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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report pursuant to Section 13 or 15(d) of the Securities
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Exchange Act of 1934 for the quarterly period ended June 30, 2001
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Transition report pursuant to section 13 or 15(d) of the Securities
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Exchange Act of 1934 for the transition period from _______ to _______
Commission File Number 0-24760
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Orphan Medical, Inc.
(Exact name of registrant as specified in its charter)
Delaware 41-1784594
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
13911 Ridgedale Drive, Suite 250, Minnetonka,
MN 55305 (952) 513-6900
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(Address of principal executive offices (Registrant's telephone number,
and zip code) including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 par value 8,489,677
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(Class) (Outstanding at August 1, 2001)
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INDEX
ORPHAN MEDICAL, INC.(R)
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - June 30, 2001 and December 31, 2000. 3
Statements of Operations - Three and six months ended June 30, 2001
and June 30, 2000. 4
Statements of Cash Flows - Six months ended June 30, 2001 and
June 30, 2000. 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 9
Item 3. Quantitative and Qualitative Disclosures about Market Risks 27
PART II. OTHER INFORMATION
Items 1 through 3, 5 and 6 have been omitted since all items are
inapplicable or answers negative.
Item 4. Submission of Matter to Vote of Security Holders 28
Signature 29
Antizol(R), Antizol-Vet(R), Caprogel(TM), Busulfex(R), Intrachol(TM),
Cystadane(R), Elliotts B(R) Solution, Sucraid(R), Xyrem(R), "The" Orphan Drug
Company(TM), Orphan Medical(R), Inc. and Dedicated to Patients with Uncommon
Diseases(R) are trademarks of the Company.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ORPHAN MEDICAL, INC.
BALANCE SHEETS
June 30, December 31,
2001 2000
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(Unaudited) (Note)
Assets
Current assets:
Cash and cash equivalents $ 7,170,429 $ 1,115,319
Available-for-sale securities -- 10,301,935
Accounts receivable, less allowance for doubtful accounts of
$118,200 and $116,200 for 2001 and 2000, respectively 1,269,198 1,578,544
Inventories 1,586,078 1,602,949
Other current assets 426,339 221,240
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Total current assets $10,452,044 $14,819,987
Property and equipment 1,019,513 968,118
Accumulated depreciation (589,629) (504,187)
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429,884 463,931
Other assets 3,439 12,967
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Total assets $10,885,367 $15,296,885
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Liabilities and shareholders' equity
Current liabilities:
Accounts payable 350,030 1,298,047
Accrued outdated product return allowance 147,899 181,483
Accrued compensation 778,930 806,839
Deferred revenues 438,480 500,850
Accrued expenses 1,393,251 1,766,739
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Total current liabilities 3,108,590 4,553,958
Commitments
Shareholders' equity:
Senior Convertible Preferred Stock, $.01 par value; 14,400 shares
authorized; 8,706 and 8,088 shares issued and outstanding 87 87
Series B Convertible Preferred Stock, $.01 par value; 5,000 shares
authorized; 3,294 and 3,174 shares issued and outstanding 33 32
Series C Convertible Preferred Stock, $.01 par value; 4,000 shares
authorized; 0 shares issued and outstanding -- --
Series D Convertible Preferred Stock, $.01 par value; 1,500,000 shares
authorized; 0 shares issued and outstanding -- --
Common stock, $.01 par value; 25,000,000 shares authorized; 8,487,943
and 8,442,759 issued and outstanding 84,897 84,427
Additional paid-in capital 58,419,351 57,849,390
Accumulated deficit (50,727,591) (47,178,667)
Unrealized gain (loss) on available-for-sale securities -- (12,342)
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Total shareholders' equity 7,776,777 10,742,927
Total liabilities and shareholders' equity $10,885,367 $15,296,885
=========== ===========
Note: The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
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STATEMENTS OF OPERATIONS
ORPHAN MEDICAL, INC.
(Unaudited)
For the Three Months Ended For the Six Months Ended
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June 30, June 30, June 30, June 30,
2001 2000 2001 2000
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Revenues, net $2,424,843 $3,025,127 $4,766,352 $5,767,583
Cost of sales 434,579 433,692 724,245 893,046
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Gross Profit 1,990,264 $2,591,435 4,042,107 4,874,537
Operating expenses:
Research and development 1,217,223 1,340,604 2,123,415 3,107,006
Sales and marketing 1,355,647 1,503,995 2,922,355 2,308,585
General and administrative 1,220,019 984,897 2,336,410 1,720,326
---------- ---------- ---------- ----------
Total operating expenses 3,792,889 3,829,496 7,382,180 7,135,917
---------- ---------- ---------- ----------
Loss from operations (1,802,625) (1,238,061) (3,340,073) (2,261,380)
Other income:
Interest, net 93,336 231,545 240,310 357,019
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Net loss (1,709,289) (1,006,516) (3,099,763) (1,904,361)
Less: Preferred stock dividends 224,383 214,156 445,512 425,582
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Net loss attributable to common shareholders ($1,933,672) ($1,220,672) ($3,545,275) ($2,329,943)
========== ========== ========== ==========
Basic and diluted loss per common share ($0.23) ($0.15) ($0.42) ($0.30)
========== ========== ========== ==========
Weighted average number of shares outstanding 8,483,154 8,378,087 8,473,491 7,832,310
========== ========== ========== ==========
See accompanying notes
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STATEMENTS OF CASH FLOWS
ORPHAN MEDICAL, INC.
(Unaudited)
For the Six Months Ended
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June 30, June 30,
2001 2000
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OPERATING ACTIVITIES
Net loss ($ 3,099,763) ($ 1,904,361)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 85,442 67,466
Compensatory options -- 93,673
Changes in operating assets and liabilities:
Accounts payable and accrued expenses (1,457,449) 599,829
Inventories 16,871 (206,511)
Accounts receivable and current assets 113,774 (247,197)
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Net cash used in operating activities (4,341,125) (1,597,101)
INVESTING ACTIVITIES
Purchase of office equipment (51,393) (128,993)
Purchases of short-term investments 10,301,935 (16,769,636)
Maturities of short-term investments 12,342 7,235,540
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Net cash provided by (used in) investing activities 10,262,884 (9,663,089)
FINANCING ACTIVITIES:
Employee stock purchase plan 46,686 382,617
Stock option exercise proceeds 86,674 1,863,722
Private common stock placement -- 10,692,154
Cash dividends (9) (1,721)
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Net cash provided by financing activities 133,351 12,936,772
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Increase in cash and cash equivalents 6,055,110 1,676,582
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Cash and cash equivalents at beginning of Period 1,115,319 205,678
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Cash and cash equivalents at end of Period $ 7,170,429 $ 1,882,260
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SUPPLEMENTAL CASH FLOW INFORMATION
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Cash interest received $ 423,133 $ 206,417
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ORPHAN MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Orphan Medical, Inc. (the "Company") acquires, develops, and markets products of
high medical value intended to address inadequately treated or uncommon diseases
within selected strategic therapeutic market segments. A drug has high medical
value if it offers a major improvement in the safety or efficacy of patient
treatment and has no substantially equivalent substitute. The Company has six
products that have been approved for marketing by the Food and Drug
Administration (the "FDA") and is currently developing one potential product.
The Company expects to seek additional products for development.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, these financial statements do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal, recurring accruals) considered necessary for fair presentation have
been included. Operating results for the six-month period ended June 30, 2001
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2001. For further information, refer to the audited financial
statements and accompanying notes contained in the Company's Annual Report filed
on Form 10-K for the year ended December 31, 2000.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
3. REVENUE RECOGNITION
Sales are recognized at the time a product is shipped to the Company's customers
and are recorded net of reserves for estimated returns of outdated product and
for discounts for prompt payment. The Company is obligated to accept from all
domestic customers the return of products that have reached their expiration
date. The Company is not obligated to accept returns of outdated product from
its international distribution partners. The Company monitors the return of
product and modifies its accrual for outdated product returns as necessary.
