1
================================================================================
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
Exchange Act of 1934 for the quarterly period ended March 31, 2001
--------------
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______
Commission File Number 0-24760
----------
Orphan Medical, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 41-1784594
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
13911 Ridgedale Drive, Suite 250,
Minnetonka, MN 55305 (952) 513-6900
--------------------------------------- -------------------------------
(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 [ ]
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 8,482,943
---------------------------- -------------------------------
(Class) (Outstanding at April 30, 2001)
================================================================================
2
INDEX
ORPHAN MEDICAL, INC.(R)
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - March 31, 2001 and December 31, 2000. 3
Statements of Operations - Three months ended March 31, 2001 and
March 31, 2000. 4
Statements of Cash Flows - Three months ended March 31, 2001 and
March 31, 2000. 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 8
Item 3. Quantitative and Qualitative Disclosures about Market Risks 12
PART II. OTHER INFORMATION
Items 1 through 4 have been omitted since all items are inapplicable
or answers negative.
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signature 26
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.
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ORPHAN MEDICAL, INC.
BALANCE SHEETS
MARCH 31 DECEMBER 31,
----------- -----------
2001 2000
----------- -----------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 5,785,883 $ 1,115,319
Available-for-sale securities 3,026,401 10,301,935
Accounts receivable, less allowance for doubtful
accounts of $142,000 and $116,200 for 2001 and
2000, respectively 1,088,090 1,578,544
Inventories 1,605,329 1,602,949
Prepaid expenses 459,031 221,240
----------- -----------
Total current assets 11,964,733 14,819,987
Property and equipment:
Property and equipment 1,003,189 968,118
Accumulated depreciation (546,338) (504,187)
----------- -----------
456,851 463,931
Other assets 8,202 12,967
----------- -----------
Total assets $12,429,787 $15,296,885
=========== ===========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable 247,765 1,298,047
Accrued outdated product return allowance 143,174 181,483
Accrued compensation 540,199 806,839
Deferred revenues 438,480 500,850
Accrued expenses 1,592,865 1,766,739
----------- -----------
Total current liabilities 2,962,483 4,553,958
Commitments
Shareholders' equity:
Senior Convertible Preferred Stock, $.01 par
value; 14,400 shares authorized; 8,706 and 8,706
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; 8,482,943 and 8,442,759 issued and
outstanding 84,829 84,427
Additional paid-in capital 58,401,581 57,849,390
Accumulated deficit (49,015,680) (47,178,667)
Unrealized gain (loss) on available-for-sale
securities (3,546) (12,342)
Total shareholders' equity 9,467,304 10,742,927
----------- -----------
Total liabilities and shareholders' equity 12,429,787 $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.
3
4
STATEMENTS OF OPERATIONS
ORPHAN MEDICAL, INC.
(Unaudited)
For the Three Months Ended
--------------------------
March 31, March 31,
2001 2000
--------- ---------
Revenues $ 2,341,510 $ 2,742,456
Cost of sales 289,666 459,353
----------- -----------
Gross Profit 2,051,844 2,283,103
Operating expenses:
Research and development 906,193 1,766,403
Sales and marketing 1,566,707 804,590
General and administrative 1,116,392 735,429
----------- -----------
Total operating expenses 3,589,292 3,306,422
----------- -----------
Loss from operations (1,537,448) (1,023,319)
Other income:
Interest, net 146,974 125,474
----------- -----------
Net loss (1,390,474) (897,845)
Less: Preferred stock dividends 221,129 211,426
----------- -----------
Net loss attributable to common
shareholders (1,611,603) $(1,109,271)
=========== ===========
Basic and diluted loss per
common share $ (0.19) $ (0.15)
=========== ===========
Weighted average number of
shares outstanding 8,463,610 7,288,125
=========== ===========
See accompanying notes.
4
5
STATEMENTS OF CASH FLOWS
ORPHAN MEDICAL, INC.
