UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-21699
VIROPHARMA INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Delaware 94-2347624
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
405 Eagleview Boulevard
Exton, Pennsylvania 19341
(Address of Principal Executive Offices and Zip Code)
610-458-7300
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days: Yes X No ___
---
Number of shares outstanding of the issuer's Common Stock, par value $.002 per
share, as of November 5, 2001: 18,719,457 shares.
1
VIROPHARMA INCORPORATED
INDEX
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements:
Balance Sheets at December 31, 2000 and September 30, 2001 3
Statements of Operations for the three months ended September 30, 2000 and 2001, the nine 4
months ended September 30, 2000 and 2001, and the period from December 5, 1994
(inception) to September 30, 2001
Statements of Cash Flows for the nine months ended September 30, 2000 and 2001 and the period 5
from December 5, 1994 (inception) to September 30, 2001
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and 9
Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
PART I. FINANCIAL INFORMATION
---------------------------------
ITEM 1. FINANCIAL STATEMENTS
ViroPharma Incorporated
(A Development Stage Company)
Balance Sheets
(unaudited)
December 31, 2000 and September 30, 2001
December 31, September 30,
2000 2001
------------------ ----------------
Assets
Current assets:
Cash and cash equivalents $ 960,355 $ 29,593,958
Short-term investments 202,374,825 153,975,485
Notes receivable from officers - current 111,895 91,041
Due from partners 3,979,408 3,321,555
Other current assets 3,980,430 3,520,358
---------------- ----------------
Total current assets 211,406,913 190,502,397
Equipment and leasehold improvements, net 5,055,935 6,259,194
Restricted investments 550,000 550,000
Notes receivable from officers - noncurrent 332,930 332,930
Debt issue costs, net 5,047,153 4,433,310
Other assets 45,899 45,899
---------------- ----------------
Total assets $ 222,438,830 $ 202,123,730
================ ================
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 3,546,643 $ 4,178,761
Loans payable - current 200,000 200,000
Deferred revenue - current 1,000,000 2,153,846
Accrued expenses and other current liabilities 10,380,639 10,021,689
---------------- ----------------
Total current liabilities 15,127,282 16,554,296
Loans payable - noncurrent 325,000 175,000
Deferred revenue - noncurrent 3,000,000 6,000,000
Convertible subordinated notes 180,000,000 180,000,000
Other liabilities - 20,000,000
---------------- ----------------
198,452,282 222,729,296
---------------- ----------------
Commitments
Stockholders' equity:
Preferred stock, par value $.001 per share. 5,000,000 shares authorized;
Series A convertible participating preferred stock; 2,300,000 issued and outstanding
at December 31, 2000 and no shares issued and outstanding at September 30, 2001 2,300 -
Series A junior participating preferred stock; 200,000 shares designated;
no shares issued and outstanding - -
Common stock, par value $.002 per share. Authorized 100,000,000 shares;
issued and outstanding 15,450,349 shares at December 31, 2000 and
18,702,768 shares at September 30, 2001 30,900 37,406
Additional paid-in capital 143,452,825 160,896,893
Deferred compensation (990,234) (959,362)
Unrealized gains on available for sale securities 1,229,131 811,472
Deficit accumulated during the development stage (119,738,374) (181,391,975)
---------------- ----------------
Total stockholders' equity (deficit) 23,986,548 (20,605,566)
---------------- ----------------
Total liabilities and stockholders' equity (deficit) $ 222,438,830 $ 202,123,730
================ ================
See accompanying notes to financial statements.
3
ViroPharma Incorporated
(A Development Stage Company)
Statements of Operations
(unaudited)
Three months ended September 30, 2000 and 2001,
the nine months ended September 30, 2000 and 2001, and the
period from December 5, 1994 (inception) to September 30, 2001
Period from
December 5, 1994
Three months ended Nine months ended (inception) to
September 30, September 30, September 30,
2000 2001 2000 2001 2001
--------------- --------------- --------------- --------------------------------
Revenues:
License fee and milestone revenue $ 250,000 $ 346,154 $ 1,750,000 $ 2,846,154 $ 8,846,154
Grant revenue - - - - 526,894
--------------- --------------- --------------- --------------------------------
Total revenues 250,000 346,154 1,750,000 2,846,154 9,373,048
--------------- --------------- --------------- --------------------------------
Operating expenses incurred in the
development stage:
Research and development 12,172,700 12,340,218 22,946,047 31,241,683 140,467,552
Acquisition of technology rights - - - 16,500,000 16,500,000
Sales and marketing 276,163 4,207,810 1,280,197 8,084,927 12,910,310
General and administrative 1,488,544 4,481,589 4,443,333 9,255,697 28,506,348
--------------- --------------- --------------- --------------------------------
Total operating expenses 13,937,407 21,029,617 28,669,577 65,082,307 198,384,210
--------------- --------------- --------------- --------------------------------
Loss from operations (13,687,407) (20,683,463) (26,919,577) (62,236,153) (189,011,162)
Interest income 3,888,521 2,744,007 8,901,021 9,289,205 26,657,403
Interest expense 2,925,757 2,912,911 6,865,259 8,706,653 19,038,216
--------------- --------------- --------------- --------------------------------
Net loss ($12,724,643) ($20,852,367) ($24,883,815) ($61,653,601) ($181,391,975)
=============== =============== =============== ================================
Preferred stock dividends 181,838 - 545,514 345,242
--------------- --------------- --------------- ---------------
Net loss allocable to common stockholders ($12,906,481) ($20,852,367) ($25,429,329) ($61,998,843)
=============== =============== =============== ===============
Basic and diluted net loss per share allocable
to common stockholders ($0.85) ($1.12) ($1.68) ($3.58)
=============== =============== =============== ===============
Shares used in computing basic and diluted
net loss per share allocable to common
stockholders 15,210,428 18,611,706 15,167,736 17,310,762
=============== =============== =============== ===============
See accompanying notes to financial statements.
