgical
will continue to use the Company to manufacture AMVISC and AMVISC Plus. If
Bausch & Lomb Surgical discontinues the use of the Company as a manufacturer
after such time, the Company's business, financial condition and results of
operations would be materially and adversely affected.
RISKS ASSOCIATED WITH MANUFACTURING. The Company's results of operations are
dependent upon the continued operation of its manufacturing facility in Woburn,
Massachusetts. The operation of biomedical manufacturing plants involves many
risks, including the breakdown, failure or substandard performance of equipment,
natural and other disasters, and the need to comply with the requirements of
directives of government agencies, including the FDA. In addition, the Company
relies on a single supplier for syringes and a small number of suppliers for a
number of other materials required for the manufacturing and delivery of its HA
products. Furthermore, manufacturing processes and research and development
efforts of the Company involve animals and products derived from animals. The
utilization of animals in research and development and product commercialization
is subject to increasing focus by animal rights activists. The activities of
animal rights groups and other organizations that have protested animal based
research and development programs or boycotted the products resulting from such
programs could cause an interruption in the Company's manufacturing processes
and research and development efforts. The occurrence of material operational
problems, including but not limited to the events described above, could have a
material adverse effect on the Company's business, financial condition and
results of operations during the period of such operational difficulties.
15
NO ASSURANCE OF GROWTH OR ABILITY TO MANAGE GROWTH. The Company's future success
depends on substantial growth in product sales. There can be no assurance that
such growth can be achieved or, if achieved, can be sustained. There can be no
assurance that even if substantial growth in product sales and the demand for
the Company's products is achieved, the Company will be able to (i) develop the
necessary manufacturing capabilities, (ii) obtain the assistance of additional
marketing partners, (iii) attract, retain and integrate the required key
personnel, or (iv) implement the financial, accounting and management systems
needed to manage growing demand for its products, should it occur. Failure of
the Company to successfully manage future growth could have a material adverse
effect on the Company's business, financial condition and results of operations.
THIRD PARTY REIMBURSEMENT AND HEALTH CARE COST CONTAINMENT INITIATIVES. In the
U.S. and other markets, health care providers, such as hospitals and physicians,
that purchase health care products, such as the Company's products, generally
rely on third party payors, including Medicare, Medicaid and other health
insurance and managed care plans, to reimburse all or part of the cost of the
health care product. Reimbursement by a third party payor may depend on a number
of factors, including the payor's determination that the use of the Company's
products are clinically useful and cost-effective, medically necessary and not
experimental or investigational. Since reimbursement approval is required from
each payor individually, seeking such approvals can be a time consuming and
costly process which, in the future, could require the Company or its marketing
partners to provide supporting scientific, clinical and cost-effectiveness data
for the use of the Company's products to each payor separately. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and third party payors are increasingly attempting to contain the
costs of health care products and services by limiting both coverage and the
level of reimbursement for new therapeutic products and by refusing in some
cases to provide coverage for uses of approved products for disease indications
for which the FDA has not granted marketing approval. In addition, Congress and
certain state legislatures have considered reforms that may affect current
reimbursement practices, including controls on health care spending through
limitations on the growth of Medicare and Medicaid spending. There can be no
assurance that third party reimbursement coverage will be available or adequate
for any products or services developed by the Company. Outside the U.S., the
success of the Company's products is also dependent in part upon the
availability of reimbursement and health care payment systems. Lack of adequate
coverage and reimbursement provided by governments and other third party payors
for the Company' products and services could have a material adverse effect on
the Company's business, financial condition and results of operations.
NEED FOR ADDITIONAL FUNDS; LIQUIDITY. The Company had cash, cash equivalents and
investments of $21.0 million as of June 30, 1999. The Company's future capital
requirements and the adequacy of available funds will depend, however, on
numerous factors, including market acceptance of its existing and future
products, the successful commercialization of products in development, progress
in its product development efforts, the magnitude and scope of such efforts,
progress with preclinical studies, clinical trials and product clearances by the
FDA and other agencies, the cost and timing of its efforts to expand its
manufacturing capabilities, the cost of filing, prosecuting, defending and
enforcing patent claims and other intellectual property rights, competing
technological and market developments, and the development of strategic
alliances for the marketing of certain of its products. To the extent that funds
generated from the Company's operations, together with the Company's existing
capital resources, are insufficient to meet future requirements, the Company
will be required to obtain additional funds through equity or debt financings,
strategic alliances with corporate partners and others, or through other
sources. The terms of any future equity financings may be dilutive to the
Company's stockholders and the terms of any debt financings may contain
restrictive covenants which limit the Company's ability to pursue certain
courses of action. The ability of the Company to obtain financing is dependent
on the status of the Company's future business prospects as well as conditions
prevailing in the relevant capital markets. No assurance can be given that any
additional financing will be made available to the Company or will be available
on acceptable terms should such a need arise.
