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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________________ TO _____________________
COMMISSION FILE NO. 0-23641
ALLERGAN SPECIALTY THERAPEUTICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0779207
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2525 DUPONT DRIVE
IRVINE, CALIFORNIA 92612
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(714) 246-6301
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CLASS A COMMON STOCK
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of February 28, 2001 was $30,340,104.*
The number of shares outstanding of the Registrant's Class A Common
Stock was 3,272,690 as of February 28, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Definitive Proxy Statement to be filed with the Securities
and Exchange Commission (the "Commission") pursuant to Regulation 14A in
connection with the 2001 Annual Meeting of Stockholders to be held on April 19,
2001 (the "2001 Annual Meeting") is incorporated by reference into Part III of
this Report.
TRADEMARK CLAIMS
Zorac(R) and Tazorac(R) (tazarotene) are trademarks of Allergan, Inc.
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* Excludes the Class A Common Stock held by executive officers, directors and
stockholders whose beneficial ownership equals or exceeds 10% of the Class A
Common Stock outstanding at December 31, 2000, as well as the 1,000 shares
of Class B Common Stock that were issued and outstanding on such date, for
which no public market currently exists. Exclusion of such shares should not
be construed to indicate that any such stockholder possesses the power,
direct or indirect, to direct or cause the direction of the management or
policies of the Registrant or that such person is controlled by or under
common control with the Registrant.
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This Annual Report on Form 10-K contains certain forward-looking
statements that involve risks and uncertainties. The actual future results for
Allergan Specialty Therapeutics, Inc. ("ASTI" or the "Company") may differ
materially from those discussed here. Additional information concerning factors
that could cause or contribute to such differences can be found in this Annual
Report on Form 10-K in Part II, Item 7 entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Certain Risk
Factors Related to the Company's Business" and elsewhere throughout this Annual
Report.
PART I
ITEM 1. BUSINESS
BACKGROUND
ASTI was formed by Allergan, Inc., a technology-driven, global health
care company ("Allergan"), in November 1997 to research and develop various
pharmaceutical products. In March 1998, Allergan distributed all of the
currently outstanding ASTI Class A Common Stock (the "ASTI Shares") to holders
of Allergan's Common Stock, with such holders receiving one share of ASTI Class
A Common Stock for each 20 shares of Allergan Common Stock held (the
"Distribution"). Prior to the Distribution, Allergan contributed $200 million
and licensed certain Allergan technology to ASTI, and ASTI issued to Allergan
1,000 shares of its Class B Common Stock. As the sole holder of ASTI's
outstanding Class B Common Stock, Allergan has the option to repurchase all of
the outstanding ASTI Shares under specified conditions. In addition, Allergan
and ASTI entered into a Technology License Agreement, a Research and Development
Agreement, a License Option Agreement, a Distribution Agreement and a Services
Agreement (the "Allergan/ASTI Agreements"), each of which is described in the
Prospectus of ASTI dated March 6, 1998 (the "Prospectus") as well as in the
Notes to the Financial Statements in this Annual Report on Form 10-K. The terms
"ASTI Product," "Product Payments," "Pre-Selection Work," "Pre-Selection
Product," "Developed Technology," "Developed Technology Product," "Developed
Technology Royalties," "Licensed Product," "Technology Fee," and "Allergan
Technology" as used herein have the definitions given them in the Prospectus. To
date, ASTI has not performed, and does not intend to perform, any research,
development or other activities on its own behalf, as it pays Allergan to
perform all such activities pursuant to the terms of the Research and
Development Agreement.
ASTI PRODUCTS
In 2000, ASTI funded research and development on the following ASTI
Products:
1. AGN 194310
AGN 194310 is an RAR antagonist/inverse agonist, a class of compounds
having a unique biology distinct from that observed for retinoid
agonists. In late 1998, ASTI filed an Investigational New Drug
application ("IND") for AGN 194310 for two indications: (1) topical
antidote to systemic retinoid-induced mucocutaneous toxicity and (2)
topical treatment of psoriasis and eczema.
2. Tazarotene (Oral)
Tazarotene is a potent RAR beta gamma selective agonist which was
introduced into the market as a topical treatment for psoriasis and
acne under the brand name "Tazorac(R)" in the United States and
Canada and "Zorac(R)" outside the United States and Canada.
Although ASTI has no rights in the topical formulation of Tazarotene,
the oral formulation of Tazarotene is an ASTI Product, and ASTI has
been investigating a number of possible indications, including acne
and psoriasis as well as oncology. In 2000 the acne and psoriasis
indications were in Phase II while the oncology indication was in
Phase I.
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3. Memantine
Memantine is a glutamate receptor blocker, which has been shown to
protect nerve cells from injury and death in a number of in vitro and
in vivo studies.
In 1995, Allergan obtained exclusive ophthalmic rights to Memantine
from Children's Hospital, Boston, Massachusetts, and Merz + Co. GmbH
& Co. Allergan's United States rights to Memantine were given to ASTI
as an ASTI Product, and ASTI is investigating Memantine as a possible
treatment for glaucoma. Memantine is in Phase III clinical
development for the treatment of glaucoma.
4. Androgen Tears
Dry eye or keratoconjunctivitis ("KCS"), is a potentially
debilitating disease that affects more than 30 million people
worldwide.
Topical androgens have been shown to suppress the abnormal cell death
associated with KCS and may also reestablish the normal
anti-inflammatory ocular surface and lachrymal glands and allow for
resolution of the symptoms associated with KCS. Phase II studies are
planned to commence in 2001.
5. Hypotensive Lipid/Timolol combination:
ASTI is performing pre-clinical development work on a Hypotensive
Lipid/Timolol combination for the treatment of ocular hypertension
and primary open-angle glaucoma.
6. Ketorolac/Oflaxacin combination:
ASTI is funding Phase I development of a Ketorolac/Oflaxacin
combination for the treatment of infectious corneal ulcers.
7. Endotoxin:
ASTI has received rights in and is funding research and development
regarding the uses of a novel clostridia endotoxin derivative.
8. Epinastine:
ASTI is developing Epinastine, a topical drug for the prevention
and/or treatment of itch associated with allergic conjunctivitis of
the eye. Epinastine was licensed, by Allergan, from Boehringer
Ingelheim in 2000. An IND was submitted in September and the first
patient was enrolled in a Phase III study the fourth quarter of 2000.
Upon the recommendation of Allergan, ASTI chose not to fund research and
development activity in 2001 on the following ASTI Products: AGN 194310;
Tazarotene Oral--Oncology; Ketorolac/Oflaxacin combination; Memantine-Topical;
and Tazarotene Oral--pre-clinical.
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Additionally, Allergan proposed, and ASTI accepted, the following new projects
to be elevated to the status of ASTI Products and funded in 2001 (the "New ASTI
Products"):
1. Brimonodine/Timolol combination:
ASTI is developing a Brimonodine/Timolol combination product, a
topical drug for treatment of ocular hypertension and primary
open-angle glaucoma. The project is currently in Phase III.
2. Ketoraloc reformulation:
ASTI is developing a new formulation of Ketoraloc, a topical drug for
the treatment of post-surgical pain. The project is currently in the
pre-clinical development phase.
3. Alpha2 Pain Compound:
ASTI is developing AGN 197075 for the treatment of chronic pain. The
project is currently in the pre-clinical phase of development.
4. Photodynamic Therapy:
ASTI is developing ATX-S10 for the treatment of age-related macular
degeneration. The project is currently in the pre-clinical phase. In
December 2000, ASTI, through Allergan, obtained rights to ATX-S10
from Photo Chemical Company of Japan.
5. AGN 195795:
ASTI is developing AGN 195795, a topical drug for treatment of ocular
hypertension and primary open-angle glaucoma. The project is
currently in Phase II.
PRE-SELECTION WORK
In addition to ASTI Products, in 2000 ASTI funded research and
development in Pre-Selection Work projects, including those below, to explore
additional candidates for ASTI Products:
1. RAR Alpha Selective Retinoids and Other Retinoids
ASTI has funded research and development of retinoid compounds,
including retinoid compounds which are selective for receptor
families, as well as for individual receptor subtypes, in search of
potential candidates for additional ASTI Products.
For instance, Allergan has identified several series of RAR alpha
specific agonists. Studies in pre-clinical models suggest that RAR
alpha specific agonists may be of potential use in cancer such as
breast cancer and leukemia.
2. Vision Sparing Project
In collaboration with Cambridge NeuroSciences, Inc. ("CNSI"), ASTI
has been funding research and development to identify novel
treatments designed to protect the retina and optic nerve from
glaucomatous injury.
3. Retinal Disease Project
In 2000, ASTI continued to fund research and development into
treatment of unwanted growth of new blood vessels in the retina or
subretinal space, which growth has been associated with vision loss
in patients with retinal diseases such as age-related macular
degeneration.
4. Cytochroma Project
In 2000, ASTI also funded research into the development of a specific
P450 RAI inhibitor for the topical treatment of photo-damaged skin
and acne. This work is being conducted pursuant to a collaboration
with Cytochroma, Inc.
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POTENTIAL RESEARCH AND DEVELOPMENT EXPENDITURES
Product development activity costs include costs of pre-clinical
studies; costs of Phase I, Phase II and Phase III human clinical trials; and
costs of preparation and filing with the FDA (or similar governmental bodies in
other countries) to register drugs for sale. It is anticipated that if ASTI were
to fund the continued research and development of the current ASTI Products
through FDA review for marketing clearance, the funding of these activities,
together with the Pre-Selection Work expected to be undertaken by Allergan and
funded by ASTI, would substantially exceed the remaining "Available Funds" (the
$200 million contributed to ASTI by Allergan in connection with the
Distribution, plus any investment income earned thereon, less certain research
and development costs, ASTI's administrative expenses and the Technology Fee).
Any estimates regarding costs and the use of Available Funds will change as ASTI
Products are researched and developed and as projects are added or removed as
ASTI Products. Because of the long-range nature of any pharmaceutical product
research and development plan, research and development of a particular product
or products could accelerate, slow down or be discontinued, research and
development with respect to additional ASTI Products could be commenced,
technology or products could be purchased or licensed, and other unforeseen
events could occur, all of which would significantly affect the timing and
amount of expenditures.
As noted by ASTI in January 2000, ASTI anticipates substantially all of
the funds available for research and development remaining in ASTI will be
expended during 2001. See "Certain Risk Factors Related to the Company's
Business - No Assurance of Continued Research or Development of ASTI Products."
RELATIONSHIP BETWEEN ASTI AND ALLERGAN
ASTI performs its research and development through a number of
agreements with Allergan, including a Distribution Agreement, Technology License
Agreement, Research and Development Agreement, License Option Agreement, and
Services Agreement, each of which agreements is more fully described in the
Prospectus.