4
ViroPharma Incorporated
(A Development Stage Company)
Statements of Cash Flows
(unaudited)
Nine months ended September 30, 2000 and 2001 and the
period from December 5, 1994 (inception) to September 30, 2001
Period from
December 5, 1994
Nine months ended (inception) to
September 30, September 30,
2000 2001 2001
-------------- --------------- -----------------
Cash flows from operating activities:
Net loss $ (24,883,815) $ (61,653,601) $ (181,391,975)
Adjustments to reconcile net loss to net cash
used in operating activities:
Non-cash acquisition of technology rights - 16,500,000 16,500,000
Non-cash compensation expense 44,580 247,747 1,146,850
Non-cash warrant value - - 153,751
Non-cash consulting expense - - 46,975
Non-cash interest expense 473,649 613,843 1,292,106
Depreciation and amortization expense 618,416 987,285 3,204,923
Changes in assets and liabilities:
Other current assets (2,499,588) 460,072 (3,520,358)
Notes receivable from officers (325,570) 20,854 (423,971)
Due from partners (1,783,130) 657,853 (3,321,555)
Other assets 36,000 - (45,899)
Accounts payable 1,056,863 632,118 4,178,761
Deferred revenue (750,000) 4,153,846 8,153,846
Accrued expenses and other current liabilities 1,745,309 (358,950) 10,021,689
Other liabilities - 20,000,000 20,000,000
-------------- --------------- -----------------
Net cash used in operating activities (26,267,286) (17,738,933) (124,004,857)
Cash flows from investing activities:
Purchase of equipment and leasehold improvements (1,573,340) (2,190,544) (9,464,117)
Purchase of short-term and restricted investments (220,303,882) (129,861,766) (608,526,077)
Sales of short-term investments - - 9,680,414
Maturities of short-term investments 72,370,497 177,843,447 445,131,650
-------------- --------------- -----------------
Net cash (used in) provided by investing activities (149,506,725) 45,791,137 (163,178,130)
Cash flows from financing activities:
Net proceeds from issuance of preferred stock - - 27,242,143
Net proceeds from issuance of common stock 836,805 1,076,641 115,495,387
Preferred stock cash dividends (545,514) (345,242) (1,254,293)
Proceeds from loans payable and milestone advance - - 2,100,000
Payment of loans payable (1,150,000) (150,000) (1,725,000)
Proceeds received on notes receivable - - 1,625
Gross proceeds from notes payable 180,000,000 - 180,692,500
Issuance costs on notes payable (5,725,417) - (5,725,417)
Payment of notes payable - - (50,000)
Obligation under capital lease (2,807) - -
-------------- --------------- -----------------
Net cash provided by financing activities 173,413,067 581,399 316,776,945
Net increase (decrease) in cash and cash equivalents (2,360,944) 28,633,603 29,593,958
Cash and cash equivalents at beginning of period 6,984,707 960,355 -
-------------- --------------- -----------------
Cash and cash equivalents at end of period $ 4,623,763 $ 29,593,958 $ 29,593,958
============== =============== =================
Supplemental disclosure of noncash transactions:
Conversion of milestone advance to loan payable - - 1,000,000
Unrealized gains (losses) on available for sale securities 345,601 (417,659) 811,472
Deferred compensation 1,056,250 216,875 2,106,212
Supplemental disclosure of interest paid 5,681,207 10,827,810 16,817,360
See accompanying notes to financial statements.
5
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements
September 30, 2000 and 2001
(unaudited)
(1) Organization and Business Activities
ViroPharma Incorporated (a development stage company) (the "Company") commenced
operations on December 5, 1994. The Company is a development stage
pharmaceutical company engaged in the discovery and development of new antiviral
medicines.
The Company is devoting substantial effort towards conducting drug discovery and
development, raising capital, conducting clinical trials, pursuing regulatory
approval for products under development, recruiting personnel and building the
sales and marketing organization and infrastructure to support the anticipated
commercial launch of Picovir(TM) in mid-2002, if the drug is approved by the
Food and Drug Administration. In the course of such activities, the Company has
sustained operating losses and expects such losses to continue for at least the
next several years. The Company has not generated any significant revenues or
product sales and has not achieved profitable operations or positive cash flow
from operations. The Company's deficit accumulated during the development stage
aggregated $181,391,975 through September 30, 2001. There is no assurance that
profitable operations, if ever achieved, could be sustained on a continuing
basis.