Management bases the reserve on historical experience and these estimates are
subject to change.
Deferred revenue represents prepayment from customers for products not yet
shipped.
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NOTES TO FINANCIAL STATEMENTS
(Unaudited) continued
4. INVENTORIES
Inventories are valued at the lower of cost or market determined using the
first-in, first-out (FIFO) method. The Company's policy is to establish an
excess and obsolete reserve for its products in excess of the expected demand
for such products.
JUNE 30, DECEMBER 31,
2001 2000
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Raw materials and packaging $ 1,080,566 $ 1,213,464
Finished goods 505,512 389,485
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$ 1,586,078 $ 1,602,949
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5. COMPREHENSIVE INCOME
The following summarizes the comprehensive income for the periods ended:
JUNE 30,
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2001 2000
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Net Income $ (3,545,275) $ (2,329,943)
Unrealized gain on securities 12,342 (2,825)
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Total net comprehensive income $ (3,532,933) $ (2,332,768)
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6. COMMITMENTS
The Company has various commitments under agreements with outside consultants
and contractors to provide services relating to drug development, drug
acquisition, manufacturing and marketing. At June 30, 2001, the Company
estimates that it could incur approximately $3.9 million of additional
expenditures in subsequent periods under existing commitments. Commitments for
research and development expenditures will likely fluctuate from quarter to
quarter and from year to year depending on, among other factors, the timing of
product development and the progress of clinical development programs.
7. BORROWINGS
The Company has a commercial revolving line of credit with a bank, which expires
on June 15, 2002. The maximum amount available to the Company under this
arrangement is $1.0 million, subject to certain limitations. The Company's
indebtedness to the bank may not exceed the lesser of (1) 75 percent of the
Company's trade accounts receivable that have been outstanding for 90 days or
less or (2) $1.0 million in cash. Advances are charged a variable rate of
interest equal to the prime rate. Through June 30, 2001, the Company has not
borrowed under this arrangement.
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NOTES TO FINANCIAL STATEMENTS
(Unaudited) continued
8. RECLASSIFICATIONS
Certain prior period balances have been reclassified in order to conform with
the presentation for the period ended June 30, 2001. These reclassifications
have no impact on the net loss or shareholders' equity as previously reported.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
CAUTIONARY STATEMENT
This Quarterly Report on Form 10-Q contains statements that are not descriptions
of historical facts. The words or phrases "will likely result", "look for", "may
result", "will continue", "is anticipated", "expect", "project", or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
may be forward-looking statements that are subject to risks and uncertainties.
Actual results could differ materially from those currently anticipated due to a
number of factors, including those identified in the section of this Quarterly
Report filed on Form 10-Q for the quarterly period ended June 30, 2001 titled
"Risk Factors".
GENERAL
The Company incorporated in Minnesota in June 1994 to carry on the business
previously conducted by the Orphan Medical Division of Chronimed, Inc. In
September 2000, the Company reincorporated in Delaware. Since its inception in
January 1993, the activities of the Orphan Medical Division and the Company have
consisted primarily of obtaining the rights for developing and marketing
proposed pharmaceutical products, managing the development of these products and
preparing for and initiating the commercial introduction of six products. The
Company operates in a single business segment: pharmaceutical products. The
Company has experienced recurring losses from operations and has generated an
accumulated deficit through June 30, 2001 of $50.7 million. In addition, the
Company expects to incur additional losses from operations in 2001 and 2002.
RECENT DEVELOPMENTS
On July 3, 2001, the Company announced that it had received an Approvable Letter
from the U.S. Food and Drug Administration (FDA) in response to the Company's
New Drug Application (NDA) for Xyrem. An Approvable Letter defines the FDA
requirements of approval. The Company is in discussions with the FDA to fully
define the issues in the FDA's Approvable Letter. The Company believes that all
components of the Approvable Letter can be addressed by year-end. Items to be
addressed include a safety update of on-going clinical trials and an additional
acute exposure trial in respiratory compromised patients. Final product labeling
and modifications to the Company's proposed Risk Management Program must also be
negotiated. The manufacturer must also undergo a successful re-inspection for
current Good Manufacturing Practices (GMP) as well as a pre-approval inspection
relating to Xyrem. By regulation, the FDA has up to six months to review a
response to the Approvable Letter.
THREE MONTHS ENDED JUNE 30, 2001 VS. THREE MONTHS ENDED JUNE 30, 2000
Net loss applicable to common shareholders was $1.9 million for the three months
ended June 30, 2001 compared to $1.2 million for the three months ended June 30,
2000. The increase in the loss results principally from a decrease in revenues
from approved products. In addition, the Company had lower sales and marketing
spending due to a reduction in spending for the launch planning for Xyrem(R)
(sodium oxybate) oral solution due to the delay in approval of that drug. The
development costs were also lower due to the reduction in clinical trial
activities after the submission of the New Drug Application. These reductions
were offset by an increase in general and administrative expenses resulting from
compensation expense associated with staffing and building infrastructure for
the anticipated launch of Xyrem. The preferred stock dividend increased in the
second quarter of 2001 over the second quarter of 2000 due to issuance of
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additional preferred shares in August 2000 to pay dividends on outstanding
Preferred Stock. This preferred stock dividend increased the net loss applicable
to common shareholders in the current quarter.
Net sales decreased 20% to $2.4 million for the three months ended June 30, 2001
compared to $3.0 million the prior year. Sales of Antizol(R) (fomepizole)
Injection were lower for the three months ended June 30, 2001 as compared to the
same period in the prior year. During 2000 several pharmaceutical wholesale
supply chain management customers started to stock Antizol in inventory in
addition to shipping directly to end users. This stocking "wholesale" activity
increased the sales during that time period. The Company believes that these
pharmaceutical wholesale supply chain management customers are now fully stocked
and that the sales predominantly reflect actual hospital purchasing in the
current quarter. While Busulfex(R) (busulfan) Injection continues to be used in
an increasing number of transplant centers, sales are slightly behind 2000 sales
for the same period since wholesaler stocking is lower than last year. This
decline also reflects the recent clinical trials and subsequent approval of a
new treatment for chronic myelogenous leukemia (CML) in May. Busulfex is
approved in the United States as part of conditioning regimens prior to bone
marrow or hematopoietic progenitor cell transplantation for CML. In Canada and
Israel, Busulfex is approved for regimens associated with a broader range of
indications. A Busulfex regimen provides an alternative to oral busulfan and
total body irradiation regimens.
Gross profit margins decreased to 82% for the 2001 quarter compared to 86% for
the 2000 quarter. Cost of sales as a percentage of net sales will fluctuate from
quarter to quarter and from year to year depending on, among other factors,
demand for the Company's products, new product introductions and the mix of
approved products shipped.
Research and development expense decreased 9% from $1.3 million for the three
months ended June 30, 2000 to $1.2 million for three months ended June 30, 2001.
The decrease results from reduced research and development spending on Xyrem
during the current quarter pending the outcome of the NDA submission. The 2001
spending includes ongoing trials for Xyrem and other development activities.
Prior year spending included amounts for clinical trials included in the NDA
submission. The Phase III(b) trial for Xyrem now underway will increase research
and development spending in subsequent quarters as will additional trials and
data updates requested by the FDA. Clinical spending for these activities will
be dependent on a number of factors, including among others, the number of human
subjects screened and enrolled in the trials, and the number of active clinical
sites.