Additionally, ASTI's Restated Certificate of Incorporation provides that
Allergan has an irrevocable option to purchase all of the issued and outstanding
ASTI Shares (the "Purchase Option"). This Purchase Option will terminate on the
90th day after the date on which Allergan receives notice that the amount of
cash and marketable securities held by ASTI is less than $15 million. If the
Purchase Option is exercised, the exercise price will be the greatest of:
(a) (i) 25 times the aggregate of (a) all worldwide payments
made by and all worldwide payments due to be made by Allergan to ASTI
with respect to all Licensed Products, Developed Technology Products and
Pre-Selection Products for the four calendar quarters immediately
preceding the quarter in which the Purchase Option is exercised (the
"Base Period") and (b) all payments that would have been made and all
payments due to be made by Allergan to ASTI during the Base Period if
Allergan had not previously exercised its payment buy-out option with
respect to any product; provided, however, that, for the purposes of the
foregoing calculation, for any product which has not been commercially
sold during each of the four calendar quarters in the Base Period,
Allergan will be deemed to have made Product Payments, Developed
Technology Royalties and Pre-Selection Product payments to ASTI for each
such quarter equal to the average of the payments made during each of
such calendar quarters during which such product was commercially sold,
less (ii) any amounts previously paid to exercise any payment buy-out
option for any product;
(b) the fair market value of 1,000,000 shares of Allergan Common
Stock determined as of the date Allergan provides notice of its
intention to exercise its Purchase Option;
(c) $250 million less the aggregate amount of all Technology Fee
payments and research and development costs paid or incurred by ASTI as
of the date the Purchase Option is exercised; or
(d) $60 million.
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Pursuant to the License Option Agreement, ASTI has also granted a
License Option to Allergan pursuant to which Allergan may, on a
product-by-product and country-by-country basis, obtain from ASTI a perpetual,
exclusive license (with the right to sublicense) to research, develop, make,
have made and use an ASTI Product and to sell and have sold such product in the
country or countries as to which the License Option is exercised. The License
Option is described more fully in the Prospectus. In late 2000, in connection
with the addition of ASTI Products to ASTI, Allergan and ASTI agreed to increase
the license royalty rate under the License Option associated with any new ASTI
Products to which a license is taken to 15% of net sales.
GOVERNMENTAL REGULATION
All ASTI Products, Developed Technology Products and Pre-Selection
Products will require clearance by the FDA and comparable agencies in other
countries before they can be marketed. During the research and development stage
and as required, INDs for all new products will be filed with the FDA prior to
the commencement of initial (Phase I) clinical testing in human subjects in the
United States. In some instances this process could result in substantial delay
and expense.
After Phase I/II testing, which is intended to demonstrate the safety
and functional characteristics of a product, extensive efficacy and safety
studies in patients must be conducted. After completion of Phase III clinical
testing, an NDA is submitted, and its clearance involves an extensive review
process. There can be no marketing in the United States of any product for which
an NDA has been submitted until that NDA has been accepted for filing and
cleared by the FDA. It is impossible to determine the amount of time that will
be required to obtain clearance from the FDA to market any product or the cost
of obtaining such clearance.
Whether or not FDA clearance has been obtained, marketing clearance of a
product by the relevant regulatory authorities must be obtained in each foreign
country before the product may be marketed in that country. The clearance
procedures vary from country to country, and the time required may be longer or
shorter than that required for FDA clearance. In many foreign countries, pricing
and reimbursement approvals are also required. Although there are certain
procedures for unified filing in the European Community, in general each country
has its own procedures and requirements.
All facilities and manufacturing techniques used for the manufacture of
products for clinical use or for sale must conform with "current Good
Manufacturing Practices," the FDA regulations governing the production of
pharmaceutical products. These regulations govern a range of activities
including manufacturing, packaging, quality assurance and recordkeeping. Other
FDA regulations govern labeling and advertising materials. From time to time,
the FDA and other federal, state and local government agencies may adopt
regulations that affect the manufacturing and marketing of pharmaceutical
products. Environmental regulations will also affect the manufacture of such
products. Pharmaceutical products and their manufacture often use chemicals and
materials that may be classified as hazardous or toxic and/or require special
handling and disposal. Some of the therapeutic agents used in ASTI Products,
Developed Technology Products and Pre-Selection Products may also be regulated
by the United States Drug Enforcement Administration.
PATENTS
ASTI believes that Allergan's current patents, and patents that may be
obtained in the future, are important to ASTI's operations.
Patent protection generally has been important in the pharmaceutical
industry, and the commercial success of ASTI Products, Pre-Selection Products
and Developed Technology Products may depend, in part, upon Allergan's ability
to obtain patent protection. Although Allergan's existing patents, pending
patents, and any patents obtained in the future may be of importance to ASTI,
there can be no assurance that any additional patents will be issued or that any
patents now or hereafter issued will be of commercial benefit.
Although a patent has a statutory presumption of validity in the United
States, the issuance of a patent is not conclusive as to such validity or as to
the enforceable scope of the claims therein, and the validity and enforceability
of a patent after its issuance by the United States Patent and Trademark Office
can be challenged in litigation. If the outcome of such litigation is adverse to
the owner of the patent, third parties may then be able to use the invention
pertaining to the patent, in some cases without payment. There can be no
assurance that patents covering ASTI Products, Developed Technology Products or
Pre-Selection Products, if and when issued, will not be infringed or
successfully avoided through design innovation.
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It is also possible that third parties will obtain patents or other
proprietary rights that might be necessary or useful to Allergan or ASTI. In
cases where third parties are the first to invent a particular product or
technology, it is possible that those parties will obtain patents that will be
sufficiently broad so as to prevent Allergan or ASTI from using certain
Developed Technology or other Allergan Technology or from marketing certain
products. If licenses from third parties are necessary and cannot be obtained,
commercialization of such products could be delayed or prevented. Third parties
may claim that ASTI Products infringe their patents; in such event Allergan or
ASTI would need to defend against such claims. Defense of such claims could be
costly and time consuming. If licenses to the third party's patents are
available, the payments required by the third parties could be significant.
In addition, ASTI may use substantial unpatented technology. There can
be no assurance that others will not develop similar technology. Allergan
licenses certain intellectual property from third parties which it will
sublicense to ASTI pursuant to the Technology License Agreement. Under the terms
of certain of its license agreements, Allergan may be obligated to exercise
diligence and make certain royalty and milestone payments as well as incur costs
related to filing and prosecuting the underlying patents. Each agreement is
terminable by either party upon notice if the other party defaults in its
obligations. Should Allergan default under any of its agreements, Allergan and
therefore ASTI may lose their rights to market and sell products based upon such
licensed technology. In addition, there can be no assurance that Allergan's
licensors will meet their obligations to Allergan pursuant to such licenses. In
such event, ASTI's results of operations and business prospects would be
materially and adversely affected. See "Certain Risk Factors Related to the
Company's Business - Reliance on Proprietary Technologies; Unpredictability of
Patent Protection."
FACILITIES AND PERSONNEL
ASTI is not expected to hire employees or to acquire significant
property or assets prior to completion of the development stage of the ASTI
Products. However, pursuant to the Research and Development Agreement, Allergan
has been engaged by ASTI to research and develop human pharmaceutical products
under work plans and cost estimates recommended by Allergan and accepted by
ASTI. Decisions as to whether and/or when to hire employees, purchase property
or assets, perform administrative functions, engage Allergan to perform
administrative services under the Services Agreement, engage others to do so or
engage third parties other than or in addition to Allergan to perform research
and development activities will be made by ASTI.
COMPETITION
Any ASTI Product successfully developed under the Research and
Development Agreement will face competition from other therapies for the same
indications. Competitors potentially include any of the world's pharmaceutical
and biotechnology companies. Allergan is also free to develop competitive
products for its own account. Furthermore, the fundamental technology underlying
retinoids licensed to ASTI is also cross-licensed to Ligand Pharmaceuticals
Incorporated ("Ligand") and therefore competition from similar activities by
Ligand in retinoids is likely. In addition, pursuant to the agreement between
Allergan and Ligand, each party has been granted non-exclusive rights to use the
Allergan Ligand Retinoid Therapeutics, Inc. ("ALRT") technology with respect to
any unsynthesized compounds, provided that such license will become exclusive
with respect to any compound with respect to which an IND is filed with and
accepted by the FDA. Accordingly, no assurance can be given that Ligand will not
be the first party to file an IND with respect to any retinoid compound under
research by ASTI, thereby preventing ASTI and Allergan from undertaking any
further research, development or commercialization with respect to such
compound. See "Certain Risk Factors Related to the Company's Business -
Competition."
EMPLOYEES
At December 31, 2000, ASTI had no full-time employees, and all of the
Company's executive officers are affiliated with Allergan, the holder of all of
the Company's outstanding Class B Common Stock.
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EXECUTIVE OFFICERS
The executive officers of ASTI and their ages as of March 1, 2001 are as
follows:
NAME AGE POSITION
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William C. Shepherd............... 62 Chairman of the Board, President and
Chief Executive Officer
Douglas S. Ingram................. 38 General Counsel and Secretary
James M. Hindman.................. 40 Chief Financial Officer
Officers are appointed by and hold office at the pleasure of the Board
of Directors.
Mr. Shepherd has been President and Chief Executive Officer of the
Company since March 1998. He also served as Chairman of the Board of Allergan,
from January 1996, and as Allergan's President and Chief Executive Officer from
1992, until his retirement effective January 1, 1998. Since his retirement, Mr.
Shepherd has served as a consultant to Allergan. Mr. Shepherd first joined
Allergan in 1966 and, from 1984 to 1991, was its President and Chief Operating
Officer. He serves on the Board of Directors of ANSYS Diagnostics, Inc., a
private company engaged in the development, manufacture and marketing of
disposable medical diagnostic products. Mr. Shepherd was elected to the ASTI
Board in 1998.
Mr. Ingram has been the General Counsel and Secretary of the Company
since October 1998. He has also been Senior Vice President and General Counsel
of Allergan since January 2001, and its Assistant Secretary since November 1998.
Prior to that, Mr. Ingram was Allergan's Associate General Counsel from August
1998, its Assistant General Counsel from January 1998 and Senior Attorney and
Chief Litigation Counsel of Allergan from March 1996, when he first joined
Allergan. Prior to joining Allergan, Mr. Ingram was, from August 1988 to March
1996, an attorney with the Orange County office of the law firm Gibson, Dunn &
Crutcher.