The Company plans to continue to finance its operations with a combination of
stock issuances, debt issuances, license payments, payments from strategic
research and development arrangements and, in the longer term, revenues from
product sales or collaborations. There are no assurances, however, that the
Company will be successful in obtaining an adequate level of financing needed
for the long-term development and commercialization of its planned products.
Reclassification
Certain prior year amounts have been reclassified to conform to current year
presentation.
Basis of Presentation
The information at September 30, 2001 and for the three and nine months ended
September 30, 2000 and 2001, is unaudited but includes all adjustments
(consisting only of normal recurring adjustments) which, in the opinion of
management, are necessary to state fairly the financial information set forth
therein in accordance with accounting principles generally accepted in the
United States of America. The interim results are not necessarily indicative of
results to be expected for the full fiscal year. These financial statements
should be read in conjunction with the audited financial statements for the year
ended December 31, 2000 included in the Company's Annual Report on Form 10-K
filed with the Securities and Exchange Commission.
(2) Comprehensive Loss
In the Company's annual financial statements, comprehensive loss is presented as
a separate financial statement. For interim financial statements, the Company is
permitted to disclose the information in the footnotes to the financial
statements. The disclosures are required for comparative purposes. The only
comprehensive income item the Company has is unrealized gains and losses on
available for sale securities.
The following reconciles net loss to comprehensive loss for the quarter and
nine-month periods ended September 30, 2000 and 2001:
6
Quarter ended Nine-month period ended
September 30, September 30,
2000 2001 2000 2001
------------- ------------- ------------- -------------
Net loss ($12,724,643) ($20,852,367) ($24,883,815) ($61,653,601)
Other comprehensive income (loss):
Unrealized gains (losses) on
available for sale securities 154,260 (285,549) 345,601 (417,659)
------------- ------------- ------------- -------------
Comprehensive loss ($12,570,383) ($21,137,916) ($24,538,214) ($62,071,260)
============= ============= ============= =============
(3) Conversion of Preferred Stock
Effective May 7, 2001, pursuant to the terms of our Series A Convertible
Participating Preferred Stock, 2,300,000 shares of preferred stock were
converted into 2,346,295 shares of common stock.
(4) Employee Stock Plan
In June 2001, the stockholders of the Company approved an amendment to the
Company's Stock Option and Restricted Share Plan (the "plan") to increase the
number of shares eligible to grant under the plan by 1,000,000 shares and allow
for the issuance of restricted shares.
(5) Acquisition of Technology Rights
In February 2001, the Company revised its agreement with Sanofi-Synthelabo for
Picovir(TM), the Company's most advanced drug candidate. The original agreement
signed in 1995 provided the Company with exclusive rights to develop and
commercialize the product in the United States and Canada. Under the revised
agreement, the Company expanded its intellectual property position, eliminated
obligations for future milestone payments, reduced royalty rate obligations to
Sanofi-Synthelabo on future sales of products, if any, under certain conditions,
in exchange for a reduction of royalty rate obligations by Sanofi-Synthelabo to
the Company on future sales of products, if any, under certain conditions,
outside of the United States and Canada and the issuance of 750,000 shares of
the Company's common stock. Included in operating expenses in the nine months
ended September 30, 2001 is a non-cash charge of $16.5 million resulting from
the issuance of 750,000 shares of common stock to Sanofi-Synthelabo in exchange
for the expansion of the Company's intellectual property rights related to
Picovir(TM), the Company's most advanced product candidate, as these additional
intellectual property rights licensed from Sanofi-Synthelabo have not reached
technological feasibility and have no alternative uses.
(6) Co-Promotion and Co-Development Agreement
In September 2001, the Company entered into a collaboration to co-develop and
co-promote Picovir(TM) (pleconaril) in the United States with Aventis
Pharmaceuticals Inc. (Aventis), the U.S. pharmaceutical company of Aventis
Pharma AG. As part of the agreement, the Company received an initial payment of
$25 million from Aventis, and may receive additional cash payments, each of
which is dependent upon reaching certain regulatory and other milestones. $5
million of the initial payment received by the Company is reflected in Deferred
revenue, and will be recognized as revenue over the estimated performance
period. The balance of the initial payment is reflected in Other liabilities, as
part or all of this balance will have to be repaid by the Company if certain
milestones are not met. The Company and Aventis will share the cost of preparing
for the commercial launch of Picovir(TM) and the continued marketing and
commercialization efforts: 55 percent by Aventis and 45 percent by ViroPharma.