Sales and marketing expense decreased 10% from $1.5 million for the three months
ended June 30, 2000 to $1.4 million for the three months ended June 30, 2001.
This decrease is largely attributable to reduced spending in pre-approval market
planning for Xyrem. Sales and marketing expenses should be consistent with the
second quarter during the remainder of 2001 or early 2002 to support the new
timeline for the expected launch of Xyrem.
General and administrative expense increased 24% from $1.0 million for the three
months ended June 30, 2000 to $1.2 million for the three months ended June 30,
2001. The increase in general and administrative expenses is related to building
infrastructure including the addition of staff to prepare for the anticipated
Xyrem launch. General and administrative expenses are not expected to rise
significantly above current levels in the next few quarters.
Other income is the sum of interest income from investment activities less
interest expense from
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financing activities. Other income decreased 60% from $231,545 in the 2000
second quarter to $93,336 in the 2001 second quarter. This decrease is the
result of cash balances being used to fund development and working capital
activities of the Company. In addition, interest rates on invested funds have
been declining, reducing the yields received. Other income is expected to
decline in subsequent quarters as currently invested funds are used to fund
Xyrem development activities, and for other working capital requirements.
Preferred stock dividends relate to the Senior Convertible Preferred Stock that
was issued on July 23, 1998 and Series B Convertible Preferred Stock issued on
August 2, 1999. Both have dividend rates of 7.5%. Preferred stock dividends were
$0.2 million for both the 2001 and 2000 second quarters. Preferred stock
dividends, which commenced on February 1, 1999, are payable in arrears on August
1 and February 1 of each year. The Company has chosen to satisfy its dividend
payment obligation by issuing additional common or preferred stock, as permitted
by the terms of the Senior Convertible Preferred Stock and the Series B
Convertible Preferred Stock respectively. For the February 1, 2001 Senior
Preferred Stock dividend, the Company elected to issue 20,572 shares of common
stock to satisfy its obligation. The Company also intends to continue to satisfy
this obligation in the future by issuing common stock. The Company is obligated
to pay the dividend for the Series B Convertible Preferred Stock in cash or
through the issuance of additional preferred shares, which will cause preferred
stock dividends to increase in subsequent quarters. For the February 1, 2001
Series B Convertible Preferred Stock dividend, the Company issued 120 new shares
of Series B Convertible Preferred Stock to satisfy its obligation. The Company
also intends to satisfy the Series B Convertible Preferred Stock obligation by
issuing additional preferred shares.
SIX MONTHS ENDED JUNE 30, 2001 VS. SIX MONTHS ENDED JUNE 30, 2000
Net loss applicable to common shareholders was $3.5 million for the first six
months of 2001 compared with a net loss of $2.3 million for the first six months
of 2000. The increase in the loss results principally from a decrease in
revenues from approved products. In addition, the Company had higher sales and
marketing spending for pre-approval market planning efforts for the anticipated
launch of Xyrem. The Company also had increased general and administrative
expense resulting from additional spending on infrastructure, including staffing
in preparation for the launch of Xyrem. The preferred stock dividend increased
in the first six months of 2001 over the first six months of 2000 due to the
issuance of additional preferred stock in the prior year to pay dividends. The
preferred stock dividend increased the net loss applicable to common
shareholders in the current period.
Net sales decreased 17% from $5.8 million in the first six months of 2000 to
$4.8 million in the first six months of 2001. Sales of Antizol were lower for
the three months ended June 30, 2001 as compared to the same period in the prior
year. During 2000, several pharmaceutical wholesale supply chain management
customers started to stock Antizol in inventory in addition to shipping directly
to end users. This stocking activity increased the sales during that time
period. The Company believes that these pharmaceutical wholesalers are now fully
stocked and that the sales predominantly reflect actual hospital purchasing in
the current year. While Busulfex continues to be used in an increasing number of
transplant centers, sales are slightly behind 2000 sales for the same period
since wholesaler stocking is lower than last year. This decline also reflects
the recent clinical trials and subsequent approval of a new treatment for
chronic myelogenous leukemia (CML) in May. Busulfex is approved in the United
States as part of conditioning regimens prior to bone marrow or hematopoietic
progenitor cell transplantation for CML. In Canada and Israel, Busulfex is
approved for regimens associated with a broader range of indications. A Busulfex
regimen provides an alternative to oral busulfan and total body
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irradiation regimens.
Gross profit margins were 85% for both the six months ended June 30, 2000 and
2001. Cost of sales as a percentage of net sales will fluctuate from quarter to
quarter and from year to year depending on, among other factors, demand for the
Company's products, new product introductions and the mix of approved products
shipped.
Research and development expense decreased 32% to $2.1 million for the six
months ended June 30, 2001 compared to $3.1 million for the same period the
prior year. The decrease results from reduced research and development spending
on Xyrem during the current year pending the outcome of the NDA submission. The
prior year spending includes trials for Xyrem, which were completed and included
in the NDA submission, and other development activities for Busulfex. The Phase
III(b) trial for Xyrem now underway will increase research and development
spending in subsequent quarters. Clinical spending for these activities will be
dependent on a number of factors, including among others, the number of human
subjects screened and enrolled in the trials, and the number of active clinical
sites.
Sales and marketing expense increased 27% to $2.9 million for the six months
ended June 30, 2001 from $2.3 million for the six months ended June 30, 2000.
This increase is largely attributable to spending related to the current
commercialized products and higher spending earlier this year for pre-approval
market planning for Xyrem. Sales and marketing expenses will be consistent with
the current levels until late 2001 or early 2002 to support the new timeline for
Xyrem.
General and administrative expense increased 36% to $2.3 million for the six
months ended June 30, 2001 from $1.7 million for the same period in the prior
year. This increase related to building infrastructure, including the addition
of staff to prepare for the anticipated launch of Xyrem. General and
administrative expenses are not expected to increase significantly above current
levels in subsequent quarters.
Other income is the sum of interest income from investment activities less
interest expense from financing activities. Other income decreased 33% from $0.4
million in the first six months of 2000 to $0.2 million in the first six months
of 2001. This decrease is the result of cash balances being used to fund
development and working capital activities of the Company. In addition, interest
rates on invested funds have been declining, reducing the yields received. Other
income is expected to decline in subsequent quarters as currently invested funds
are used to fund Xyrem development activities, and for working capital
requirements.
Preferred stock dividends relate to the Senior Convertible Preferred Stock that
was issued on July 23, 1998 and Series B Convertible Preferred Stock issued on
August 2, 1999. Both have dividend rates of 7.5%. Preferred stock dividends were
$0.4 million for the first six months of 2001 and 2000. Preferred stock
dividends, which commenced on February 1, 1999, are payable in arrears on August
1 and February 1 of each year. The Company has chosen to satisfy its dividend
payment obligation by issuing additional common or preferred stock, as permitted
by the terms of the Senior Convertible Preferred Stock and the Series B
Convertible Preferred Stock respectively. For the February 1, 2001 Senior
Preferred Stock dividend, the Company elected to issue 20,572 shares of common
stock to satisfy its obligation. The Company also intends to continue to satisfy
this obligation in the future by issuing common stock. The Company is obligated
to pay the dividend for the Series B Convertible Preferred Stock in cash or
through the issuance of additional preferred shares, which will cause preferred
stock dividends to increase in
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subsequent quarters. For the February 1, 2001 Series B Convertible Preferred
Stock dividend, the Company issued 120 new shares of Series B Convertible
Preferred Stock to satisfy its obligation. The Company also intends to satisfy
the Series B Convertible Preferred Stock obligation by issuing additional
preferred shares.