Mr. Hindman has been the Chief Financial Officer of the Company since
April 2000. He has been Senior Vice President and Controller of Allergan since
January 2000 and prior thereto was its Vice President, Financial Planning and
Analysis since February 1997. Prior to that, Mr. Hindman served 12 years in a
variety of positions at Allergan, including Plant Controller, Director of
Manufacturing Planning and Reporting, Director of Finance (Northwest Europe),
and Assistant Corporate Controller. Mr. Hindman first joined Allergan in 1984.
ITEM 2. PROPERTIES
ASTI's offices are located at Allergan's principal offices at 2525
Dupont Drive, Irvine, California 92612. ASTI does not own or lease any
properties.
ITEM 3. LEGAL PROCEEDINGS
From time to time, ASTI may be involved in litigation relating to claims
arising out of its operations in the normal course of business. As of the date
of this Annual Report on Form 10-K, the Company is not a party to any legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The ASTI Shares are subject to the Purchase Option. See "Relationship
Between ASTI and Allergan" under Part I above.
The following table shows the quarterly price range of the ASTI Shares
during the period listed, as reported on the Nasdaq National Market. Such
quotations represent inter-dealer prices without retail markup, markdown or
commission and may not necessarily represent actual transactions.
2000 1999
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CALENDAR QUARTER HIGH LOW HIGH LOW
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First............................... $16.44 $11.88 $10.00 $ 9.25
Second.............................. 18.25 13.50 11.00 9.52
Third............................... 23.75 17.38 12.50 10.38
Fourth.............................. 29.50 19.81 13.69 11.50
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The Class A Common Stock of ASTI is traded on the Nasdaq National Market
under the symbol "ASTI." The last sales price for the Company's Class A Common
Stock, as reported by the Nasdaq National Market on February 28, 2001, was
$24.31.
At February 28, 2001, there was one holder of record of the Class B
Common Stock (Allergan), and there were 6,306 holders of record of the Class A
Common Stock. This number does not reflect persons or entities who hold their
Class A Common Stock in nominee or "street name" through various brokerage
firms.
The Company has not declared or paid any cash dividends on its Class A
Common Stock to date. ASTI is prohibited from using Available Funds to pay
dividends on the Class A Common Stock and, accordingly, does not expect to pay
any dividends.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Financial Statements of the Company and related notes thereto
included elsewhere in this Annual Report on Form 10-K.
Cumulative
Period from period from
November 12, November 12,
1997 1997
Year Ended December 31, (inception) to (inception) to
------------------------------------------- December 31, December 31,
2000 1999 1998 1997 2000
----------- ----------- ----------- ----------- -----------
(in thousands, except per share data)
RESULTS OF OPERATIONS:
Revenues .............................. $ 3,218 $ 7,110 $ 9,043 $ -- $ 19,371
=========== =========== =========== =========== ===========
Costs and expenses
Research and development .......... $ 64,299 $ 49,200 $ 35,886 $ -- $ 149,385
Technology fees ................... 5,775 5,500 6,520 -- 17,795
General and administrative expenses 1,033 1,198 933 -- 3,164
----------- ----------- ----------- ----------- -----------
Total costs and expenses ........ $ 71,107 $ 55,898 $ 43,339 $ -- $ 170,344
=========== =========== =========== =========== ===========
Net loss .............................. $ (69,246) $ (52,806) $ (36,808) $ -- $ (158,860)
=========== =========== =========== =========== ===========
Basic and diluted loss per share ...... $ (21.15) $ (16.13) $ (11.24) $ -- $ (48.53)
=========== =========== =========== =========== ===========
Basic and diluted shares outstanding .. 3,273,690 3,273,690 3,273,690 100 3,273,690
Dec. 31, 2000 Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997
------------- ------------- ------------- -------------
(in thousands)
BALANCE SHEET DATA:
Cash ..................... $ 22 $ 47 $ -- $ 1
Investments .............. 42,581 105,252 158,667 --
Total assets ............. 45,350 112,022 165,137 1
Payable to Allergan, Inc. 7,085 6,047 4,509 --
Total liabilities ........ 7,223 6,047 4,804 --
Total stockholders' equity 38,127 105,975 160,333 1
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Allergan contributed a total of $200 million in cash to ASTI in March
1998. Through December 31, 2000, ASTI's funds were used primarily to fund
activities conducted under the Research and Development Agreement with Allergan
and to reimburse Allergan for the research and development costs relating to the
ASTI Products and Pre-Selection Work. Remaining funds will be used primarily to
continue the funding of activities under the Research and Development Agreement
with Allergan. At the time of its formation, ASTI was projected to spend its
funds over a five-year period. In January 2000, ASTI announced that it will
likely exhaust all Available Funds by mid-2001. This potential accelerated
spending is the result of the acceptance by ASTI of more research and
development projects as well as more rapid research and development of compounds
than anticipated at the time of ASTI's formation. Pursuant to ASTI's Restated
Certificate of Incorporation and Allergan's rights as the sole holder of all of
the ASTI Class B Common Stock, Allergan has certain rights (but no obligation)
to purchase all of the ASTI Class A Common Stock, which purchase rights could be
triggered by the use of substantially all of ASTI's funds. Allergan's purchase
rights, which expire if not exercised by Allergan by the 90th day after the date
on which Allergan receives notice that the amount of cash and marketable
securities held by ASTI is less than $15 million, are summarized in ASTI's
Prospectus dated March 6, 1998. See also "No Assurance of Continued Research or
Development of ASTI Products" below for further discussion of factors impacting
the rate of ASTI spending on research and development.
10
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ASTI is not expected to require facilities or capital equipment of its
own during the term of the Research and Development Agreement. Pending the use
of ASTI's cash resources for the research and development activities described
in this Annual Report on Form 10-K, ASTI has invested such resources in
investment grade securities including money market funds, equity securities and
debt instruments of financial institutions and corporations with strong credit
ratings.
There can be no assurance, particularly given the existence of the
Allergan/ASTI Agreements, that ASTI will be able to raise any additional
capital. Such additional capital, if raised, would most likely reduce the per
share proceeds available to holders of ASTI Shares if the Purchase Option were
to be exercised. See "Relationship Between ASTI and Allergan."
OPERATIONS
From ASTI's formation and continuing through completion of the
development stage of the ASTI Products or until Allergan exercises its Purchase
Option, ASTI's operations will be conducted largely pursuant to the
Allergan/ASTI Agreements.
ASTI's revenues consist primarily of interest and investment income
(which has been included in Available Funds). In later years, ASTI may receive
revenues through the commercialization of ASTI Products either from Allergan in
the form of Product Payments, if Allergan were to exercise its License Option
for any ASTI Product, or otherwise if Allergan's License Option for any ASTI
Product were to expire unexercised and ASTI were to commercialize the product
alone or with a third party. ASTI also may receive revenues in the form of
Developed Technology Royalties or Pre-Selection Product payments. ASTI received
$400,000 in 1999 and $500,000 in 1998 in Pre-Selection Product payments in
connection with a collaboration agreement between Allergan and Warner-Lambert
(see note 4 to Financial Statements); there were no such payments in 2000.
However, ASTI is not expected to earn substantial revenues, other than interest
and investment income, unless or until ASTI Products or, to a lesser extent,
Pre-Selection Products or Developed Technology Products are successfully
commercialized. As a result of the foregoing factors, it is anticipated that
ASTI will continue to incur substantial losses.
ASTI incurred a net loss of $69.2 million in 2000, $52.8 million in
1999, and $36.8 million in 1998. Interest and investment income was $3.2 million
in 2000, $7.1 million in 1999, and $9.0 million in 1998 as a result of
investment of the unexpended cash held by ASTI from its commencement of
operations on March 10, 1998. Interest will decrease in the future, subject to
general interest rate trends, as funds are used in performance of research and
development activities.
Research and development expenses were $64.3 million in 2000, $49.2
million in 1999, and $35.9 million in 1998. The 1998 amount includes
reimbursement to Allergan for research and development services performed during
the period from October 24, 1997 through March 9, 1998.
ASTI's expenses largely have been and will in the future be incurred
under the Allergan/ASTI Agreements. ASTI will have research and development
expenses as a result of (i) the payment of research and development costs under
the Research and Development Agreement, most likely through reimbursements to
Allergan, and (ii) payment of the Technology Fee to Allergan under the
Technology License Agreement. The Technology License Agreement provides that the
Technology Fee will be payable monthly by ASTI over a period of four years and
will be $833,333 for each of the 12 months following October 23, 1997, $558,333
per month for the following 12 months, $275,000 per month for the following 12
months and $166,667 per month for the following 12 months; provided that the
Technology Fee will no longer be payable at such time as fewer than two ASTI
Products are being researched or developed by ASTI and/or have been licensed by
Allergan. The Technology Fee is for ASTI's use of Allergan Technology existing
as of the date of the Technology License Agreement or during the term of the
Research and Development Agreement. The Technology Fee payment amounts are based
upon the expected value of the originally transferred technology. The value of
the technology transferred is expected to decrease as ASTI further develops the
technology on its own. The Technology Fee is being expensed by ASTI on a basis
which approximates straight-line over 48 months.
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12
Pursuant to the Research and Development Agreement, Allergan charges
ASTI for both "direct" and "indirect" research and development costs based on
Allergan's internal R&D Project Accounting System, as well as an amount equal to
10% of such direct and indirect costs representing an allocation of Allergan
corporate overhead. Direct costs include third party contract costs, such as
those expenses paid to outside vendors, which can be directly identified to a
specific research and development program or project. Indirect costs include the
fully-absorbed cost of labor which can be specifically identified with or
physically traced to a project using the internal Allergan R&D Project
Accounting System. The fully-absorbed cost of labor included with indirect costs
consists of actual labor hours charged to ASTI projects plus research and
development overhead costs of approximately 200% to 250% of such actual labor
hours charged. The research and development overhead allocations are based upon
Allergan's historical overhead experience arising from its research and
development activities and include only overhead costs incurred by Allergan's
Research and Development Department.
In addition, in order to fully and fairly allocate an appropriate
portion of Allergan's general corporate overhead to projects undertaken by
Allergan on behalf of ASTI, an amount equal to 10% of the fully-absorbed cost of
labor for each ASTI project is added to the amount charged by Allergan to ASTI.
Such costs are separate and distinct from the direct and indirect costs charged
to research and development identified in the Research and Development
Agreement. Such costs are charged to ASTI by Allergan for the purpose of
recovery of such costs applicable to ASTI projects.
Items included in general corporate overhead include human resources,
accounting, treasury, payroll, accounts payable, legal, procurement, tax and
common area maintenance costs. None of these services is performed within
Allergan's Research and Development Department. As a result, such costs are in
addition to the costs incurred within research and development as described in
the Research and Development Agreement. A portion of the costs of these services
calculated to be attributable to Allergan's Research and Development Department
comprises the 10% allocation of Allergan corporate overhead. The 10%
proportionate share is based on the number of Research and Development
Department personnel relative to total personnel at Allergan's corporate
headquarters.