Additionally, Aventis will fund 50% of the company's research and development
efforts for the use of Picovir(TM) in the treatment of adult and pediatric viral
respiratory infection. If Picovir(TM) is approved by the U.S. Food and Drug
Administration (FDA), Aventis will distribute Picovir(TM) and both companies
will share profits: 55 percent to Aventis and 45 percent to ViroPharma. If
ViroPharma hires its initial sales force by early 2002, ViroPharma will co-
promote certain Aventis Pharmaceuticals prescription products to primary care
physicians in the United States, and will receive detailing fees from Aventis
for such calls. The term of the agreement is through the market exclusivity
period for Picovir(TM), currently 2012, unless such period is extended or the
agreement is terminated earlier due to the failure to attain certain milestones.
7
Upon FDA marketing clearance of Picovir(TM) for adult viral respiratory
infection, an Aventis affiliate will purchase $20 million in ViroPharma common
stock priced at a trailing average of the last sale prices of ViroPharma's
common stock.
(7) Registration Statement
In July 2001, ViroPharma filed a Form S-3 universal shelf registration statement
with the Securities and Exchange Commission (the "SEC") for the registration and
potential issuance of up to $300 million of ViroPharma securities, along with
the common stock held by, and common stock issuable upon exercise of warrants
owned by, PSV, LP and Perseus Capital, LLC. The registration statement will
provide ViroPharma the flexibility to determine the type of security it chooses
to sell, including common stock, preferred stock, warrants and debt securities,
as well as the ability to time such sales when market conditions are favorable.
The securities covered by the universal shelf registration statement are being
registered on a delayed basis because ViroPharma does not intend to sell
securities immediately upon the effectiveness of the registration statement. The
actual amount of any securities to be issued, and the terms of those securities,
will be determined at the time of sale, if such sales occur. On October 19, 2001
the SEC declared the registration statement effective.
8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our disclosure and analysis in this report contains some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. They use words such
as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe,"
and other words and terms of similar meaning in connection with any discussion
of future operating or financial performance. In particular, these include
statements relating to present or anticipated scientific or regulatory progress,
development of potential pharmaceutical products, future revenues, capital
expenditures, research and development expenditures, future financings and
collaborations, personnel, manufacturing requirements and capabilities, and
other statements regarding matters that are not historical facts or statements
of current condition.
Any or all of our forward-looking statements in this report may turn out to
be wrong. They can be affected by inaccurate assumptions we might make or by
known or unknown risks and uncertainties. Many factors, including those
mentioned in the discussion below and those described in the "Risk Factors"
discussion of our most recent registration statement on form S-3 filed with the
Securities and Exchange Commission, will be important in determining future
results. Consequently, no forward-looking statement can be guaranteed. Actual
future results may vary materially. We do not intend to update our
forward-looking statements to reflect future events or developments.
Since inception, we have devoted substantially all of our resources to our
research and product development programs. We have generated no revenues from
product sales and have been dependent upon funding primarily from equity and
debt financing. We do not expect any revenues derived from Picovir(TM) sales
until Picovir(TM) is approved by the U.S. Food and Drug Administration (FDA)
which we do not expect to occur before mid-2002, at the earliest. There can be
no assurance that we will receive such approval from the FDA. We have not been
profitable since inception and have incurred a cumulative net loss of
$181,391,975 through September 30, 2001. Losses have resulted principally from
costs incurred in research and development activities and general and
administrative expenses. We expect to incur additional operating losses over at
least the next several years. We expect our expenses to increase significantly
over historical levels and our losses during the next several years to be higher
than we have experienced in the past. Our level of losses during this period,
however, depends upon if we are successful in commercializing Picovir(TM) and
whether or not we receive certain milestone payments from Aventis. Our
anticipated significant increase in expenses will be due to the near-term costs
of developing our marketing and sales staff and building the requisite
infrastructure, significant investments in Picovir(TM) marketing and market
research activities, research and development activities related to additional
clinical trials and supporting studies for the potential expansion of the use of
Picovir(TM) and to discovery and development activities with our hepatitis C and
RSV disease programs. Our ability to achieve profitability is dependent on
developing and obtaining regulatory approvals for our product candidates,
successfully commercializing such product candidates (which may include entering
into collaborative agreements for product development and commercialization),
and securing contract manufacturing services and distribution and logistics
services.
Liquidity and Capital Resources
We commenced operations in December 1994. We are a development stage
company and to date have not generated revenues from product sales. The cash
flows used in operations historically have been applied to research and
development activities and the supporting marketing and general and
administrative expenses. We expect to incur significant additional expenses
related to the anticipated commercialization of Picovir(TM). Through September
30, 2001, we have used approximately $124.0 million in operating activities. We
invest our cash in short-term investments. Through September 30, 2001, we have
used approximately $163.2 million in investing activities, including $153.7
million in short-term investments and $9.5 million in equipment purchases and
new construction. Through September 30, 2001, we have financed our operations
primarily through public offerings of common stock, a convertible subordinated
notes offering, private placements of redeemable preferred stock, two bank loans
and equipment lease lines totaling approximately $316.8 million. At September
30, 2001, we had cash and cash equivalents and short-term investments
aggregating approximately $183.6 million.