LIQUIDITY AND CAPITAL RESOURCES
Since July 2, 1994, the effective date the Company was spun-off from Chronimed,
it has financed its operations principally from net proceeds from several public
and private financings, interest income and product sales. In February 2000, the
Company completed a private placement of 1.365 million shares of newly issued
common stock, resulting in net proceeds of $10.7 million. The various public and
private placement transactions since inception resulted in aggregate net
proceeds, after commissions and expenses, of $47.5 million.
Net working capital (current assets less current liabilities) decreased from
$10.3 million at December 31, 2000 to $7.3 million at June 30, 2001. Cash and
cash equivalents, and available-for-sale securities decreased from $11.4 million
at December 31, 2000 to $7.2 million at June 30, 2001. The Company continues to
invest its excess cash in interest bearing, investment grade securities. The
Company has a $1.0 million commercial revolving line of credit with a bank,
expiring on June 15, 2002. In connection with the financing transaction in
August 1999, the Company received a $2.05 million commitment in the form of a
line of credit from UBS Capital. Amounts outstanding under this line of credit
bear an interest rate of 7.5% and mature on August 2, 2002. To date, the Company
has not borrowed under either of these credit arrangements.
The Company's commitments for outside development spending were $3.9 million at
both June 30, 2001 and December 31, 2000. If additional products are licensed
for development, these expenditures and commitments could increase
significantly.
Management believes the Company's current cash availability and anticipated
operating cash flows from product sales will be sufficient to fund its
operations at least through June 30, 2002.
For continued listing on the NASDAQ National Market, a company must satisfy a
number of requirements, which in the Company's case include either: (1) net
tangible assets in excess of $4.0 million or (2) a market capitalization of at
least $50.0 million. Net tangible assets are defined as total assets less the
sum of total liabilities and intangible assets. The Company met both of the
thresholds at June 30, 2001. The Company's net tangible assets at June 30, 2001
equaled approximately $7.2 million and the Company's market capitalization was
approximately $96.1 million (based on the last sale price of $11.32 and
8,489,677 shares outstanding as of June 30, 2001). Although the Company does not
expect to be profitable in 2001 and 2002, the Company nevertheless expects to
meet the net tangible asset requirement for listing on the NASDAQ National
Market. However there can be no assurance that the Company will continue to have
adequate capital to meet the net tangible asset requirement through the year
2001 and thereafter. The NASDAQ National Market issued new listing
qualifications, which will become effective November 2002, and which will
replace the net asset requirement with a minimum net equity requirement of $10.0
million. At June 30, 2001, the Company meets the new listing requirements.
In connection with the 1998 and 1999 private placements of convertible preferred
stock, the Company agreed to certain restrictions and covenants, which could
limit its ability to obtain additional financing. The most important of the
restrictions are: (1) the Company cannot incur additional indebtedness, except
for indebtedness secured solely by the Company's trade
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receivables, until it has profitable operations, subject to certain limitations
and (2) the Company cannot, without the approval of a majority of the preferred
stockholders, issue additional equity securities unless the selling price per
share exceeds the then conversion price of the outstanding convertible preferred
stock or the sale of equity is accomplished in a public offering. The present
conversion price is $8.14 for the Senior Convertible Preferred Stock and $6.50
for the Series B Convertible Preferred Stock. Even without these restrictions,
the Company can make no assurances that additional financing opportunities will
be available or, if available, on acceptable terms.
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GEOGRAPHIC SALES INFORMATION
The Company monitors sales in two geographic segments, domestic and
international. The Company has no assets outside of the United States. The
following is a summary of net sales by geographic segment for the quarters and
six months ended June 30, 2001 and 2000, respectively.
For the Three Months Ended For the Six Months Ended
--------------------------- ----------------------------
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
---------- ---------- ---------- ----------
Domestic $1,984,706 $2,181,670 $4,016,701 $4,394,145
International 440,137 843,457 749,651 1,373,438
---------- ---------- ---------- ----------
Total $2,424,843 $3,025,127 $4,766,352 $5,767,583
========== ========== ========== ==========
RISK FACTORS
An investment in our common stock involves a number of risks, including among
others, risks associated with companies that operate in the pharmaceutical
industry. These risks are substantial and inherent in our operations and
industry. Any investor or potential investor should carefully consider the
following information about these risks before buying shares of common stock.
WE HAVE A HISTORY OF LOSSES, WHICH WE EXPECT TO CONTINUE.
We have been unprofitable since our inception in January 1993. We expect
operating losses in 2001 and 2002 because anticipated gross profits from product
revenues will not offset our operating expenses and additional spending to
continue drug development activities. The amount of these losses may vary
significantly from year-to-year and quarter-to-quarter. Our actual losses will
depend on, among other factors, the timing of product development, regulatory
approval, and market demand for our Food and Drug Administration ("FDA")
approved products. We cannot assure you that we will ever generate sufficient
product revenues to achieve profitability.
LIMITATIONS TO SOURCES OF ADDITIONAL CAPITAL - RESTRICTIONS, COVENANTS AND
RIGHTS RELATED TO SENIOR CONVERTIBLE PREFERRED STOCK AND SERIES B CONVERTIBLE
PREFERRED STOCK.
On July 23, 1998, we completed the private sale to UBS Capital of $7.5 million
of Senior Convertible Preferred Stock. On August 2, 1999, we completed another
private sale to UBS Capital of $2.95 million of Series B Convertible Preferred
Stock. In conjunction with the issuance of the preferred shares, we agreed to
several restrictions and covenants, and granted certain voting and other rights
to the holders of the preferred shares. One of the most important of these
restrictions is that we cannot incur additional indebtedness, except for
indebtedness secured solely by our trade receivables, until we have profitable
operations, subject to certain limitations. Another important restriction is
that, without the approval of a majority of the preferred stockholders, we
cannot issue additional equity securities unless the selling price per share
exceeds the then conversion price of the outstanding convertible preferred stock
or the sale of equity is accomplished in a public offering. The present
conversion price is $8.14 per share for the Senior Convertible Preferred Stock
and $6.50 for the Series B Convertible Preferred
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Stock. These restrictions could make it more difficult and more costly for us to
obtain additional capital. We cannot assure you that additional sources of
capital will be available to us or, if available, on terms acceptable to us.
POSSIBLE PRICE VOLATILITY AND LIMITED LIQUIDITY OF STOCK.
There is generally significant volatility in the market prices and limited
liquidity of securities of early stage companies, and particularly of early
stage pharmaceutical companies. Contributing to this volatility are various
factors and events that can affect our stock price in a positive or negative
manner. These factors and events include, but are not limited to:
o announcements by us or our competitors of new product developments or
clinical testing results;
o governmental approvals, refusals to approve, regulations or actions;
o developments or disputes relating to patents or proprietary rights;
o public concern over the safety of therapies;
o financial performance;
o fluctuations in financial performance from period to period; and
o small float or number of shares of our stock available for sale and trade.
These and other factors and events may have a significant impact on our business
and on the market price of the common stock.
WE CANNOT BE SURE THAT FUTURE CAPITAL WILL BE AVAILABLE TO MEET OUR EXPECTED
CAPITAL REQUIREMENTS.
Although we believe that we have sufficient capital to meet current business
objectives, if we expand our business plans, we may need additional capital.
Adequate funds for our operations, continued development, and expansion of our
business plans, whether from financial markets or from other sources, may not be
available when needed on acceptable terms, or at all. If we issue additional
securities your holding may be diluted.