CERTAIN RISK FACTORS RELATED TO THE COMPANY'S BUSINESS
The Company believes that certain statements made by the Company in this
report and in other reports and statements released by the Company constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, such as comments which express the Company's
opinions about trends and factors which may impact future operating results.
Disclosures which use words such as the Company "believes," "anticipates,"
"expects" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties which
could cause actual results to differ materially from expectations. Any such
forward-looking statements, whether made in this report or elsewhere, should be
considered in context with the various disclosures made by the Company about its
businesses including, without limitation, the factors discussed below.
In addition to those risks identified elsewhere in this Annual Report on
Form 10-K, the Company's business and results of operations are subject to other
risks, including the following risk factors:
NEW COMPANY. ASTI was formed in late 1997 and is subject to the risks
inherent in the establishment of a new business enterprise in the biotechnology
industry. ASTI will incur substantial losses for several years due to the
long-term nature of the research and development of pharmaceutical products
through clinical testing and the regulatory process, which losses may never be
recovered.
NO ASSURANCE OF CONTINUED RESEARCH OR DEVELOPMENT OF ASTI PRODUCTS.
There can be no assurance that the ASTI Board of Directors will continue the
funding of the research and development of all of the current ASTI Products or
Pre-Selection Work, or that any ASTI Products can be successfully researched,
developed and/or commercialized within the anticipated cost estimates or time
frames, if at all. Certain of the ASTI Products are at critical stages of
research and development, and technical and clinical outcomes are impossible to
predict. Because of the long-range nature of any pharmaceutical product research
and development plan, research and development of a particular product or
project could accelerate, slow down or be discontinued, and other unforeseen
events could occur, all of which would significantly affect the timing and
amount of ASTI's expenditures on a particular product, or in total. As a result,
estimates of costs and timing of research and development programs and for the
use of Available Funds may not be accurate.
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Although ASTI has received from Allergan a license to use Allergan
Technology for the purpose of researching, developing and commercializing ASTI
Products, some or all of the ASTI Products may require new technologies or
enhancements or modifications to existing Allergan Technology, and there can be
no assurance that such technology can or will be successfully developed or
acquired. Even if appropriate technology is available or developed, there can be
no assurance that such ASTI Products will be successfully researched or
developed (or be researched or developed in a timely fashion) or be proven to be
safe and efficacious in clinical trials.
NEED FOR REGULATORY CLEARANCE. All ASTI Products, Developed Technology
Products and Pre-Selection Products will require FDA clearance before such
products may be lawfully marketed in the United States. Applications for FDA
clearance must be based on costly and extensive clinical trials designed to
demonstrate safety and efficacy. Clearance to market such products will also be
required from corresponding regulatory authorities in foreign countries before
such products may be marketed in those countries. Such clearance often involves
pricing and reimbursement approvals in addition to clearance based on safety and
efficacy. Delay in obtaining FDA and/or foreign regulatory clearance or pricing
or reimbursement approvals for any such product may have a material adverse
effect on the commercial success of such product. There can be no assurance that
the necessary regulatory clearances and approvals will be obtained in a timely
fashion or, if obtained, that such clearances and approvals will not be revoked
or withdrawn.
NO ASSURANCE OF SUFFICIENCY OF FUNDS OR AVAILABILITY OF ADDITIONAL
FUNDS. Allergan has contributed $200 million in cash to ASTI. Allergan has no
obligation to contribute additional funds to ASTI, and, to the best of ASTI's
knowledge, has no present intention to do so. It is anticipated that if ASTI
were to fund the continued research and development of the ASTI Products through
FDA review for marketing clearance, the funding of these activities, together
with any Pre-Selection Work undertaken by Allergan and/or ASTI and funded by
ASTI, would require substantially all of the Available Funds. It is unlikely
that ASTI will have sufficient funds to complete the research and development of
any or all of the ASTI Products.
Allergan's rights under the Allergan/ASTI Agreements may limit ASTI's
ability to raise funds, or may prevent ASTI from doing so, if ASTI needs
additional funds to continue or complete research and development of any ASTI
Product. If ASTI were to attempt to raise funds following the expiration of the
Purchase Option, ASTI would have very little cash and few assets other than the
ASTI Products. Allergan would at that time have the unilateral option to license
any or all ASTI Products for such countries for which Allergan's License Option
had not previously expired. Third parties might therefore be reluctant to lend
money to ASTI, or to invest in ASTI.
NO ASSURANCE OF SUCCESSFUL MANUFACTURING OR MARKETING. Even if ASTI
Products are developed and receive necessary regulatory clearances and
approvals, there can be no assurance that the ASTI Products will be successfully
manufactured for clinical trials or successfully manufactured or marketed for
commercial sale. To be successfully marketed, any ASTI Product must be
manufactured in commercial quantities in compliance with regulatory requirements
and at an acceptable cost. Any significant delays in the completion of
validation and licensing of expanded or new facilities could have a material
adverse effect on the ability to continue clinical trials of and ultimately to
market ASTI Products on a timely and profitable basis. If Allergan does not
exercise its License Option for an ASTI Product (and does not exercise the
Purchase Option), ASTI will have to make alternative arrangements for
manufacturing that ASTI Product, and there can be no assurance that ASTI will be
able to do so.
If Allergan exercises its License Option for any ASTI Product, Allergan
may need to develop and/or expand its marketing capabilities to commercialize
such Licensed Product effectively. If Allergan exercises its License Option for
any ASTI Product, and does not at the time the product is to be commercialized
have a sales force in the relevant country or countries, Allergan will need to
arrange for marketing by third parties outside of the United States, and, if the
product is not within Allergan's target markets at such time, within the United
States. If Allergan does not exercise its License Option for an ASTI Product
(and does not exercise the Purchase Option), ASTI will need to find other means
to commercialize that ASTI Product not involving Allergan, and there can be no
assurance that ASTI will be able to do so.
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At the present time, ASTI does not have, nor, through the development
stage of the ASTI Products, does it expect to develop, any manufacturing or
marketing capability. If ASTI decides to manufacture or market one or more ASTI
Products itself, ASTI will need substantial additional funds. There is no
assurance that additional funds will be available, or will be available on
attractive terms, and Allergan has no obligation to supply any additional funds
to ASTI. In addition, ASTI may not use Available Funds for this purpose without
Allergan's consent.
If either Allergan or ASTI seeks a third party to manufacture or market
an ASTI Product, there can be no assurance that satisfactory arrangements can be
successfully negotiated or that any such arrangements will be on commercial
terms acceptable to Allergan or ASTI. In addition, even if ASTI decides to
license any ASTI Product to a third party, agreements with that third party, if
available, may be on terms less favorable to ASTI than the terms of the
Allergan/ASTI Agreements.
Even if acceptable manufacturing and marketing resources are available,
there can be no assurance that any ASTI Products will be accepted in the
marketplace. There can be no assurance that there will be adequate reimbursement
by health insurance companies or other third party payors for any ASTI Products
that are marketed.
NO ASSURANCE OF EXERCISE OF ALLERGAN'S OPTIONS. Allergan is not
obligated to exercise the License Option for any ASTI Product or to exercise the
Purchase Option, and Allergan will exercise any such option only if it is in
Allergan's best interest to do so. The timing of the exercise of the Purchase
Option is within Allergan's sole discretion, and Allergan may choose to exercise
the Purchase Option at a time when the Purchase Option exercise price is as low
as possible. Because the contractual relationship between Allergan and ASTI
contemplates that Allergan will perform research and development activities on
behalf of ASTI, in the event of Allergan's failure to exercise the Purchase
Option, ASTI might be required to seek alternative research and development
facilities, either independently or with a third party. There can be no
assurance that ASTI would be able to obtain access to adequate research and
development facilities in such event on a timely basis, on acceptable terms, or
at all. The timing of the exercise of the License Option with respect to any
Licensed Product is also within Allergan's sole discretion and thereafter
research, development and funding of any such product will be controlled by
Allergan.
RELIANCE ON PROPRIETARY TECHNOLOGIES; UNPREDICTABILITY OF PATENT
PROTECTION. Patent protection generally has been important in the pharmaceutical
industry. Therefore, ASTI's financial success may depend in part upon Allergan
obtaining patent protection for the technologies incorporated in ASTI Products.
Allergan will determine which patent applications to pursue, and the expense of
obtaining and maintaining patents covering Developed Technology will be paid by
ASTI during the term of the Research and Development Agreement.
However, there can be no assurance that patents will be issued covering
any products, or that any existing patents or patents issued in the future will
be of commercial benefit. In addition, it is impossible to anticipate the
breadth or degree of protection that any such patents will afford, and there can
be no assurance that any such patents will not be successfully challenged in the
future. If Allergan is unsuccessful in obtaining or preserving patent
protection, or if any products rely on unpatented proprietary technology, there
can be no assurance that others will not commercialize products substantially
identical to such products.
Patents have been issued to third parties covering various therapeutic
agents, products and technologies. There can be no assurance that any ASTI
Products, Developed Technology Products or Pre-Selection Products will not
infringe patents held by third parties. In such event, licenses from such third
parties would be required, or their patents would have to be designed around.
There can be no assurance that such licenses would be available or that they
would be available on commercially attractive terms, or that any necessary
redesign could be successfully completed.
Allergan licenses certain intellectual property from third parties which
it will sublicense to ASTI pursuant to the Technology License Agreement. Under
the terms of certain of its license agreements, Allergan may be obligated to
exercise diligence and make certain royalty and milestone payments as well as
incur costs related to filing and prosecuting the underlying patents. Each
agreement is terminable by either party upon notice if the other party defaults
in its obligations. Should Allergan default under any of its agreements,
Allergan and therefore ASTI may lose their rights to market and sell products
based upon such licensed technology. In addition, there can be no assurance that
Allergan's licensors will meet their obligations to Allergan pursuant to such
licenses. In such event, ASTI's results of operations and business prospects
would be materially and adversely affected.
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COMPETITION. ASTI Products, Developed Technology Products and
Pre-Selection Products are likely to face competition from other therapies for
the same indications. Competitors potentially include any of the world's
pharmaceutical and biotechnology companies. Many pharmaceutical companies have
greater financial resources, technical staffs and manufacturing and marketing
capabilities than Allergan or ASTI. A number of companies have developed and are
developing competing technologies and products. To the extent that ASTI
Products, Developed Technology Products and Pre-Selection Products incorporate
therapeutic agents that are off-patent or therapeutic agents marketed by
multiple companies, such products will face more competition than products
incorporating proprietary therapeutic agents.