9
We lease our corporate and research and development facilities under an
operating lease expiring in 2008. We also have the right, under certain
circumstances, to purchase the facility. We have exercised our right to expand
our current facility by 16,500 square feet. This expansion began in the third
quarter of 2001 and we expect to incur approximately $3.0 million of capital
expenditures in connection with this expansion through the second quarter of
2002. We expect that rent expense in future years will increase approximately
$200,000 per year, commencing in mid-2002. In September 2001, we entered into a
lease for 30,000 square feet of additional office space which will result in an
annual increase in rent expense of approximately $600,000 starting in mid-to
late 2002 and capital expenditures of approximately $500,000 through mid-2002.
Additionally, we will be renovating and expanding our existing research and
development and warehousing facilities over the next six to nine months which
will result in capital outlays of approximately $1.5 million. We expect to
secure bank financing of approximately $5 million to fund these expansions and
renovations.
We have financed substantially all of our equipment under two bank loans
and two master lease agreements. The first bank loan, which we entered into in
February 1997, is for $600,000, is payable in equal monthly installments over 72
months and has a 9.06% interest rate. The second bank loan, which we entered
into in December 1998, is for $500,000, is payable in equal monthly installments
over 60 months and has a 7.25% interest rate. As of September 30, 2001,
aggregate outstanding borrowings under these bank loans were approximately
$375,000. We have paid off both of the lease agreements.
We amended and restated our agreement with Sanofi-Synthelabo in February
2001. Under this agreement, we are required to make royalty payments on any
sales in the United States and Canada of products developed under the agreement,
which royalty payments will be reduced upon the expiration of the last patent on
Picovir(TM) or any related drug.
In May 2001, we entered into a manufacturing agreement with Produits
Chimiques Auxilliaires et de Synthese for Picovir(TM) drug substance. We
currently are negotiating commercial supply agreements for Picovir(TM) with
additional drug substance and final product manufacturers and with drug
micronizers. These agreements will commit these suppliers to manufacture and
supply Picovir(TM) to us at prices based on the quantity of product we require
from them. We expect that prior to the anticipated commercial launch of Picovir
(TM) we may pay up to approximately $12.0 million during the next nine months
under these arrangements.
In September 2001, the we entered into a collaboration to co-develop and
co-promote Picovir(TM) (pleconaril) in the United States with Aventis
Pharmaceuticals Inc. (Aventis), the U.S. pharmaceutical company of Aventis
Pharma AG. As part of the agreement, we received an initial payment of $25
million from Aventis, and may receive additional cash payments, each of which
is dependent upon reaching certain regulatory and other milestones. $5 million
of the initial payment received is reflected in Deferred revenue, and will be
recognized as revenue over the estimated performance period. The balance of the
initial payment is reflected in Other liabilities, as part or all of this
balance will have to be repaid if certain milestones are not met. We will share
the cost of preparing for the commercial launch of Picovir(TM) and the continued
marketing and commercialization efforts: 55 percent by Aventis and 45 percent by
us. Additionally, Aventis will fund 50% of our research and development efforts
for the use of Picovir(TM) in the treatment of adult and pediatric viral
respiratory infection. If Picovir(TM) is approved by the U.S. Food and Drug
Administration (FDA), Aventis will distribute Picovir(TM) and both companies
will share profits: 55 percent to Aventis and 45 percent to us. If we hire our
initial sales force by early 2002, we will co-promote certain Aventis
Pharmaceuticals prescription products to primary care physicians in the United
States, and will receive detailing fees from Aventis for such calls. The term of
the agreement is through the market exclusivity period for Picovir(TM),
currently 2012, unless such period is extended or the agreement is terminated
earlier due to the failure to attain certain milestones. We expect to incur
significant expenses under this agreement over the next several years related to
marketing and market research activities for Picovir(TM), the development of a
marketing and sales staff, building the requisite infrastructure and further
clinical trials for Picovir(TM).
We have incurred losses from operations since inception because we have
generated minimal revenue to date. We expect to incur additional operating
losses over at least the next several years. We expect our expenses to increase
significantly over historical levels and our losses during the next several
years to be higher than we have experienced in the past. Our level of losses
during this period, however, depends upon if we are successful in
commercializing Picovir(TM) and whether or not we receive certain milestone
payments from Aventis. Our anticipated significant increase in expenses will be
due to the near-term cost of developing our marketing and sales staff and
building the requisite infrastructure, significant investments in Picovir(TM)
marketing and market research activities, research and development activities
related to additional clinical trials and supporting studies for the potential
expansion of the use of Picovir(TM) and to discovery and development activities
with our hepatitis C and RSV disease programs. We expect that our spending in
the general and administrative areas to increase modestly over the next nine to
twelve months when compared to such spending to date in 2001.
10
In November 2001, we and American Home Products (AHP), through its
subsidiary Wyeth-Ayerst laboratories, announced that we have halted further
development of VP50406, our first product candidate for the treatment of
hepatitis C. We will continue to fund the development of additional compounds
under our collaboration agreement with AHP, one of which we expect to enter
clinical trials in the second half of 2002.