(Unaudited)
For the Three Months Ended
---------------------------
March 31, March 31,
2001 2000
--------- ---------
OPERATING ACTIVITIES
Net loss (1,390,474) $ (897,845)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 42,151 32,474
Compensatory options -- 16,991
Changes in operating assets and
liabilities:
Accounts payable and accrued expenses (1,603,557) 75,378
Inventories (2,380) 71,184
Accounts receivable and current
assets 257,426 (202,444)
----------- ------------
Net cash used in operating activities (2,696,834) (904,262)
INVESTING ACTIVITIES
Purchase of office equipment (35,070) (45,072)
Purchases of short-term investments -- (12,639,256)
Maturities of short-term investments 7,284,331 3,782,159
----------- ------------
Net cash provided by (used in) investing 7,249,261 (8,902,169)
activities
FINANCING ACTIVITIES:
Employee stock purchase plan 33,033 366,756
Stock option exercise proceeds 85,113 1,506,348
Private common stock placement -- 10,719,963
Cash dividends (9) (1,721)
----------- ------------
Net cash provided by financing activities 118,137 12,591,346)
----------- ------------
Increase (decrease) in cash and cash 4,670,564 2,784,915
equivalents
Cash and cash equivalents at beginning of
period 1,115,319 205,678
----------- ------------
Cash and cash equivalents at end of
period 5,785,883 $ 2,990,593
=========== ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash interest received 228,728 $ 138,427
=========== ============
See accompanying notes
5
6
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 three month period ended March 31, 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.
4. INVENTORIES
Inventories are valued at the lower of cost or market determined using the
first-in,
6
7
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.
MARCH 31, DECEMBER 31,
2001 2000
----------- -----------
Raw materials and packaging $ 1,129,519 $ 1,213,464
Finished goods 475,810 389,485
----------- -----------
$ 1,605,329 $ 1,602,949
=========== ===========
5. COMPREHENSIVE INCOME
The following summarizes the comprehensive income for the periods ended:
MARCH 31,
-----------------------------
2001 2000
------------ ------------
Net Income $(1,390,474) $(1,109,271)
Unrealized gain on
securities 8,796 --
----------- -----------
Total net comprehensive
income $(1,381,678) (1,109,271)
=========== ===========
6. COMMITMENTS
The Company has various commitments under agreements with outside consultants
and contractors to provide services relating to drug development, drug
acqusition, manufacturing and marketing. At March 31, 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 May 15, 2001. The maximum amount available to the Company under this
arrangement is $500,000, 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) $500,000. In addition, the Company must maintain a minimum balance
of at least $250,000 in accounts which the bank controls. Advances are charged a
variable rate of interest equal to the prime rate plus one half of a percent.
Through March 31, 2001, the Company has not borrowed under this arrangement. The
Company expects to renew this line of credit under substantially the same terms.
7
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THREE MONTHS ENDED MARCH 31, 2001 VS. THREE MONTHS ENDED MARCH 31, 2000
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 March 31, 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 March 31, 2001 of $49.0 million. In addition, the
Company expects to incur additional losses from operations in 2001 and 2002.
Net loss applicable to common shareholders was $1.6 million for the three months
ended March 31, 2001 compared to $1.1 million for the three months ended March
31, 2000. The increase in net loss can be attributed, in part, to a decrease in
revenue for the quarter ended March 31, 2001 compared to the same period in the
prior year. In addition, the Company had higher expenses for the three months
ended March 31, 2001 in both sales and marketing and general and administrative
compared to the same period in the prior year. These increases were offset by
lower research and development expenses for the first three months of 2001 as
compared to the same period in the prior year. The preferred stock dividend
increased in the first quarter of 2001 over the first quarter of 2000 due to
issuance of 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 15% to $2.3 million for the three months ended March 31,
2001 compared to $2.7 million for the same period in the prior year. Sales of
Antizol(R) (fomepizole) Injection were lower for the three months ended March
31, 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
8
9
stocking 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. Domestic sales for Busulfex(R) (busulfan)
Injection continue to grow. Busulfex is increasingly being considered for use in
many bone marrow and stem cell transplant preparatory regimens. The Company has
been successful in obtaining protocol status for Busulfex in a growing number of
oncology protocols at leading bone marrow transplant centers. International
sales for Busulfex for the three months ended March 31, 2001 were less than
during the same period in the prior year. During the first quarter of 2000 one
of our international distribution partners purchased an initial supply of
Busulfex. While the distribution partner continues to purchase the product, the
quantities are less than the initial stocking quantity.