The fundamental technology underlying retinoids licensed to ASTI is also
cross-licensed to Ligand and therefore competition from similar activities by
Ligand and its collaborators in retinoids is likely. In addition, pursuant to an
agreement between Allergan and Ligand, each party has been granted non-exclusive
rights to use any unsynthesized compounds developed by ALRT provided that such
license will become exclusive with respect to any compound for which an IND is
filed with and accepted by the FDA. Accordingly, no assurance can be given that
Ligand will not be the first party to file an IND with respect to any retinoid
compound under research by ASTI, thereby preventing ASTI and Allergan from
undertaking any further research, development or commercialization with respect
to such compound.
POTENTIAL CONFLICTS OF INTEREST BETWEEN ALLERGAN AND ASTI. Because
Allergan may develop and/or market products (including Developed Technology
Products and Pre-Selection Products) for its own account, independent of ASTI,
that compete directly with ASTI Products, Allergan and ASTI may have conflicting
interests with respect to certain products and/or certain markets. In addition,
ASTI Products, Developed Technology Products and Pre-Selection Products may
compete with one another. Allergan Technology excludes, and ASTI will have no
rights with respect to, any topical formulation of Tazarotene. Allergan is
currently marketing a topical formulation of Tazarotene for the treatment of
psoriasis and acne in the United States and Canada under the brand name
"Tazorac" and outside of the United States and Canada under the brand name
"Zorac."
DEPENDENCE ON ALLERGAN FOR PERSONNEL AND FACILITIES. ASTI depends
substantially on Allergan for research and development activities to be
performed under the Research and Development Agreement. Although ASTI may
perform directly, or engage other third parties to perform on its behalf, some
of these activities, Allergan is currently responsible for executing
substantially all of ASTI's research and development activities. While Allergan
believes that its current and planned personnel and facilities will be adequate
for the performance of its duties under the Research and Development Agreement,
such personnel will perform services in the same facilities for Allergan itself.
Subject to Allergan's obligation to use diligent efforts under the Research and
Development Agreement, Allergan may allocate its personnel and facilities as it
deems appropriate. Allergan's own research and development activities may
restrict the resources that otherwise would be available for performing
Allergan's duties under the Research and Development Agreement.
RELATIONSHIP BETWEEN ASTI AND ALLERGAN MAY LIMIT ASTI'S ACTIVITIES AND
MARKET VALUE. The terms of the Allergan/ASTI Agreements and ASTI's Restated
Certificate of Incorporation were not determined on an arm's-length basis and
certain terms may limit ASTI's activities and its market value. ASTI's Restated
Certificate of Incorporation prohibits ASTI from taking or permitting any action
that might impair Allergan's rights under the Purchase Option. Prior to the
expiration of the Purchase Option, ASTI may not, without the consent of the
holders of ASTI Class B Common Stock, merge or liquidate, or sell, lease,
exchange, transfer or dispose of any substantial assets, or amend its Restated
Certificate of Incorporation to alter the Purchase Option, ASTI's authorized
capitalization, or the provisions of the Restated Certificate of Incorporation
governing ASTI's Board of Directors. Because Allergan owns all of the
outstanding Class B Common Stock, Allergan is able to influence significantly or
control the outcome of any of the foregoing actions requiring approval by the
Class B stockholders of ASTI. The ability of Allergan to significantly influence
or control such matters, together with the provisions of ASTI's Restated
Certificate of Incorporation eliminating the right of the ASTI stockholders to
call special meetings of stockholders, could affect the liquidity of the ASTI
Shares and have an adverse effect on the price of the ASTI Shares, and may have
the effect of delaying or preventing a change in control of ASTI, including
transactions in which stockholders might otherwise receive a premium for their
shares over the current market price. Neither the terms of the ASTI/Allergan
Agreements nor ASTI's Restated Certificate of Incorporation prohibit Allergan
from transferring its ASTI Class B Common Stock. The special rights accorded to
the holder or holders of the ASTI Class B Common Stock will expire upon
expiration of the Purchase Option.
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So long as the Purchase Option is exercisable, the market value of the
ASTI Shares will be limited by the Purchase Option exercise price. The Purchase
Option exercise price was not determined on an arm's-length basis. The Purchase
Option exercise price was determined by Allergan, giving consideration to the
structure of the Distribution, ASTI's planned business, the Allergan/ASTI
Agreements, advice given by Merrill Lynch, Pierce, Fenner & Smith Incorporated,
and such other factors as Allergan deemed appropriate.
The existence of the Purchase Option and Allergan's rights as holder of
the ASTI Class B Common Stock may inhibit ASTI's ability to raise capital.
Additional capital raised by ASTI, if any, would most likely reduce the per
share proceeds available to holders of ASTI Shares if the Purchase Option were
exercised. The existence of the Purchase Option and Allergan's rights as the
holder of the ASTI Class B Common Stock may inhibit a change of control and may
make an investment in ASTI Shares less attractive to certain potential
stockholders, which could adversely affect the liquidity and market value of
ASTI Shares.
If Allergan exercises its License Option for any ASTI Product, Allergan
will have the right to commercialize the product with third parties on such
terms as Allergan deems appropriate. In such event, payments from Allergan to
ASTI with respect to the ASTI Products will be based solely on sublicensing
revenues received from such third parties.
COMMON MANAGEMENT. Each of the current executive officers of ASTI is
employed by or retained as a consultant to Allergan and receives compensation
solely from Allergan, which may further contribute to Allergan's ability to
influence significantly or control the outcome of actions taken by ASTI.
LIMITATION ON ASTI'S ABILITY TO LICENSE PRODUCTS TO THIRD PARTIES. ASTI
has granted Allergan the License Option, which is exercisable on a
product-by-product and country-by-country basis. During the term of the License
Option for each ASTI Product, ASTI will not be able to license such ASTI Product
to any party other than Allergan. Furthermore, ASTI may perform research with
respect to product candidates which become ASTI Products only if recommended by
Allergan and accepted by ASTI. In particular, it is expected that Allergan will
perform Pre-Selection Work with respect to various product candidates. If such
product candidates do not become ASTI Products, ASTI will have no rights with
respect thereto except the right to receive limited royalties from Allergan on
commercial sales of such products, if any.
POSSIBLE DILUTION; REDUCTION OF PER SHARE PURCHASE OPTION EXERCISE
PRICE. All ASTI Shares issued by ASTI after the Distribution will be subject to
the Purchase Option, and the Purchase Option exercise price will not increase as
a result of any such issuance. Accordingly, if additional ASTI Shares were to be
issued, the percentage of the Purchase Option exercise price payable with
respect to each ASTI Share in the event Allergan exercises the Purchase Option
would be reduced. Liabilities, including any debt issued by ASTI, but excluding
any accounts payable to Allergan, will reduce the Purchase Option exercise price
to the extent that such liabilities exceed ASTI's cash, cash equivalents, and
short-term and long-term investments (excluding Available Funds), unless repaid
or discharged by ASTI prior to exercise of the Purchase Option.
NO DIVIDENDS. ASTI's Restated Certificate of Incorporation prohibits the
payment of dividends from Available Funds.
HAZARDOUS MATERIALS. ASTI's research and development activities are
conducted by Allergan on ASTI's behalf and involve the controlled use of
hazardous materials, chemicals and various radioactive compounds. Although ASTI
believes that Allergan's safety procedures for handling and disposing of such
materials comply with the standards prescribed by state and federal regulations,
the risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of an accident, ASTI could be held liable
for any damages that result and any such liability could exceed the resources of
ASTI. ASTI may be required to reimburse Allergan for substantial costs it incurs
to comply with environmental regulations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASTI does not use derivative financial instruments in its non-trading
investment portfolio. The Company's primary investment objective is preservation
of capital in order to fund research and development of potential pharmaceutical
products pursuant to the Company's agreements with Allergan. (See note 4 to
Financial Statements). As such, the Company invests its excess cash in money
market funds, equity securities and debt instruments of financial institutions
and corporations that must be at least investment grade. These securities
typically have an "A" rating or better. Interest and investment income earned on
the Company's investment portfolio is most sensitive to fluctuations in the
general level of U.S. interest rates. The Company mitigates interest rate risk
by a program of diversification so that exposure to risks relating to a single
security or investment manager is minimal. Further, the Company invests in money
market funds and debt instruments with varying maturity dates to correspond to
anticipated research and development expenses. These securities typically bear
minimal credit risk and ASTI has not experienced any losses on its investments
to date due to credit risk.
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At December 31, 2000, the Company had investments in equity securities
with a fair market value of $17,163,000 and such investments are subject to
price risk. The Company's equity securities are generally invested in companies
that have a history of paying dividends. The Company addresses price risk by a
program of diversification so that exposure to risks relating to a single
security is minimal.
The following table provides information about the Company's investment
portfolio as of December 31, 2000 and 1999.
2000
--------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair Market
Cost Gain Loss Value
------------ ----------- ------------- ------------
Commercial paper and money
market funds ................ $ 8,334,000 $ -- $ (154,000) $ 8,180,000
U.S. government debt securities 6,902,000 30,000 6,932,000
Corporate debt securities ..... 10,300,000 6,000 10,306,000
Equity securities ............. 16,706,000 457,000 17,163,000
------------ ----------- ------------- ------------
$ 42,242,000 $ 493,000 $ (154,000) $ 42,581,000
============ =========== ============= ============
1999
--------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair Market
Cost Gain Loss Value
------------ ----------- ------------- ------------
Commercial paper and money
market funds ................ $ 26,831,000 $ 59,000 $ -- $ 26,890,000
Certificates of deposit ....... 13,551,000 (15,000) 13,536,000
U.S. government debt securities 25,644,000 (241,000) 25,403,000
Corporate debt securities ..... 24,831,000 (221,000) 24,610,000
Equity securities ............. 16,414,000 (1,601,000) 14,813,000
------------ ----------- ------------- ------------
$107,271,000 $ 59,000 $ (2,078,000) $105,252,000
============ =========== ============= ============
The amortized cost, estimated fair value of investments and range of
rates of return of debt securities at December 31, 2000, by contractual
maturity, are presented below. Investments in equity securities are classified
as due after three years. Actual maturities may differ from contractual
maturities because the issuers of the securities may have the right to prepay
obligations without prepayment penalties. Further, all of the Company's
investments are classified as available-for-sale, and the Company may instruct
its professional investment managers to liquidate any or all of its investments
prior to their contractual maturity dates.
Percentage
Amortized Estimated Rates of Return
Cost Fair Value (Range)
----------- ----------- ---------------
Due in one year or less...................... $16,951,000 $16,800,000 5.38% - 8.63%
Due after one year through three years....... 7,593,000 7,630,000 5.38% - 6.85%
Due after three years........................ 17,698,000 18,151,000 5.75%
----------- -----------
$42,242,000 $42,581,000
=========== ===========
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In June 1998, SFAS No. 133 - "Accounting for Derivative Instruments and
Hedging Activities" was issued and is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Company is required to adopt SFAS No. 133 on January 1, 2001.