We expect that we will need to raise additional funds to continue our
business activities, fund debt service and to further expand our facilities. We
have convertible notes payable in the amount of $180.0 million. These notes bear
interest at 6% per annum and become due in March 2007. We may need additional
financing to complete all Picovir(TM) clinical studies, to develop our marketing
and sales staffs for Picovir(TM) and to build the requisite infrastructure. We
expect that we will need additional financing for the development and required
testing of our hepatitis C and RSV disease compounds, and for any other product
candidates. To obtain this financing, we intend to access the public or private
equity or debt markets or enter into additional arrangements with corporate
collaborators to whom we may issue shares of our stock. In July 2001, we filed a
Form S-3 universal shelf registration statement with the Securities and Exchange
Commission for the registration and potential issuance of up to $300.0 million
of our securities. On October 19, 2001 the SEC declared the registration
statement effective. The registration statement will provide us with the
flexibility to determine the type of security we choose to sell, including
common stock, preferred stock, warrants and debt securities, as well as the
ability to time such sales when market conditions are favorable. Also, in
connection with certain of our collaboration agreements, American Home Products
Corporation and Aventis will purchase our common stock at the time of completion
of certain product development and regulatory approval events, respectively. If
we raise additional capital by issuing equity securities, the terms and prices
for these financings may be much more favorable to the new investors than the
terms obtained by our existing stockholders. These financings also may dilute
the ownership of existing stockholders. Collaborative arrangements may require
us to grant product development programs or licenses to third parties for
products that we might otherwise seek to develop or commercialize ourselves.
Additional financing, however, may not be available on acceptable terms from any
source. If sufficient additional financing is not available, we may need to
delay, reduce or eliminate current research and development programs, delay or
reduce our commercialization efforts for Picovir(TM) or reduce or eliminate
other aspects of our business.
Results of Operations
Quarters ended September 30, 2001 and 2000
We earned license fee revenue from our collaboration with Wyeth-Ayerst in
the hepatitis C area of $250,000 in each of the quarters ended September 30,
2001 and 2000. Additionally, in the quarter ended September 30, 2001, we earned
license fee revenue of approximately $96,000 in connection with our Picovir(TM)
collaboration with Aventis, which was entered into in September 2001. Research
and development expenses of approximately $12.3 million in the quarter ended
September 30, 2001 were essentially flat when compared to the same period in the
prior year. Higher employee costs of approximately $1.7 million (associated with
increased development and discovery staffing levels), higher spending of
approximately $0.8 million related to increased efforts in discovery research
and the cost associated with the manufacturing of validation batches of
Picovir(TM) were offset by lower spending in Picovir(TM) development efforts of
approximately $3.4 million. A portion of the reduction in Picovir(TM) costs in
the third quarter of 2001 versus the third quarter of 2000 is due to the cost
sharing provisions of our agreement with Aventis. In the third quarter of 2001
we continued manufacturing validation batches of Picovir(TM), completed and
submitted our new drug application (NDA) for Picovir(TM) to the FDA, commenced
additional clinical trials for Picovir(TM) for the treatment of pediatric VRI
and for the prophylaxis of VRI in healthy adults, and were conducting two-phase
2a studies for the treatment of hepatitis C. During the same period in 2000, we
initiated two large phase 3 trials with Picovir(TM) for the treatment of VRI and
additional pre-clinical studies for the treatment of RSV disease, and we were
preparing for, but had not yet initiated, patient studies for the treatment of
hepatitis C.
Sales and marketing expense for the third quarter of 2001 was $4.2 million
compared to approximately $0.3 million for the same period in 2000. This
increase reflects our significant investments, net of the Aventis cost sharing,
in pre-launch activities, including medical education, brand development and
market research for Picovir(TM), as well as initial investments in the
development of a sales force that is expected to commence selling two Aventis
products in the first quarter of 2002, and Picovir(TM) in the second half of
2002 if the NDA for Picovir(TM) is approved by the FDA.
General and administrative expenses for the third quarter of 2001 were
approximately $4.5 million compared to approximately $1.5 million for the same
period in 2000. The increase in general and administrative expenses is primarily
due to costs associated with the completion of the collaboration agreement with
Aventis, higher employee related expenses due to increased staffing levels and
facilities cost of approximately $0.8 million.
11
Interest expense for the quarter ended September 30, 2001 was essentially
flat when compared to the same period in the prior year due to relatively
consistent levels of debt in both periods. Interest income fell approximately
$1.2 million during the third quarter 2001 when compared to the same quarter in
2000 primarily due to lower levels of cash and short term investments. The net
loss increased to $20.9 million for the quarter ended September 30, 2001 from
$12.7 million for the quarter ended September 30, 2000. As of September 30, 2001
we had approximately $183.6 million in cash, cash equivalents and short-term
investments. Also, at September 30, 2001, the weighted average interest rate
that we are earning on our short-term investments was approximately 6.3%.