EXPOSURE TO PRODUCT LIABILITY CLAIMS. The testing, marketing and sale of human
health care products entail an inherent risk of allegations of product
liability, and there can be no assurance that substantial product liability
claims will not be asserted against the Company. Although the Company has not
received any material product liability claims to date and has a $5 million
insurance policy to cover such claims should they arise, there can be no
assurance that material claims will not arise in the future or that the
Company's insurance will be adequate to cover all situations. Moreover, there
can be no assurance that such insurance, or additional insurance, if required,
will be available in the future or, if available, will be available on
commercially reasonable terms. Any product liability claim, if successful, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
16
DEPENDENCE UPON KEY PERSONNEL. The Company is highly dependent on the members of
its management and scientific staff, the loss of one or more of whom could have
a material adverse effect on the Company. In addition, the Company believes that
its future success will depend in large part upon its ability to attract and
retain highly skilled, scientific, managerial and manufacturing personnel. The
Company faces significant competition for such personnel from other companies,
research and academic institutions, government entities and other organizations.
There can be no assurance that the Company will be successful in hiring or
retaining the personnel it requires. The failure to hire and retain such
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations.
ENVIRONMENTAL REGULATION. The Company is subject to a variety of local, state
and federal government regulations relating to the storage, discharge, handling,
emission, generation, manufacture and disposal of toxic, or other hazardous
substances used in the manufacture of the Company's products. Any failure by the
Company to control the use, disposal, removal or storage of hazardous chemicals
or toxic substances could subject the Company to significant liabilities, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
RISKS RELATING TO INTERNATIONAL OPERATIONS. Approximately 30% of the Company's
product sales during the second quarter of 1999 were generated in international
markets through marketing partners. The Company's representatives, agents and
distributors which sell products in international markets are subject to the
laws and regulations of the foreign jurisdictions in which they operate and in
which the Company's products are sold. A number of risks are inherent in
international sales and operations. For example, the volume of international
sales may be limited by the imposition of government controls, export license
requirements, political instability, trade restrictions, changes in tariffs,
difficulties in managing international operations, import restrictions and
fluctuations in foreign currency exchange rates. Such changes in the volume of
sales may have an adverse effect on the Company's business, financial condition
and results of operations.
POTENTIAL VOLATILITY OF STOCK PRICE; NO CONTROL OVER MARKET MAKING. The market
price of shares of the Company's Common Stock may be highly volatile. Factors
such as announcements of new commercial products or technological innovations by
the Company or its competitors, disclosure of results of clinical testing or
regulatory proceedings, governmental regulation and approvals, developments in
patent or other proprietary rights, public concern as to the safety of products
developed by the Company and general market conditions may have a significant
effect on the market price of the Company's Common Stock. In particular, the
Company's stock price declined significantly in October 1998 following the
Company's announcement that the FDA had notified the Company that its PMA for
ORTHOVISC was not approvable and that additional clinical data would be required
to demonstrate the effectiveness of ORTHOVISC. To the extent the Company
experiences any other adverse developments in the process of seeking FDA
approval for ORTHOVISC, the price of the Common Stock will likely be subject to
further, and perhaps substantial, declines. The trading price of the Company's
Common Stock could be subject to wide fluctuations in response to
quarter-to-quarter variations in the Company's operating results, material
announcements by the Company or its competitors, governmental regulatory action,
conditions in the health care industry generally or in the medical products
industry specifically, or other events or factors, many of which are beyond the
Company's control. In addition, the stock market has experienced extreme price
and volume fluctuations which have particularly affected the market prices of
many medical products companies and which often have been unrelated to the
operating performance of such companies. The Company's operating results in
future quarters may be below the expectations of equity research analysts and
investors. In such event, the price of the Common Stock would likely decline,
perhaps substantially.
No person is under any obligation to make a market in the Common Stock or
publish research reports on the Company, and any person making a market in the
Common Stock or publishing research reports on the Company may discontinue
market making or publishing such reports at any time without notice. There can
be no assurance that an active public market in the Common Stock will develop
or, if developed, will be sustained.
POSSIBLE ADVERSE EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS. Certain provisions
of the Company's Restated Articles of Organization and Amended and Restated
By-laws could have the effect of discouraging a third party from pursuing a
non-negotiated takeover of the Company and preventing certain changes in
control. These provisions include a classified Board of Directors, advance
notice to the Board of Directors of stockholder proposals, limitations on the
ability of stockholders to remove directors and to call stockholder meetings,
the provision that vacancies on the Board of Directors be filled by a majority
of the remaining directors, the ability of the Board of Directors to issue,
without further stockholder approval, a Shareholder Rights Plan. The Company
also is subject to Chapter 110F of the Massachusetts General Laws which, subject
to
17
certain exceptions, prohibits a Massachusetts corporation from engaging in any
of a broad range of business combinations with any "interested stockholder" for
a period of three years following the date that such stockholder became an
interested stockholder. These provisions could discourage a third party from
pursuing a takeover of the Company at a price considered attractive by many
stockholders, since such provisions could have the effect of preventing or
delaying a potential acquiror from acquiring control of the Company and its
Board of Directors.
18
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT NO. DESCRIPTION
27.1 Financial Data Schedule
(b) Reports on Form 8-K: None
19
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.
ANIKA THERAPEUTICS, INC.
DATE: AUGUST 16, 1999 By: /s/ J. Melville Engle
-----------------------------------------
J. Melville Engle
Chairman, Chief Executive Officer, President
DATE: AUGUST 16, 1999 By: /s/ Sean F. Moran
-----------------------------------------
Sean F. Moran
PRINCIPAL FINANCIAL & ACCOUNTING OFFICER
20