The Company does not believe adoption of SFAS No. 133 will have any impact on
the Company's financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data of the Company required
by this item are listed under item 14(a)(1) and (2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See the section entitled "Executive Officers" in Part I, Item 1 hereof
for information regarding executive officers.
The additional information required by this item is incorporated by
reference to the information under the captions "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" contained in the
Company's Definitive Proxy Statement to be filed with the Commission pursuant to
Regulation 14A in connection with the 2001 Annual Meeting (the "Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the information under the caption "Compensation of Executive Officers" contained
in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the information under the caption "Security Ownership of Certain Beneficial
Owners and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the information under the caption contained in "Certain Relationships and
Related Transactions" contained in the Proxy Statement.
18
19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Index to Financial Statements
The financial statements required by this item are submitted in a
separate section beginning on page F-1 of this Annual Report on Form 10-K.
PAGE
NUMBER
------
Report of KPMG LLP, Independent Auditors.................................. F-2
Balance Sheets at December 31, 2000 and 1999.............................. F-3
Statements of Operations for the years ended December 31,
2000, 1999 and 1998, and the cumulative period from
November 12, 1997 (inception) to December 31, 2000...................... F-4
Statements of Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998, and the cumulative
period from November 12, 1997 (inception) to December 31, 2000.......... F-5
Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998, and the cumulative period from
November 12, 1997 (inception) to December 31, 2000...................... F-6
Notes to Financial Statements............................................. F-7
Supplementary Data - Quarterly Results (Unaudited) ....................... F-14
(a)(2) Index to Financial Statement Schedules
None.
19
20
(a)(3) Index to Exhibits.
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
-------- ------- -----------
(1) 3.1 Amended and Restated Certificate of Incorporation of ASTI.
(2) 3.2 Bylaws of ASTI.
(2) 4.1 Specimen Certificate of Class A Common Stock of ASTI.
(3) 10.1 Research and Development Agreement dated as of March 6,
1998 between the Company and Allergan, Inc. ("Allergan").
(3) 10.2 Technology License Agreement dated as of March 6, 1998
between the Company and Allergan.
(3) 10.3 Services Agreement dated as of March 6, 1998 between the
Company and Allergan.
(3) 10.4 License Option Agreement dated as of March 6, 1998 between
the Company and Allergan.
(3) 10.5 Distribution Agreement dated as of March 6, 1998 between
the Company and Allergan.
(4) 10.6 Letter agreement dated as of October 23, 1998 between the
Company and Allergan.
(1) 10.7 Waiver letter dated as of October 23, 1998 between the
Company and Allergan.
10.8 Letter agreement between the Company and Allergan re
royalty rate adjustment.
24.1 Power of Attorney. Reference is made to page 21.
- ----------
(1) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998 and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-40503) or amendments thereto and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998 and incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998 and incorporated herein by reference.
(b) Reports on Form 8-K
Not applicable.
(c) Exhibits
The exhibits required by this item are listed under Item 14(a)(3).
(d) Financial Statement Schedules
The financial statement schedules required by this item are listed
under Item 14(a)(2).
20
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ALLERGAN SPECIALTY THERAPEUTICS, INC.
By: /s/ WILLIAM C. SHEPHERD
---------------------------------
William C. Shepherd
Chairman of the Board,
President and Chief Executive
Officer
Date: March 9, 2001
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Douglas S. Ingram and James M. Hindman,
and each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place, and
stead, in any and all capacities, to sign any and all amendments to this Report,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ WILLIAM C. SHEPHERD Chairman of the Board, President March 9, 2001
- ------------------------------- and Chief Executive Officer
William C. Shepherd (Principal Executive Officer)
/s/ JAMES M. HINDMAN Chief Financial Officer March 9, 2001
- ------------------------------- (Principal Financial and
James M. Hindman Accounting Officer)
/s/ LESTER J. KAPLAN, PH.D. Director March 9, 2001
- -------------------------------
Lester J. Kaplan, Ph.D.
/s/ ALAN J. LEWIS, PH.D. Director March 9, 2001
- -------------------------------
Alan J. Lewis, Ph.D.
/s/ MARVIN E. ROSENTHALE, PH.D. Director March 9, 2001
- -------------------------------
Marvin E. Rosenthale, Ph.D.
21
22
ALLERGAN SPECIALTY THERAPEUTICS, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
NUMBER
---------
Report of KPMG LLP, Independent Auditors............................. F-2
Balance Sheets at December 31, 2000 and 1999......................... F-3
Statements of Operations for the years ended December 31,
2000, 1999 and 1998, and the cumulative period from
November 12, 1997 (inception) to December 31, 2000................. F-4
Statements of Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998, and the cumulative
period from November 12, 1997 (inception) to December 31, 2000..... F-5
Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998, and the cumulative period from
November 12, 1997 (inception) to December 31, 2000................. F-6
Notes to Financial Statements........................................ F-7 - F-13
Supplementary Data - Quarterly Results (Unaudited) .................. F-14
F-1
23
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Allergan Specialty Therapeutics, Inc.:
We have audited the accompanying balance sheets of Allergan Specialty
Therapeutics, Inc. (a development stage company) as of December 31, 2000 and
1999 and the related statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2000,
and the cumulative period from November 12, 1997 (inception) to December 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Allergan Specialty
Therapeutics, Inc. (a development stage company) as of December 31, 2000 and
1999, and the results of its operations and its cash flows for each of the years
in the three-year period ended December 31, 2000, and the cumulative period from
November 12, 1997 (inception) to December 21, 2000, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred operating losses and has a
deficit accumulated during the development stage that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
- ---------------------------
KMPG LLP
Costa Mesa, California
January 29, 2001
F-2
24
ITEM 14. FINANCIAL STATEMENTS
ALLERGAN SPECIALTY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
December 31,
-------------------------
2000 1999
--------- ---------
Cash $ 22 $ 47
Investments 42,581 105,252
Prepaid technology fees 2,576 5,292
Other assets 171 1,431
--------- ---------
$ 45,350 $ 112,022
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Payable to Allergan, Inc. $ 7,085 $ 6,047
Deferred income taxes 138 --
--------- ---------
Total liabilities 7,223 6,047
Stockholders' equity:
Callable Class A Common Stock,
$.01 par value; 6,000,000 shares
authorized, 3,272,690 issued and
outstanding in 2000 and 1999 33 33
Class B Common Stock, $1.00 par value;
1,000 shares authorized, issued and
outstanding in 2000 and 1999 1 1
Additional paid-in capital 196,753 196,753
Accumulated other comprehensive income (loss) 200 (1,198)
Deficit accumulated during the development stage (158,860) (89,614)
--------- ---------
Total stockholders' equity 38,127 105,975
--------- ---------
$ 45,350 $ 112,022
========= =========
See accompanying notes to financial statements.
F-3
25
ALLERGAN SPECIALTY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Cumulative
period from
November 12,
1997
Year Ended December 31, (inception) to
----------------------------------------------- December 31,
2000 1999 1998 2000
----------- ----------- ----------- -----------
Revenues $ 3,218 $ 7,110 $ 9,043 $ 19,371
Costs and expenses:
Research and development 64,299 49,200 35,886 149,385
Technology fees 5,775 5,500 6,520 17,795
General and administrative expenses 1,033 1,198 933 3,164
----------- ----------- ----------- -----------
Total costs and expenses 71,107 55,898 43,339 170,344
----------- ----------- ----------- -----------
Loss before income taxes (67,889) (48,788) (34,296) (150,973)
Provision for taxes 1,357 4,018 2,512 7,887
----------- ----------- ----------- -----------
Net loss $ (69,246) $ (52,806) $ (36,808) $ (158,860)
=========== =========== =========== ===========
Basic and diluted loss per share $ (21.15) $ (16.13) $ (11.24) $ (48.53)
=========== =========== =========== ===========
Basic and diluted shares outstanding 3,273,690 3,273,690 3,273,690 3,273,690
See accompanying notes to financial statements.
F-4
26
ALLERGAN SPECIALTY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
Deficit
Callable Accumulated Accumulated
Class A Class B Additional Other During
Common Common Paid-In Comprehensive Development Comprehensive
Stock Stock Capital Income (Loss) Stage Total Loss
------- ------- ---------- ------------- ----------- --------- -------------
Issuance of 100 shares of Common
Stock (par value $1.00 per share)
on November 12, 1997 (inception) $ -- $ -- $ 1 $ -- $ -- $ 1 $ --
---- ---- -------- ------- -------- --------- --------
Balance at December 31, 1997 -- -- 1 -- -- 1
Conversion of Common Stock into
1,000 shares of Class B Common Stock
in March 1998 -- 1 (1) -- -- --
Issuance of 3,272,690 shares of callable
Class A Common Stock in March 1998 33 -- 196,753 -- -- 196,786
Net loss -- -- -- -- (36,808) (36,808) (36,808)
Other comprehensive income consisting
of unrealized gain on available for sale
securities, net of tax -- -- -- 354 -- 354 354
--------
Comprehensive loss $(36,454)
----- ---- -------- ------- -------- --------- ========
Balance at December 31, 1998 33 1 196,753 354 (36,808) 160,333
Net loss -- -- -- -- (52,806) (52,806) (52,806)
Other comprehensive loss
consisting of unrealized loss
on available for sale securities,
net of tax -- -- -- (1,552) -- (1,552) (1,552)
--------
Comprehensive loss $(54,358)
----- ---- -------- ------- -------- --------- ========
Balance at December 31, 1999 33 1 196,753 (1,198) (89,614) 105,975
Net loss -- -- -- -- (69,246) (69,246) (69,246)
Other comprehensive gain
consisting of unrealized gain
on available for sale securities,
net of tax -- -- -- 1,398 -- 1,398 1,398
--------
Comprehensive loss $(67,848)
---- --- -------- ------- --------- --------- ========
Balance at December 31, 2000 $ 33 $ 1 $196,753 $ 200 $(158,860) $ 38,127
==== === ======== ======= ========= ========
See accompanying notes to financial statements.