Nine-months ended September 30, 2001 and 2000
We earned license fee and milestone revenue from our collaboration with
Wyeth-Ayerst in the hepatitis C area of $2.75 million for the nine-month period
ended September 30, 2001 compared to $1.75 million during the same period in
2000. In the nine-month period ended September 30, 2001, we achieved one
milestone and earned $2.0 million compared to achieving one milestone and
earning $1.0 million for the nine-month period ended September 30, 2000.
Research and development expenses increased to $31.2 million for the nine-month
period ended September 30, 2001 from $22.9 million for the nine-month period
ended September 30, 2000. The increase in the nine-month period ended September
30, 2001 over the same period in 2000 was primarily due to higher clinical,
preclincal and manufacturing costs of approximately $3.5 million, partly offset
by increased costs to be repaid by our development partners. Employee related
expenses for nine months in 2001 were approximately $4.0 million higher when
compared to the same period in 2000, primarily as a result of higher staffing
levels necessary to support development and discovery programs. The increased
efforts in discovery research resulted in increased spending of approximately
$2.2 million during the nine months ended 2001 when compared to the same period
in 2000. The increase in development expenses for the nine-months ended
September 30, 2001 over the same period for 2000 was due primarily to the
completion of two phase 3 clinical trials for Picovir(TM) for the treatment of
VRI in adults, the preparation and submission of our NDA for Picovir(TM),
manufacturing of validation batches of Picovir(TM) and the completion of all
clinical and pre-clinical studies included in the NDA. Also, in the nine-month
period ended September 30, 2001, the company initiated additional clinical
trials with Picovir(TM) for the treatment of pediatric VRI and for the
prophylaxis of VRI in healthy adults. The company also was conducting two phase
2a studies for the treatment of hepatitis C and completed one phase 1 study for
the treatment of RSV disease. In comparison, during the nine months in 2000 we
completed three phase 3 clinical trials of pleconaril, and were conducting a
phase 1 clinical trials for the treatment of hepatitis C and the advancement of
our drug candidate for the treatment of RSV disease.
Sales and marketing expenses in the nine-months ended September 30, 2001
were $8.1 million compared to $1.3 million for the same period of 2000. This
increase reflects our significant investments, net of the Aventis cost sharing,
in pre-launch activities for Picovir(TM), including medical education, brand
development and market research, as well as initial investments in the
development of a sales force that is expected to commence selling two Aventis
products in the first quarter of 2002, and Picovir(TM) in the second half of
2002 if our NDA for Picovir(TM) is approved by the FDA.
General and administrative expenses increased to $9.3 million in the nine-
months ended September 30, 2001 from $4.4 million for the same period of 2000.
The increase in general and administrative expenses primarily is due to costs
associated with the completion of the collaboration agreement with Aventis, and
higher employee related expenses due to increased staffing levels and facilities
cost of approximately $2.4 million. Included in operating expenses in the nine-
month period ended September 30, 2001 is a non-cash charge of $16.5 million
resulting from the issuance of 750,000 shares of common stock to Sanofi-
Synthelabo in exchange for the expansion of our intellectual property rights
related to Picovir(TM), as these additional intellectual property rights
licensed from Sanofi-Synthelabo have not reached technological feasibility and
have no alternative uses. Interest expense and interest income increased in the
nine-month period ended September 30, 2001 compared to the same period in 2000.
The increase in interest income is due to the investing of $180.0 million
convertible subordinated debentures issued in March of 2000 which pay 6%
interest per annum. The increase in interest expense is due to the debt service
costs associated with such convertible subordinated debentures. The net loss
increased to $61.7 million for the nine-month period ended September 30, 2001
from $24.9 million for the nine-month period ended September 30, 2000.
12
Recently Issued Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations. SFAS No. 141 requires the use of the purchase
method of accounting for all business combinations initiated after June 30, 2001
and eliminates the pooling-of-interest method. We do not believe that the
adoption of SFAS No. 141 will have an impact on our financial statements.
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 requires goodwill and other intangible assets with
indefinite lives to no longer be amortized, but instead tested for impairment at
least annually. In addition, the standard includes provisions for the
reclassification of certain existing intangibles as goodwill and reassessment of
the useful lives of existing recognized intangibles. The standard is effective
for fiscal years beginning after December 15, 2001. We do not believe that the
adoption of SFAS No. 142 will have an impact on our financial statements.
In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the recognition of a liability for an asset
retirement in the period in which it is incurred. A retirement obligation is
defined as one in which a legal obligation exists in the future resulting from
existing laws, statues or contracts. The standard is effective for fiscal years
beginning after June 15, 2002. We do not believe the adoption of SFAS No. 143
will have a material impact on our financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which supersedes both SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of and the accounting and reporting provisions of APB Opinion No. 30, Reporting
the Results of Operations--Reporting the Effects of Diposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business (as previously defined
in that Opinion). SFAS No. 144 retains the fundamental provisions in SFAS No.