POSSIBLE VOLATILITY OF STOCK PRICE AND REDUCED LIQUIDITY OF THE MARKET FOR THE
STOCK - POSSIBLE LOSS OF NASDAQ NATIONAL MARKET LISTING AND FAILURE TO QUALIFY
FOR NASDAQ SMALL CAP MARKET LISTING.
There is a risk that the market value and the liquidity of the public float for
our common stock could be adversely affected in the event we no longer meet the
NASDAQ's requirements for continued listing on the National Market. For
continued listing on the NASDAQ National Market, a company must satisfy a number
of requirements, which in our case includes either: (1) net tangible assets in
excess of $4.0 million as reported on Form 10-Q or Form 10-K or (2) a market
capitalization of at least $50.0 million. Net tangible assets are defined as
total assets less the sum of total liabilities and intangible assets. Market
capitalization is defined as total outstanding shares multiplied by the last
sales price quoted by NASDAQ. We met both of these criteria as of June 30, 2001,
however, we cannot assure you that the market capitalization threshold will
continue to be met or that we will continue to have adequate capital to meet the
net tangible asset requirement. The NASDAQ National Market has issued new
listing qualifications which will become effective November 2002, and which will
replace the net tangible asset requirement with a minimum net equity requirement
of $10.0 million. At June 30, 2001, the Company meets the new listing
qualifications.
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THERE IS A LIMITED MARKET FOR OUR PRODUCTS.
Most orphan drugs have a potential United States market of less than $25 million
annually and many address annual markets of less than $1 million. We cannot
assure you that sales of our products will be adequate to make us profitable
even if the products are accepted by medical specialists and used by patients.
WE RELY ON THE LIMITED PROTECTION OF THE ORPHAN DRUG ACT.
UNITED STATES
Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs
intended to treat a "rare disease or condition." The Orphan Drug Act generally
defines a "rare disease or condition" as one that affects populations of fewer
than 200,000 people in the United States. The Orphan Drug Act provides us with
certain limited protections for our products.
The first step in obtaining the limited protection under the Orphan Drug Act is
acquiring the FDA's approval of "orphan drug designation," which must be
requested before submitting a New Drug Application ("NDA"). After the FDA grants
orphan drug designation, it publishes the generic identity of the therapeutic
agent and the potential orphan use specified in the request. Orphan drug
designation does not constitute FDA approval. In addition, orphan drug
designation does not convey any advantage in, or shorten the duration of, the
regulatory approval process.
The second step in obtaining the limited protection under the Orphan Drug Act is
acquiring the FDA's recognition of "orphan drug status." The Orphan Drug Act
confers orphan drug status upon the first company to receive FDA approval to
market a drug with "orphan drug designation" for a specific designated
indication. Orphan drug status does not protect against another formulation or
drug of materially different composition from being approved, with or without
orphan drug status, for the same indication. FDA approval also results in United
States marketing exclusivity for a period of seven years, subject to certain
limitations. Although obtaining FDA approval to market a product with orphan
drug status can be advantageous, we cannot assure you that the scope of
protection or the level of marketing exclusivity will remain in effect in the
future. In addition, United States orphan drug status does not provide any
marketing exclusivity in foreign markets. Although certain foreign countries
provide development and marketing benefits to orphan drugs, we cannot assure you
that such benefits can be obtained or, if obtained, will be of material value to
us. The FDA has granted us orphan drug status for Antizol, Elliotts B Solution,
Cystadane, Sucraid, and Busulfex.
We have obtained orphan drug designation for Xyrem and, on October 2, 2000, we
submitted an NDA for approval. On July 3, 2001, the Company announced the FDA
issued an approvable letter regarding the Company's NDA for Xyrem. Sodium
oxybate is the generic identity of the therapeutic agent for Xyrem. Despite
orphan drug designation for Xyrem, another pharmaceutical company could attempt
to develop sodium oxybate for the same designated indication as Xyrem or may
seek approval of an NDA for their drug prior to the approval of an NDA for
Xyrem. If the FDA first approves another sponsor's NDA for sodium oxybate and
for the same indication as Xyrem, that sponsor will be entitled to exclusive
marketing rights. In that case, the FDA would not approve our application to
market Xyrem for seven years, if at all. We are aware that the FDA has granted
Teva (formerly Biocraft) orphan drug designation for the use of sodium oxybate
to treat the symptoms of narcolepsy, however, we have obtained the exclusive
right to use Teva's data for one controlled study in our NDA submission. While
we are not
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aware of activities to develop sodium oxybate by any other US Company, we cannot
assure you that the FDA will approve Xyrem first for the designated indication.
We also cannot assure you that the FDA will not grant orphan drug designation
and marketing approval to other competing products prior to approving our NDA
for Xyrem.
Even if the FDA approves an NDA for a drug with an orphan drug designation, the
FDA may still approve the same drug for a different indication, or a molecular
variation of the same drug for the same indication. We are aware that the FDA
granted to Sparta Pharmaceutical, which has been acquired by SuperGen Inc.,
orphan drug designation for an intravenous busulfan for a closely related
indication. If the FDA approves an NDA for SuperGen's product for a different
indication, SuperGen could seek orphan drug status. In addition, the FDA does
not restrict doctors from prescribing an approved product for uses not approved
by the FDA for that product. Thus, a doctor could prescribe another company's
drug for indications for which our product has received FDA approval and orphan
drug status. Significant "off label" use, that is, prescribing approved drugs
for unapproved uses, could adversely affect the marketing potential of any of
our products that have received orphan drug status and NDA approval by FDA.
The possible amendment of the Orphan Drug Act by Congress has been the subject
of congressional discussion from time to time over the last ten years. Although
Congress has made no significant changes to the Orphan Drug Act for a number of
years, members of Congress have from time to time proposed legislation that
would limit the application of the Orphan Drug Act. We cannot assure you that
the Orphan Drug Act will remain in effect or that it will remain in effect in
its current form. The precise scope of protection that orphan drug designation
and marketing approval may afford in the future is unknown. We cannot assure you
that the current level of exclusivity will remain in effect.
EUROPE
An orphan drug act was enacted in Europe that provides up to ten years of market
exclusivity for a drug that meets the requirements of the act. For a
pharmaceutical product to qualify for the benefits of the act, the prevalence or
incidence (whichever is greater) must not exceed five patients per 10,000
population. Our European partners have submitted both Busulfex and Cystadane for
designation as orphan drugs in Europe. In May 2001, the Company received notice
that it was granted orphan designation for Antizol in Europe for use in
methanol poisonings. We cannot provide assurance that any of our pharmaceutical
products will qualify for orphan drug protection in Europe or that another
company will not obtain an approval which would block us from marketing our
product in Europe.
THE FDA AND FOREIGN REGULATORY AUTHORITIES MUST APPROVE OUR PRODUCTS FOR SALE.
Government regulation in the United States and abroad is a significant factor in
the testing, production and marketing of our current and future products. Each
product must undergo an extensive regulatory review process conducted by the
United States Food and Drug Administration and by comparable agencies in other
countries. We cannot market any medicine we may develop or license as a
prescription product in any jurisdiction, including foreign countries, in which
the product does not receive regulatory approval. The approval process can take
many years and requires the expenditure of substantial resources.
We depend on external laboratories and medical institutions to conduct our
pre-clinical and clinical testing in compliance with clinical and laboratory
practices established by the FDA. The
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data obtained from pre-clinical and clinical testing is subject to varying
interpretations that could delay, limit or prevent regulatory approval. In
addition, changes in FDA policy for drug approval during the period of
development and in the requirements for regulatory review of each submitted NDA
could result in additional delays or outright rejection.