Gross profit margins increased to 88% for the 2001 quarter compared to 83% for
the 2000 quarter due to product mix. Cost of sales was $0.3 million for the
three months ended March 31, 2001 compared to $0.5 million for the same period
the prior year. 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 49% from $1.8 million for the three
months ended March 31, 2000 to $0.9 million for three months ended March 31,
2001. The decrease results from reduced research and development spending on
Xyrem during the current quarter pending the outcome of the NDA submission. The
first quarter 2001 spending includes ongoing trials for Xyrem 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 this trial will be dependent on a number of factors,
including among others, the number of human subjects screened and enrolled in
the trial, and the number of active clinical sites.
Sales and marketing expense increased 95% from $0.8 million for the three months
ended March 31, 2000 to $1.6 million for the three months ended March 31, 2001.
This increase is largely attributable to spending related to significantly
higher spending in pre-approval market planning for Xyrem. Sales and marketing
expenses will likely continue to increase in subsequent quarters, however, at
substantially reduced rates of increase
General and administrative expense increased 52% from $0.7 million for the three
months ended March 31, 2000 to $1.1 million for the three months ended March 31,
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 financing activities. Other income increased 17% from
$125,474 in the 2000 first quarter to $146,974 in the 2000 first quarter. This
increase is the result of additional invested funds from the sale of common
stock in the first quarter of 2000.
9
10
Other income is expected to decline in subsequent quarters as currently invested
funds are used to fund Xyrem development activities, and other company
operations 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 first 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 preferred stock and common stock, as
permitted by the terms of the Senior Convertible Preferred Stock and the Series
B Convertible Preferred Stock. 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. 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. The 1999 private
placement of convertible preferred stock resulted in net proceeds of $2.9
million. 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 $9.0 million at March 31, 2001. Cash and
cash equivalents, and available-for-sale securities decreased from $11.4 million
at December 31, 2000 to $8.8 million at March 31, 2001. The Company continues to
invest its excess cash in interest bearing, investment grade securities. The
Company has a $500,000 commercial revolving line of credit with a bank, expiring
on May 15, 2001. The Company expects to renew this facility on substantially
similar terms. 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 arrangements.
The Company's commitments for outside development spending was at $3.9 million
at both December 31, 2000 and March 31, 2001. The Company expects development
spending to not increase significantly over current levels unless additional
products are licensed for development.
10
11
The Company expects spending during 2001 for research and development, along
with sales and marketing to increase over 2000 levels. Management believes the
Company's current working capital and anticipated operating cash flows from
product sales will be sufficient to fund its operations at least through March
31, 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 March 31, 2001. The Company's net tangible assets at March 31,
2001 equaled approximately $9.5 million and the Company's market capitalization
was approximately $92.8 million (based on the last sale price of $10.938 and
8,482,943 shares outstanding as of March 31, 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.
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 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.
GEOGRAPHIC SALES INFORMATION
The Company tracks sales in two geographic regions, domestic and international.
The Company has no assets outside of the United States. The following is a
summary of net sales by geographic region for the quarters ended March 31, 2001
and 2000, respectively.
For the Three Months Ended
--------------------------
March 31, March 31,
2001 2000
---------- ----------
Domestic $1,920,905 $2,197,650
International 420,605 544,806
---------- ----------
Total $2,341,510 $2,742,456
========== ==========
11
12
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 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
12
13
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 out 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 March 31,
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.
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
13
14
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. 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
14
15
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 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. The Company has also submitted Antizol,
for use in methanol poisonings, for designation as an orphan drug in Europe. 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
15
16
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 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.
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,
16
17
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 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;
17
18
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.
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
18
19
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 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.
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,
19
20
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 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.
20
21
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.
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
21
22
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 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.
22
23
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
23
24
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 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
Not Applicable
24
25
PART II - OTHER INFORMATION
Items 1-6 are not applicable and have been omitted
25
26
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.
Registrant
Date May 10, 2001 By /s/ Timothy G. McGrath
------------------------- ---------------------------------------
Timothy G McGrath
Chief Financial Officer
(duly authorized officer and
principal financial officer)
26