F-5
27
ALLERGAN SPECIALTY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Cumulative
period from
November 12, 1997
Year Ended December 31, (inception) to
--------------------------------------- December 31,
2000 1999 1998 2000
-------- -------- --------- --------------
OPERATING ACTIVITIES:
Net loss $(69,246) $(52,806) $ (36,808) $(158,860)
Non-cash item included in net loss:
Deferred income tax 165 462 (682) (55)
Changes in operating assets and liabilities:
Other assets 273 675 (1,065) (117)
Prepaid technology fees 2,716 (569) (4,723) (2,576)
Payable to Allergan, Inc. 1,038 1,538 4,509 7,085
Accounts payable and other liabilities -- (23) 23 --
-------- -------- --------- ---------
Net cash used in operating activities (65,054) (50,723) (38,746) (154,523)
INVESTING ACTIVITIES:
Purchases of investments (3,663) (7,350) (185,175) (196,188)
Sales of investments 68,692 58,120 27,134 153,946
-------- -------- --------- ---------
Net cash provided by (used) in
investing activities 65,029 50,770 (158,041) (42,242)
FINANCING ACTIVITIES:
Issuance of common stock -- -- 200,000 200,001
Offering costs -- -- (3,214) (3,214)
-------- -------- --------- ---------
Net cash provided by financing activities -- -- 196,786 196,787
-------- -------- --------- ---------
Net (decrease) increase in cash (25) 47 (1) 22
Cash - beginning of period 47 -- 1 --
-------- -------- --------- ---------
Cash - end of period $ 22 $ 47 $ -- $ 22
======== ======== ========= =========
See accompanying notes to financial statements.
F-6
28
ALLERGAN SPECIALTY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Allergan Specialty Therapeutics, Inc. ("ASTI" or the "Company") was
incorporated in Delaware on November 12, 1997 and commenced operations on March
10, 1998. ASTI was formed for the purpose of conducting research and development
of potential human pharmaceutical products, and to commercialize such products,
most likely through licensing to Allergan, Inc. ("Allergan"). In accordance with
accounting principles generally accepted in the United States of America, ASTI
is considered a development stage company.
All of the Company's efforts to date have been limited to obtaining
capital and conducting research and development and the Company does not yet
generate any revenues from product sales or royalties. Research and development
is performed by Allergan and the costs incurred are reimbursed by ASTI.
The Company's financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. The Company has
incurred net losses during each of the years in the three-year period ended
December 31, 2000 and has a deficit accumulated during the development stage of
$158,860,000 as of December 31, 2000.
The Company expects to incur substantial research and development
expenditures to further development of its products. Management recognizes that
the Company must generate additional resources or consider modification to its
research and development program or other operating costs to continue operations
with available resources. No assurance can be given that the Company will be
successful in raising additional capital. The conditions described above raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Accounting for revenues and expenses
ASTI's revenues consist of interest and investment income and
Pre-Selection Product Payments (see Note 4). In future years, ASTI may also
derive revenues from the sale or license of its products, most likely through
the sale of licensed products by Allergan. Royalty and other product revenue, if
any, will be recorded as earned.
ASTI incurs most of its expenses under its agreements with Allergan.
Research and development costs paid to Allergan under a Research and Development
Agreement ("R&D Agreement") are recorded as research and development expenses
when incurred. Technology fees paid to Allergan under a Technology License
Agreement ("Technology Agreement") are recorded as technology fees on a basis
which approximates straight-line over the life of the Technology Agreement.
Amounts paid to Allergan under a Services Agreement are recorded as
administrative expenses as incurred. See Note 4 for a description of the
agreements between ASTI and Allergan.
Use of estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
2. INVESTMENTS
ASTI classifies investments as available-for-sale securities with net
unrealized gains or losses recorded as a component of accumulated other
comprehensive income (loss). Amounts classified as investments are liquidated
and used to pay operating expenses as needed. The Company invests its excess
cash in money market funds, equity securities and debt instruments of financial
institutions and corporations that must be at least investment grade. These
securities typically have an "A" rating or better. These securities typically
bear minimal credit risk and ASTI has not experienced any losses on its
investments to date due to credit risk. At December 31, 2000 and 1999, the
Company's investment portfolio consisted of the following:
F-7
29
ALLERGAN SPECIALTY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
2000
-----------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair Market
Cost Gain Loss Value
------------ ----------- ------------- ------------
Commercial paper and money
market funds $ 8,334,000 $ -- $ (154,000) $ 8,180,000
U.S. government debt securities 6,902,000 30,000 6,932,000
Corporate debt securities 10,300,000 6,000 10,306,000
Equity securities 16,706,000 457,000 17,163,000
------------ ----------- ------------- ------------
$ 42,242,000 $ 493,000 $ (154,000) $ 42,581,000
============ =========== ============= ============
1999
-----------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair Market
Cost Gain Loss Value
------------ ----------- ------------- ------------
Commercial paper and money
market funds $ 26,831,000 $ 59,000 $ -- $ 26,890,000
Certificates of deposit 13,551,000 (15,000) 13,536,000
U.S. government debt securities 25,644,000 (241,000) 25,403,000
Corporate debt securities 24,831,000 (221,000) 24,610,000
Equity securities 16,414,000 (1,601,000) 14,813,000
------------ ----------- ------------- ------------
$107,271,000 $ 59,000 $ (2,078,000) $105,252,000
============ =========== ============= ============
The amortized cost, estimated fair value of investments and the range
of rates of return of debt securities at December 31, 2000, by contractual
maturity, are presented below. Investments in equity securities are classified
as due after three years. Actual maturities may differ from contractual
maturities because the issuers of the securities may have the right to prepay
obligations without prepayment penalties. Further, all of the Company's
investments are classified as available-for-sale, and the Company may instruct
its professional investment managers to liquidate any or all of its investments
prior to their contractual maturity dates.
Percentage
Amortized Estimated Rates of Return
Cost Fair Value (Range)
----------- ----------- ---------------
Due in one year or less $16,951,000 $16,800,000 5.38% - 8.63%
Due after one year through three years 7,593,000 7,630,000 5.38% - 6.85%
Due after three years 17,698,000 18,151,000 5.75%
----------- ------------
$42,242,000 $42,581,000
=========== ===========
F-8
30
ALLERGAN SPECIALTY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
3. PER SHARE INFORMATION
The following sets forth the computation of basic and diluted loss per
share for the years ended December 31, 2000, 1999 and 1998:
2000 1999
-------------------------------------- ---------------------------------------
Net Loss Shares Per-share Net Loss Shares Per Share
(Numerator) (Denominator) Loss (Numerator) (Denominator) Loss
------------ ------------- --------- ------------- ------------- ---------
Computation of
basic and
diluted EPS: $(69,246,000) 3,273,690 $(21.15) $(52,806,000) 3,273,690 $(16.13)
1998
--------------------------------------
Net Loss Shares Per share
(Numerator) (Denominator) Loss
------------- ------------ ---------
Computation of
basic and
diluted EPS: $(36,808,000) 3,273,690 $(11.24)
4. ARRANGEMENTS WITH ALLERGAN, INC.
On March 10, 1998, 3,272,690 shares of callable Class A Common Stock of
ASTI, representing all of the issued and outstanding shares of such class, were
distributed by Allergan to the holders of record of Allergan common stock at the
close of business on February 17, 1998 (the "Distribution"). Prior to the
Distribution, Allergan contributed $200,000,000 in cash to ASTI in exchange for
all of the shares of ASTI Common Stock.
On March 10, 1998, 1,000 shares of Class B Common Stock of ASTI,
representing all of the issued and outstanding shares of such class, were issued
to Allergan. As sole holder of all of the issued and outstanding shares of Class
B Common Stock, Allergan has the option to repurchase all of the outstanding
Class A Common Stock under specified conditions.
In connection with the Distribution, ASTI and Allergan entered into a
number of agreements, including the R&D Agreement, Technology Agreement,
Services Agreement and License Option Agreement ("License Agreement").
Pursuant to the R&D Agreement, ASTI reimbursed Allergan for research
and development costs of $63,186,000, $46,284,000 and $34,411,000 incurred for
the years ended December 31, 2000, 1999 and 1998, respectively. The 1998
research and development costs also includes reimbursement to Allergan for
research and development services performed during the period from October 24,
1997 through March 9, 1998. For the cumulative period from Inception (November
12, 1997) of operations to December 31, 2000, ASTI reimbursed Allergan for
research and development costs of $143,881,000. From time to time, Allergan
shall propose work plans, subject to ASTI board approval, for the continued
development of product candidates. ASTI is required to utilize the cash
initially contributed to ASTI by Allergan plus interest and investment income
thereon, less administrative expenses and technology fees to conduct activities
under the R&D Agreement. The R&D Agreement specifies payment of Developed
Technology Royalties and Pre-Selection Product Payments by Allergan to ASTI
under certain conditions. For the year ended December 31, 2000, no amounts have
been earned by ASTI with respect to Developed Technology Royalties.
In July 1998, Allergan entered into a multi-year research and
development collaboration with Parke-Davis Pharmaceutical Research Division of
Warner-Lambert Company ("Warner-Lambert") to identify, develop and commercialize
up to two RXR subtype selective retinoid compounds for the treatment of
metabolic diseases, including adult onset diabetes, insulin resistant syndromes
and dyslipidemias ("Collaboration Agreement"). The technologies involved in the
collaboration were previously licensed by ASTI from Allergan pursuant to the
Technology Agreement. In accordance with a letter agreement between Allergan and
ASTI, ASTI is entitled to receive Pre-Selection Product Payments representing
ten percent of the potential $104 million in technology access fees and
development milestones to be received by Allergan pursuant to Allergan's
agreement with Warner-Lambert. For the years ended December 31, 1999 and 1998,
ASTI earned $400,000 and $500,000, respectively, of Pre-Selection Product
Payments in accordance with the letter Agreement. For the cumulative period from
Inception (November 12, 1997) to December 31, 2000, ASTI earned $900,000 of
Pre-Selection Product Payments. There were no Pre-Selection Product Payments for
the year ended December 31, 2000. During the fourth quarter 2000, this
collaboration expired. This was subsequent to the acquisition by Pfizer Inc. of
Warner Lambert, Inc., including its pharmaceutical division, Parke-Davis. There
has been, and continues to be, interest in this technology and, as such, ASTI
and Allergan are presently evaluating other potential collaboration partners.
F-9
31
ALLERGAN SPECIALTY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
Subject to certain limitations, the Technology Agreement grants ASTI an
exclusive license to research and develop all of Allergan's proprietary and
contractual rights with respect to certain retinoid and neuroprotective
technologies. As consideration for the exclusive license, ASTI will pay a
technology fee of $10,000,000 in year one; $6,700,000 in year two; $3,300,000 in
year three; and $2,000,000 in year four commencing October 24, 1997. The
technology fee is charged to operations on a basis which approximates
straight-line over the life of the Technology Agreement. The technology fee is
payable monthly in arrears provided, however, that ASTI shall no longer be
obligated to make such payments beginning with any month following the date on
which the total number of ASTI Products either under development or licensed to
Allergan pursuant to the License Agreement is less than two. For the years ended
December 31, 2000, 1999 and 1998, ASTI paid $3,059,000, $6,069,000 and
$11,243,000 in technology fees, of which $2,576,000 and $5,292,000 were included
in prepaid technology fees in the accompanying balance sheet at December 31,
2000 and 1999, respectively. For the cumulative period from Inception (November
12, 1997) to December 31, 1999, ASTI paid $20,371,000 in technology fees.