We cannot assure you that the FDA or any foreign regulatory authority will
approve in a timely manner, if at all, any product we develop. Moreover, even if
the FDA approves a product, it may place commercially unacceptable limitations
on the uses, "indications," or conditions for which a product may be marketed or
on the way it is marketed. This could result in additional cost and delay for
further studies to provide additional data on safety or effectiveness. It could
also result in the development of costly distribution systems. Any one of, or a
combination of, these factors could lead to the decision not to market the drug
or require the Company to obtain additional capital in order to market the drug.
We cannot assure you that the Company will have or will be able to obtain the
additional capital required by such factors.
FDA APPROVAL DOES NOT GUARANTEE FINANCIAL SUCCESS.
Six of our products have been approved for marketing by regulatory authorities
in the United States or elsewhere. Even if we obtain FDA approval to market
Xyrem, we cannot assure you that Xyrem or our other products will be
commercially successful or achieve expected financial results. We may encounter
unanticipated problems relating to the development, manufacturing, distribution
and marketing of our products. Some of these problems may be beyond our
financial and technical capacity to solve. The failure to adequately address any
such problems could have a material adverse effect on our business and our
prospects. In addition, the efforts of government entities and third party
payors to contain or reduce the costs of health care may adversely affect our
sales and limit the commercial success of our products.
We cannot completely insulate our drug development portfolio from the
possibility of clinical or commercial failures. Some products that we have
selected for development may not produce the results expected during clinical
trials or receive FDA approval. Drugs approved by the FDA may not generate
product sales of an acceptable level. We have discontinued the development of
eleven products from our portfolio since inception.
SIGNIFICANT GOVERNMENT REGULATION CONTINUES ONCE A PRODUCT IS APPROVED FOR SALE.
After a reviewing division of the FDA approves a drug, the FDA's Division of
Drug Marketing, Advertising and Communication must accept such drug's marketing
claims, which are the basis for the drug's labeling, advertising and promotion.
We cannot be sure that the Division of Drug Marketing, Advertising and
Communication will accept our proposed marketing claims. The failure of the
Division of Drug Marketing, Advertising and Communication to accept our proposed
marketing claims could have a material adverse effect on our business and
prospects.
The FDA requires that a company conduct "post-marketing adverse event
surveillance programs" to monitor any side effects that occur after the
company's drug is approved for marketing. If the surveillance program indicates
unsafe side effects, the FDA may recall the product, and suspend or terminate a
company's authorization to market the product. The FDA also regulates the
manufacturing process for an approved drug. The FDA may impose restrictions or
sanctions upon the subsequent discovery of previously unknown problems with a
product or manufacturer. One possible sanction is requiring the withdrawal of
such product from the market. The FDA must approve any change in manufacturer as
well as most changes in the manufacturing process prior to implementation.
Obtaining the FDA's approval for a change in manufacturing
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procedures or change in manufacturers is a lengthy process and could cause
production delays and loss of sales, which would have a material adverse effect
on our business and our prospects.
Certain foreign countries regulate the sales price of a product after marketing
approval is granted. We cannot be sure that we can sell our products at
satisfactory prices in foreign markets even if foreign regulatory authorities
grant marketing approval.
WE RELY ON OTHERS FOR PRODUCT DEVELOPMENT OPPORTUNITIES.
We engage in only limited research to identify new pharmaceutical compounds. To
build our product portfolio, we have adopted a license and acquisition strategy.
This strategy for growth requires us to identify and acquire pharmaceutical
products targeted at niche markets preferably within selected strategic
therapeutic market segments. These products usually require further development
and approval by regulatory bodies before they can be marketed. We cannot assure
you that any such products can be successfully developed, approved or marketed.
We must rely upon the willingness of others to sell or license pharmaceutical
product opportunities to us. Other companies, including those with substantially
greater resources, compete with us to acquire such products. We cannot assure
you that we will be able to acquire rights to additional products on acceptable
terms, if at all. Our failure to acquire or license any new pharmaceutical
products or products that fit within one of our strategic therapeutic market
segments, or our failure to promote and market any products successfully or
products within an existing strategic therapeutic market segment, could have a
material adverse effect on our business and our prospects.
We have contractual development rights to certain compounds through various
license agreements. Generally, the licensor can unilaterally terminate these
agreements for several reasons, including, but not limited to the following
reasons:
o for cause if we breach the contract;
o if we become insolvent or bankrupt;
o if we do not apply specified minimum resources and efforts to develop the
compound under license; or
o if we do not achieve certain minimum royalty payments, or in some cases,
minimum sales levels.
We cannot assure you that we can meet all specified requirements and avoid
termination of any license agreements. We cannot assure you that if any
agreement is terminated, we will be able to enter into similar agreements on
terms as favorable as those contained in our existing license agreements.
WE DEPEND ON OTHERS TO MANUFACTURE AND SUPPLY THE PRODUCTS WE MARKET.
We do not have and do not intend to establish any internal product testing,
synthesis of bulk drug substance, or manufacturing capability for drug product.
Accordingly, we depend on others to supply and manufacture the components
incorporated into all of our finished drug products. The inability to contract
for these services on acceptable terms could adversely affect our ability to
develop and market our products. Failure by parties with whom we contract to
adequately perform their responsibilities may delay the submission of products
for regulatory approval, impair our ability to deliver our products on a timely
basis or otherwise adversely affect our business and our prospects. The loss of
a supply or manufacturing contractor could materially adversely affect our
business and our prospects.
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The loss of either a bulk drug supplier or drug product manufacturer would
require us to obtain regulatory clearance in the form of a "pre-approval
submission" and incur validation and other costs associated with the transfer of
the bulk drug or drug product manufacturing process. We believe that it could
take as long as one year for the FDA to approve such a submission. Because our
products are targeted to relatively small markets and our manufacturing
production runs are small by industry standards, we have not incurred the added
costs to certify and maintain secondary sources of supply for bulk drug
substance or backup drug product manufacturers for some products. Should we lose
either a bulk drug supplier or a drug product manufacturer, we could run out of
salable product to meet market demands or investigational product for use in
clinical trials, while we wait for the FDA approval of a new bulk drug supplier
or drug product manufacturer. We cannot assure you that the change of a bulk
drug supplier or drug product manufacturer and the transfer of the processes to
another third party will be approved by the FDA, and if approved, in a timely
manner. The loss of or the change of a bulk drug supplier or a drug product
manufacturer could have a material adverse effect on our business and prospects.
Bulk Drug Supply
Bulk drug substance is the active chemical compound used in the manufacture of
our drug products. We depend substantially on Ash Stevens, Inc. for the supply
of bulk drug substance used in Busulfex, Antizol, and Antizol-Vet. If we were to
lose Ash Stevens as a supplier, we would be required to identify a new supplier
for the bulk drug substance used in products that provided approximately 88% of
2000 and 90% of 1999 revenues and are expected to generate approximately 85% of
2001 total revenues. We depend substantially on Lonza, Inc. for the supply of
bulk drug substance used in Xyrem. If we were to lose Lonza as a supplier, we
would be required to identify a new supplier before an NDA is approved for
Xyrem. We also cannot assure you that our bulk drug supply arrangements with Ash
Stevens and Lonza, or any other future such supplier, might not change in the
future. We cannot assure you that any change would not adversely affect
production of Busulfex, Antizol, Antizol-Vet, Xyrem, or any other drug the
Company might attempt to develop or market.
Drug Product Manufacture
From bulk drug substance, drug product manufacturers formulate a finished drug
product and package the product for sale or for use in clinical trials. We
depend substantially on an affiliate of Boehringer Ingelheim for drug product
manufacturing of Busulfex, Antizol, and Antizol-Vet. If we were to lose
Boehringer as a manufacturer, we would be required to identify a new
manufacturer for drug products that provided approximately 88% of 2000 and 90%
of 1999 and are expected to generate approximately 85% of 2001 total revenues.