121 for recognizing and measuring impairment losses on long-lived assets held
for use and long-lived assets to be disposed of by sale, while also resolving
significant implementation issues associated with SFAS No. 121. For example,
SFAS No. 144 provides guidance on how a long-lived asset that is used as part of
a group should be evaluated for impairment, establishes criteria for when a
long-lived asset is held for sale, and prescribes the accounting for a long-
lived asset that will be disposed of other than by sale. SFAS No. 144 retains
the basic provisions of APB No. 30 on how to present discontinued operations in
the income statement but broadens that presentation to include a component of an
entity (rather than a segment of a business). Unlike SFAS No. 121, an impairment
assessment under SFAS No. 144 will never result in a write-down of goodwill.
Rather, goodwill is evaluated for impairment under SFAS No. 142, Goodwill and
Other Intangible Assets.
We are required to adopt SFAS No. 144 no later than the year beginning
after December 15, 2001, and plans to adopt its provisions for the quarter
ending March 31, 2002. We do not expect the adoption of SFAS No. 144 for long-
lived assets held for use to have a material impact on our financial statements
because the impairment assessment under SFAS No. 144 is largely unchanged from
SFAS No. 121. The provisions of the new standard for assets held for sale or
other disposal generally are required to be applied prospectively after the
adoption date to newly initiated disposal activities. Therefore, we cannot
determine the potential effects that the adoption of the provisions of SFAS No.
144 will have on our financial statements.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Our holdings of financial instruments are comprised of a mix of U.S.
corporate debt, government securities and commercial paper. All such instruments
are classified as securities available for sale. Our debt security portfolio
represents funds held temporarily pending use in our business and operations. We
manage these funds accordingly. We seek reasonable assuredness of the safety of
principal and market liquidity by investing in rated fixed income securities
while at the same time seeking to achieve a favorable rate of return. Our market
risk exposure consists principally of exposure to changes in interest rates. Our
holdings are also exposed to the risks of changes in the credit quality of
issuers. We typically invest in the shorter-end of the maturity spectrum. The
principal amount and weighted average interest rate of our short-term investment
portfolio at September 30, 2001 was $153,975,485 and approximately 6.3%,
respectively.
13
The Company has $180.0 million of convertible subordinated notes due 2007.
The notes are convertible into shares of the Company's common stock at a price
of $109.15 per share, subject to certain adjustments. The notes bear interest at
a rate of 6 % per annum, payable semi-annually in arrears, and can be redeemed
by the Company, at certain premiums over the principal amount, at any time on or
after March 6, 2003.
14
PART II - OTHER INFORMATION
---------------------------
ITEM 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits:
10.35 + Copromotion and Codevelopment Agreement dated as of
September 9, 2001 between ViroPharma Incorporated and
Aventis Pharmaceuticals Inc.
10.36 Stock Purchase Agreement dated as of September 9, 2001
between ViroPharma Incorporated and Aventis Pharma Inc.
10.37 Agreement of Lease dated as of September 24, 2001
between LV Associates, L.P. and ViroPharma Incorporated.
+ Portions of this exhibit were omitted and filed
separately with the Securities and Exchange Commission
pursuant to an application for confidential treatment.
(b) Reports on Form 8-K:
We filed the following Current Reports on Form 8-K during the
quarter ended September 30, 2001:
(i) We filed a Current Report on Form 8-K dated July
26, 2001 to report, pursuant to item 5, our
financial results for the second quarter ended
June 30, 2001.
(ii) We filed a Current Report on Form 8-K dated July
31, 2001 to report, pursuant to item 5, that we
submitted a New Drug Application to the U.S. Food
and Drug Administration for clearance to market
Picovir(TM) (pleconaril) for the treatment of
viral respiratory infection (VRI, otherwise known
as the common cold) in adults.
(iii) We filed a Current Report on Form 8-K dated
September 10, 2001 to report, pursuant to item 5,
that we entered into a Copromotion and
Codevelopment Agreement for Picovir(TM), our lead
product candidate, with Aventis Pharmaceuticals,
Inc. and a Stock Purchase Agreement with Aventis
Pharma Inc.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIROPHARMA INCORPORATED
Date: November 12, 2001 By: /s/ Michel de Rosen
-----------------------------------
Michel de Rosen
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Vincent J. Milano
-----------------------------------
Vincent J. Milano
Vice President, Chief Financial Officer and
Treasurer
(Principal Financial and Accounting
Officer)
16
Exhibit Index
--------------------------------------------------------------------------------
Exhibit Description
10.35 + Copromotion and Codevelopment Agreement dated as of September 9,
2001 between ViroPharma Incorporated and Aventis Pharmaceuticals
Inc.
10.36 Stock Purchase Agreement dated as of September 9, 2001 between
ViroPharma Incorporated and Aventis Pharma Inc.
10.37 Agreement of Lease dated as of September 24, 2001 between LV
Associates, L.P. and ViroPharma Incorporated.
+ Portions of this exhibit were omitted and filed separately with the
Securities and Exchange Commission pursuant to an application for
confidential treatment.
17