ASTI has granted Allergan an option to acquire a license to each
product developed under the R&D Agreement, including the Initial Products on a
country-by-country basis at any time until (a) with respect to the United
States, 30 days after clearance by the FDA to commercially market such ASTI
Product and (b) with respect to any other country, 90 days after the earlier of
(i) clearance by the appropriate regulatory agency to commercially market the
product and (ii) clearance by the FDA to market the product in the United
States.
Upon exercise of the license option, Allergan will make Product
Payments to ASTI as defined in the R&D Agreement. Through December 31, 2000, no
license option has been exercised. The license option will expire to the extent
not previously exercised, 30 days after the expiration of Allergan's option to
purchase all of the outstanding ASTI Shares, described below.
In accordance with ASTI's Restated Certificate of Incorporation,
Allergan has the right to purchase all (but not less than all) of the ASTI Class
A Common Stock (the "Purchase Option"). Allergan may exercise the Purchase
Option by written notice to ASTI at any time during the period beginning
immediately after the Distribution and ending on December 31, 2002; provided
that such date will be extended for successive six month periods if, as of June
30, 2001, ASTI has not paid or accrued expenses for at least 95% of all
Available Funds, as defined, pursuant to the R&D Agreement. In any event, the
Purchase Option will expire 90 days after Allergan receives notice that the
Available Funds (as defined in the R&D Agreement) held by ASTI is less than $15
million. Through December 31, 2000, Allergan has not exercised the Purchase
Option, nor has ASTI's Available Funds decreased to below $15 million.
If the Purchase Option is exercised, the exercise price will be the
greatest of:
(a) (i) 25 times the aggregate of (1) all worldwide payments
with respect to all Licensed Products, Developed Technology Products
and Pre-Selection Products for the four calendar quarters immediately
preceding the quarter in which the Purchase Option is exercised (Base
Period) and (2) all payments that would have been made and all payments
due to be made by Allergan to ASTI during the Base Period if Allergan
had not previously exercised its payment buy-out option with respect to
any product; provided, however, that, for the purposes of the foregoing
calculation, for any product which has not been commercially sold
during each of the four calendar quarters in the Base Period, Allergan
will be deemed to have made Product Payments, Developed Technology
Royalties and Pre-Selection Product Payments to ASTI for each such
quarter equal to the average of the payments made during each of such
calendar quarters during which such product was commercially sold, less
(ii) any amounts previously paid to exercise any payment buy-out option
for any product;
(b) the fair market value of 1,000,000 shares of Allergan
Common Stock determined as the average of the closing sales price of
Allergan Common Stock on the New York Stock Exchange for the 20 trading
days ending with the trading day that is two trading days prior to the
date of determination;
(c) $250 million less the aggregate amount of all technology
fee payments and research and development costs paid or incurred by
ASTI as of the date the Purchase Option is exercised; or
(d) $60 million.
In each case, the amount payable as the Purchase Option Exercise Price
will be reduced to the extent, if any, that ASTI's liabilities at the time of
exercise (other than liabilities under the R&D Agreement, Services Agreement and
the Technology Agreement) exceed ASTI's cash and cash equivalents and short-term
and long-term investments (excluding the amount of Available Funds remaining at
such time). Allergan must pay the Purchase Option Exercise Price in cash.
F-10
32
ALLERGAN SPECIALTY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
ASTI and Allergan have entered into a Services Agreement pursuant to
which Allergan has agreed to provide ASTI with administrative services,
including accounting and legal services on a fully-burdened cost reimbursement
basis. The Services Agreement expires on December 31, 2001 and will be renewed
automatically for successive one year periods during the term of the R&D
Agreement. ASTI may terminate the Services Agreement at any time upon 60 days
written notice. For the years ended December 31, 2000, 1999 and 1998, ASTI
incurred $107,000, $113,000 and $121,000, respectively, of costs pursuant to the
Services Agreement. For the cumulative period from Inception (November 12, 1997)
to December 31, 2000, ASTI incurred $341,000 of costs pursuant to the Services
Agreement.
5. INCOME TAXES
The Company recognizes deferred tax assets and liabilities for
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities and expected benefits of utilizing net
operating loss and credit carry forwards. The impact on deferred taxes of
changes in tax rates and laws, if any, are applied to the years during which
temporary differences are expected to be settled and reflected in the financial
statements in the period of enactment.
The provision for income taxes for the years ended December 31, 2000,
1999 and 1998 consists of the following:
2000 1999 1998
---------- ---------- -----------
Current
Federal $ 907,000 $2,794,000 $ 2,531,000
State 285,000 762,000 663,000
---------- ---------- -----------
Total current 1,192,000 3,556,000 3,194,000
Deferred
Federal 165,000 389,000 (609,000)
State -- 73,000 (73,000)
---------- ---------- -----------
Total deferred 165,000 462,000 (682,000)
---------- ---------- -----------
Total $1,357,000 $4,018,000 $ 2,512,000
========== ========== ===========
The reconciliation of the federal statutory tax rate to the effective
tax rate for the years ended December 31, 2000, 1999 and 1998 follows:
2000 1999 1998
------ ------ ------
Statutory rate of tax benefit (35.0)% (35.0)% (35.0)%
State taxes (9.0)% (9.5)% (8.4)%
Valuation allowance on capitalized
R&D and technology fees 46.0% 53.0% 50.7%
Other -- (0.3)% --
----- ----- -----
Effective tax rate 2.0% 8.2% 7.3%
===== ===== =====
ASTI had taxable income for the years ended December 31, 2000, 1999 and
1998 as a result of the requirement to capitalize technology fees and its
election to capitalize research and development expenses for tax purposes. The
amounts paid for taxes for the years ended December 31, 2000, 1999 and 1998,
were $906,000, $3,834,000 and $3,246,000, respectively.
F-11
33
ALLERGAN SPECIALTY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
Temporary differences and carry forwards, which give rise to a
significant portion of deferred tax assets and liabilities at December 31, 2000
and 1999 are as follows:
2000 1999
------------ ------------
Deferred tax assets
Capitalized technology fees $ 7,802,000 $ 5,270,000
Capitalized R&D 66,343,000 37,875,000
Unrealized loss on available-for-sale securities -- 821,000
Start-up costs 535,000 363,000
State taxes 100,000 220,000
------------ ------------
74,780,000 44,549,000
Less: valuation allowance (74,680,000) (43,506,000)
------------ ------------
Total deferred tax asset 100,000 1,043,000
Deferred tax liabilities
Unrealized gain on available-for-sale securities 138,000 --
------------ ------------
Net deferred tax (liability) asset $ (38,000) $ 1,043,000
============ ============
For 2000, the deferred tax asset of $100,000 is included in other
assets in the accompanying balance sheet. The net deferred tax asset for 1999 is
included in other assets in the accompanying balance sheet.
Based on the Company's taxable earnings, management believes it is more
likely than not that the Company will realize the benefit of the existing
deferred tax asset at December 31, 2000. Management believes the existing net
deductible temporary differences will reverse during periods in which the
Company generates net taxable income; however, there can be no assurance that
the Company will generate any earnings or any specific level of continuing
earnings in future years.
6. COMPREHENSIVE INCOME (LOSS)
The following summarizes the components of other comprehensive income
(loss) for the years ended at December 31:
2000 1999
---------------------------------------- -------------------------------------------
Tax Tax
Before-tax (expense) or Net of tax Before tax (expense) or Net of tax
amount benefit amount amount benefit amount
---------- ------------ ---------- ------------ ------------ ------------
Unrealized holdings gain
(loss) arising during
period $2,358,000 $(960,000) $1,398,000 $(2,646,000) $1,094,000 $(1,552,000)
7. BUSINESS SEGMENT INFORMATION
ASTI's sole business segment involves conducting research and
development of potential human pharmaceutical products based on retinoid and
neuroprotective technologies.
F-12
34
ALLERGAN SPECIALTY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
8. NEW ACCOUNTING STANDARDS
In June 1998, SFAS No. 133 - "Accounting for Derivative Instruments and
Hedging Activities" was issued and is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Company is required to adopt SFAS No. 133 on January 1, 2001.
The Company does not believe adoption of SFAS No. 133 will have any impact on
the Company's financial statements.
F-13
35
ALLERGAN SPECIALTY THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
SUPPLEMENTARY DATA
QUARTERLY RESULTS (UNAUDITED)
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
-------- --------- --------- --------- ---------
(in thousands, except per share data)
2000
- ----
Revenues $ 980 $ 861 $ 565 $ 812 $ 3,218
Total costs and expenses 17,691 15,616 17,239 20,561 71,107
Net loss (17,163) (15,099) (16,904) (20,080) (69,246)
Basic and diluted loss per share $ (5.24) $ (4.61) $ (5.16) $ (6.13) $ (21.15)
1999
- ----
Revenues $ 2,150 $ 2,342 $ 1,293 $ 1,325 $ 7,110
Total costs and expenses 12,348 13,659 14,399 15,492 55,898
Net loss (10,799) (12,191) (15,109) (14,707) (52,806)
Basic and diluted loss per share $ (3.30) $ (3.72) $ (4.62) $ (4.49) $ (16.13)
F-14
36
EXHIBIT INDEX
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION
-------- ------- -----------
(1) 3.1 Amended and Restated Certificate of Incorporation of ASTI.
(2) 3.2 Bylaws of ASTI.
(2) 4.1 Specimen Certificate of Class A Common Stock of ASTI.
(3) 10.1 Research and Development Agreement dated as of March 6,
1998 between the Company and Allergan, Inc. ("Allergan").
(3) 10.2 Technology License Agreement dated as of March 6, 1998
between the Company and Allergan.
(3) 10.3 Services Agreement dated as of March 6, 1998 between the
Company and Allergan.
(3) 10.4 License Option Agreement dated as of March 6, 1998 between
the Company and Allergan.
(3) 10.5 Distribution Agreement dated as of March 6, 1998 between
the Company and Allergan.
(4) 10.6 Letter agreement dated as of October 23, 1998 between the
Company and Allergan.
(1) 10.7 Waiver letter dated as of October 23, 1998 between the
Company and Allergan.
10.8 Letter agreement between the Company and Allergan re
royalty rate adjustment.
24.1 Power of Attorney. Reference is made to page 21.
- ----------
(1) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998 and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-40503) or amendments thereto and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998 and incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998 and incorporated herein by reference.