We have identified an affiliate of DSM, N.V as drug product manufacturer for
Xyrem and have contracted with them for its manufacture. We cannot assure you
that our drug product manufacturing arrangements with Boehringer and DSM will
not change in the future. We cannot assure you that any change would not
adversely affect production of Busulfex, Antizol, Antizol-Vet, or Xyrem, or any
other drug that we might attempt to develop or market.
WE CANNOT CONTROL OUR CONTRACTORS' COMPLIANCE WITH APPLICABLE REGULATIONS.
The FDA defines and regulates good manufacturing practices to which bulk drug
suppliers and drug product manufacturers are subject. The Drug Enforcement
Agency (DEA) defines and regulates the handling and reporting requirements for
certain drugs which have abuse potential, known as "scheduled drugs". Foreign
regulatory authorities prescribe similar rules and regulations. Our supply and
manufacturing contractors must comply with these regulatory
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requirements. Failure by our contractors to comply with FDA or DEA requirements
or applicable foreign requirements could result in significant time delays or in
our inability to commercialize or continue to market a product. Either result
could have a material adverse effect on our business and prospects. Failure to
comply with good manufacturing practices or other applicable legal requirements
can lead to federal seizure of violative products, injunctive actions brought by
the federal government, or potential criminal and civil liability for Orphan,
our officers, or our employees. We cannot assure you that we will be able to
maintain relationships either domestically or abroad with contractors whose
facilities and procedures comply or will continue to comply with FDA or DEA
requirements or applicable foreign requirements.
The Company's manufacturer of finished product is currently subject to a warning
letter from the FDA with respect to current Good Manufacturing Practices (GMP)
not related to Xyrem. Before full approval can occur, this manufacturer must
undergo a successful GMP re-inspection and a pre-approval inspection relating to
manufacture of Xyrem.
WE DEPEND UPON OTHERS FOR DISTRIBUTION.
We have an agreement with a subsidiary of Cardinal Health, Inc. ("Cardinal") to
provide a variety of services to support the effective distribution of our
currently approved products. Cardinal will provide integrated distribution and
operations services to process and support transactions between us and our
wholesalers, specialty distributors, and direct customers. Cardinal will also
provide patient assistance and information hotline services, and specialty
distribution and marketing services to physician practices. Cardinal currently
distributes Busulfex, Elliotts B Solution, Antizol, Antizol-Vet, and Sucraid.
Cardinal may also distribute our proposed products should those products receive
marketing approval from the FDA. We will substantially depend upon Cardinal's
ability to successfully distribute Busulfex, Elliotts B Solution, Antizol,
Antizol-Vet, and Sucraid and potentially any other of our products that may
receive marketing clearance from the FDA in the future.
Chronimed Inc. is the principal distributor, on a non-exclusive basis, in the
United States for Cystadane. Chronimed distributes this product directly to
patients through its mail order pharmacy. We substantially depend upon
Chronimed's ability to successfully distribute Cystadane directly to patients in
the United States.
We cannot assure you that other distribution companies would be available or
continue to be available on commercially acceptable terms. The loss of a
distributor or failure to renew agreements with an existing distributor could
have a material adverse effect on our business and prospects.
WE RELY ON FOREIGN MARKETING ALLIANCES AND HAVE NO ASSURANCE OF FOREIGN
LICENSEES.
Our strategy to sell our products in foreign markets is to license foreign
marketing and distribution rights to a foreign company after a new drug
application (referred to in the industry as an "NDA") is submitted or approved
in the United States. We consider Europe, Asia, and Canada our most attractive
foreign markets. Our current foreign developments are:
o Europe. We have licensed the marketing and distribution rights for
Busulfex, Antizol, Cystadane and Sucraid in Europe. If our licensees are
unsuccessful in their registration and distribution efforts, we may find it
difficult to contract with other distributors for these products within
Europe. Distribution of all products except Antizol is limited to "named
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patient" or "emergency use" basis until full regulatory approval is
obtained. Antizol has been approved for use in the United Kingdom but is
limited to "named patient" basis in other parts of Europe. This "emergency
use" distribution of the Company's products is expected to result in a
limited contribution to the Company's revenues.
o Australia and New Zealand. We have licensed marketing and distribution
rights for Cystadane and Sucraid in Australia and New Zealand. We do not
expect revenues to be material from such distribution.
o Israel. We have licensed marketing and distribution rights for Antizol,
Busulfex, Cystadane, Elliotts B Solution and Sucraid in Israel. Full
regulatory approval for all products except Antizol was obtained in Israel
in February 2000. Antizol has been submitted for approval, however,
approval has not yet been received. We do not expect such distribution to
result in material revenues.
o Canada. We have licensed marketing and distribution rights for Antizol in
Canada. For Cystadane we have only licensed the distribution rights in
Canada. We do not expect such distribution to result in material revenues.
o Central America. We have licensed marketing and distribution rights for
Elliotts B Solution in Central America, but sales have not been material.
We do not expect domestic or foreign revenues of Elliotts B Solution to
become material.
o Asia. We have licensed marketing and distribution rights for Busulfex in
Japan, the Peoples Republic of China, Taiwan and South Korea. Distribution
is limited to clinical trial usage until full regulatory approval is
achieved. We have also licensed marketing and distribution rights for
Busulfex in Turkey.
We depend on our foreign licensees for the regulatory registration of our
products in foreign countries. We cannot be sure that our licensees can obtain
such registration. In addition, we cannot be sure that we will be able to
negotiate commercially acceptable license agreements for our other products or
in additional foreign countries. Furthermore, we cannot assure you that these
companies will be successful in marketing and selling our products in their
respective territories.
OUR PRODUCTS MIGHT BE RECALLED.
A product can be recalled at our discretion or at the discretion of the FDA, the
U.S. Federal Trade Commission, or other government agencies having regulatory
authority for marketed products. A recall may occur due to disputed labeling
claims, manufacturing issues, quality defects, emergent unexpected safety
issues, or other reasons. We cannot assure you that a product recall will not
occur. We do not carry any insurance to cover the risk of a potential product
recall. Any product recall could have a material adverse effect on our business
and prospects. To date, no recall of products marketed by the Company has
occurred.
WE FACE LIMITS ON PRICE FLEXIBILITY AND THIRD-PARTY REIMBURSEMENT.
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The flexibility of prices that we can charge for our products depends on
government regulation, both in the United States and abroad, and on other third
parties. One important factor is the extent to which reimbursement for our
products will be available to patients from government health administration
authorities, private health insurers and other third-party payors. Government
officials and private health insurers are increasingly challenging the price of
medical products and services. We are uncertain as to the pricing flexibility we
will have with respect to, and if we will be reimbursed for, newly approved
health care products.
In the United States, we expect continuing federal and state proposals to
implement government control of the pricing and profitability of prescription
pharmaceuticals. Cost controls, if mandated by a government agency, could
decrease, or limit, the price we receive for our products or products we may
develop in the future. We may not be able to recover our development costs,
which could be substantial. We may not be able to realize an appropriate profit
margin. This could have a material adverse effect on our business. Furthermore,
federal and state regulations govern or influence reimbursement of health care
providers for medical treatment of certain patients. We cannot assure you that
actions taken by federal and/or state governments, if any, with regard to health
care reform will not have a material adverse effect on our business and
prospects.
Certain private health insurers and third-party payors may attempt to control
costs further by selecting exclusive providers of pharmaceuticals. If such
arrangements are made with our competitors, these insurers and third-party
payors would not reimburse patients who purchase our competing products. This
would diminish the market for our products and could have a material adverse
effect on our business and prospects.
PATENTS AND OTHER PROPRIETARY RIGHTS ARE SIGNIFICANT FACTORS IN THE
PHARMACEUTICAL INDUSTRY.
The pharmaceutical industry and the investment community places considerable
importance and value on obtaining patent and trade secret protection for new
technologies, products and processes. The patent position of pharmaceutical
firms is often highly uncertain and generally involves complex legal, technical
and factual questions. Our success depends on several issues, including, but not
limited to our ability:
o to obtain, and enforce proprietary protection for our products under United
States and foreign patent laws and other intellectual property laws;
o to preserve the confidentiality of our trade secrets; and
o to operate without infringing the proprietary rights of third parties.
We evaluate the desirability of seeking patent or other forms of protection for
our products in foreign markets based on the expected costs and relative
benefits of attaining such protection. We cannot assure you that any patents
will be issued from any applications or that any issued patents will afford us
adequate protection or competitive advantage. Also, we cannot assure you that
any issued patents will not be challenged, invalidated, infringed or
circumvented. Parties not affiliated with us have obtained or may obtain United
States or foreign patents or possess or may possess proprietary rights relating
to our products. We cannot assure you that patents now in existence or later
issued to others will not adversely affect the development or commercialization
of our products.
We believe that the active ingredients or compounds in our FDA approved and
proposed products, Cystadane, Elliotts B Solution, Antizol, Antizol-Vet, Xyrem
and Sucraid, are in the public domain and presently are not subject to patent
protection in the United States. However, we have filed a patent application
with respect to our formulation of Xyrem oral solution. United
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States patents issued to the licensor covers our formulation and use of
Busulfex. We could, however, incur substantial costs asserting any infringement
claims that we may have against others.
We seek to protect our proprietary information and technology, in part, through
confidentiality agreements and inventors' rights agreements with our employees.
We cannot assure you that these agreements will not be breached, that we will
have adequate remedies for any breach, or that our trade secrets will not
otherwise be disclosed to or discovered by our competitors. We also cannot
assure you that our planned activities will not infringe patents owned by
others. We could incur substantial costs in defending infringement suits brought
against us. We also could incur substantial costs in connection with any suits
relating to matters for which we have agreed to indemnify our licensors or
distributors. An adverse outcome in any such litigation could have a material
adverse effect on our business and prospects. In addition, we often must obtain
licenses under patents or other proprietary rights of third parties. We cannot
assure you that we can obtain any such licenses on acceptable terms, if at all.
If we cannot obtain required licenses on acceptable terms, we could encounter
substantial difficulties in developing, manufacturing or marketing one or more
of our products.
WE FACE INTENSE COMPETITION IN OUR INDUSTRY.
Competition in the pharmaceutical industry is intense. Potential competitors in
the United States are numerous and include pharmaceutical, chemical and
biotechnology companies. Many of these companies have substantially greater
capital resources, marketing experience, research and development staffs and
facilities than we do. We seek to limit potential sources of competition by
developing products that are eligible for orphan drug status at NDA approval or
other forms of protection. We cannot assure you, however, that our competitors
will not succeed in developing similar technologies and products more rapidly
than we can. Similarly, we cannot assure you that these competing technologies
and products will not be more effective than any of those that we have developed
or are currently developing.
WE EXPECT RAPID TECHNOLOGICAL AND OTHER CHANGE TO BE CONSTANT IN OUR INDUSTRY.
The pharmaceutical industry has experienced rapid and significant technological
change as well as structural changes, such as those brought about by changes in
heath care delivery or in product distribution. We expect that pharmaceutical
technology will continue to develop and change rapidly, and our future success
will depend, in large part, on our ability to develop and maintain a competitive
position. Technological development by others may result in our products
becoming obsolete before they are marketed or before we recover a significant
portion of the development and commercialization expenses incurred with respect
to such products. In addition, alternative therapies, new medical treatments, or
changes in the manner in which health care is delivered or products provided
could alter existing treatment regimes or health care practices, and thereby
reduce the need for one or more of our products, which would adversely affect
our business and our prospects.
WE FACE SUBSTANTIAL PRODUCT LIABILITY AND INSURANCE RISKS.
Testing and selling health care products entails the inherent risk of product
liability claims. The cost of product liability insurance coverage has increased
and is likely to continue to increase in the future. Substantial increases in
insurance premium costs in many cases have rendered coverage economically
impractical. We currently carry product liability coverage in the aggregate
amount of $20 million for all claims made in any policy year. Although to date
we have not been the subject of any product liability or other claims, we cannot
assure you that we
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will be able to maintain product liability insurance on acceptable terms or that
our insurance will provide adequate coverage against potential claims. A
successful uninsured product liability or other claim against us could have a
material adverse effect on our business and prospects.
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Item 3. Quantitative and Qualitative Disclosures about Market Risks
Not Applicable
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
The annual meeting of the shareholders of the Company was held on May 24, 2001.
Two matters were submitted to the shareholders for approval: (1) the election of
directors, (2) a proposal to amend the Company's 1994 Stock Plan ("Plan") and
(3) a proposal to ratify the selection of Ernst & Young LLP as the independent
public accountants for the Company.
Six nominees, namely John Howell Bullion, Michael Greene, Julius A Vida Ph.D.,
W. Leigh Thompson, Ph.D., M.D., William M. Wardell, M.D., Ph.D., and Lawrence C.
Weaver, Ph.D., D.Sc. (Hon.), were duly elected as directors of the Company until
the next annual meeting of shareholders. Each nominee received at least
approximately ninety-six percent of the votes cast in favor of his election.
Results of the voting were as follows:
Votes Cast for Votes
the Director Withheld
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Director
John Howell Bullion 8,163,140 313,557
Michael Greene 8,181,875 294,822
Julius A Vida Ph.D. 8,179,565 297,132
W. Leigh Thompson, Ph.D., M.D. 8,179,565 297,132
William M. Wardell, M.D., Ph.D. 8,180,940 295,757
Lawrence C. Weaver, Ph.D., D.Sc. (Hon.) 8,180,440 296,257
The proposal to approve an amendment to the Company's 1994 Stock Plan to
increase the number of shares authorized for issuance under the Plan from
1,925,000 shares to 2,675,000 shares was approved by the Company's shareholders.
A total of 4,667,155 shares of the Company's common stock voted in favor of the
proposal; 588,541 shares of the Company's common stock voted against this
proposal; 57,424 shares of the Company's common stock abstained from voting.
There were 3,163,577 broker non-voters in connection with the shareholders vote
for this proposal. The proposed to amend the Company's 1994 Stock Plan received
approximately fifty-five percent of the vote cast.
The proposal to ratify the selection of Ernst & Young LLP as the independent
public accountants for the Company was approved by the Company's shareholders. A
total of 6,995,008 shares of the Company's common stock voted in favor of the
proposal, 24,935 shares of the Company's common stock voted against the proposal
and 3,825 shares of the Company's common stock abstained from voting. There were
no broker non-voters in connection with the shareholders vote for this proposal.
The proposal to ratify the selection of Ernst & Young LLP as the independent
public accountants for the Company received approximately ninety-nine percent of
the vote cast.
Items 1, 2, 3, 5 and 6 are not applicable and have been omitted.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Orphan Medical, Inc.
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Registrant
Date August 10, 2001 By /s/ Timothy G. McGrath
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Timothy G McGrath
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Chief Financial Officer
(duly authorized officer and
principal financial officer)
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