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 June 30, 2002, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________ to _____________
Commission File No. 0-18728
INDEVUS PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3047911
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
One Ledgemont Center, 99 Hayden Avenue 02421-7966
Lexington, Massachusetts (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (781) 861-8444
Former name: Interneuron Pharmaceuticals, Inc.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.
Class: Outstanding at August 13, 2002:
Common Stock $.001 par value 46,847,104 shares
1
INDEVUS PHARMACEUTICALS, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2002
and September 30, 2001 ................................................. 3
Consolidated Statements of Operations for the Three and Nine Months
ended June 30, 2002 and 2001 ........................................... 4
Consolidated Statements of Cash Flows for the Nine Months
ended June 30, 2002 and 2001 ........................................... 5
Notes to Unaudited Consolidated 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 Risk ....... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 14
Item 6. Exhibits and Reports on Form 8-K ................................. 16
SIGNATURES ............................................................... 17
2
Item 1. Financial Statements
INDEVUS PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands except share data)
June 30, September 30,
2002 2001
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 23,050 $ 24,923
Marketable securities ............................................ 17,890 4,479
Accounts receivable .............................................. 97 331
Prepaids and other current assets ................................ 512 397
--------- ---------
Total current assets ........................................ 41,549 30,130
Marketable securities ................................................. 5,503 2,769
Equity securities ..................................................... 206 693
Property and equipment, net ........................................... 21 67
Insurance claim receivable ............................................ 1,258 1,258
--------- ---------
Total assets ................................................ $ 48,537 $ 34,917
========= =========
LIABILITIES
Current liabilities:
Accounts payable ................................................. $ 499 $ 53
Accrued expenses ................................................. 5,787 6,107
--------- ---------
Total current liabilities ................................... 6,286 6,160
Minority interest ..................................................... 98 97
STOCKHOLDERS' EQUITY
Preferred stock; $.001 par value, 5,000,000 shares authorized;
Series B, 239,425 shares issued and outstanding
(liquidation preference at June 30, 2002 $3,019) ................. 3,000 3,000
Series C, 5,000 shares issued and outstanding
(liquidation preference at June 30, 2002 $500) ................... 500 500
Common stock; $.001 par value, 80,000,000 shares authorized;
46,622,104 and 43,283,016 shares issued and outstanding at
June 30, 2002 and September 30, 2001, respectively ............... 47 43
Additional paid-in capital ............................................ 302,645 276,399
Accumulated deficit ................................................... (264,062) (251,293)
Accumulated other comprehensive income ................................ 23 11
--------- ---------
Total stockholders' equity .............................. 42,153 28,660
--------- ---------
Total liabilities and stockholders' equity ......... $ 48,537 $ 34,917
========= =========
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
3
INDEVUS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended June 30, 2002 and 2001
(Unaudited)
(Amounts in thousands except per share data)
Three months ended June 30, Nine months ended June 30,
2002 2001 2002 2001
------------ ----------- ------------ -----------
Revenues:
Royalty revenue ..................................... $ 226 $ 287 $ 3,439 $ 932
Contract and license fee revenue .................... 2 -- 416 --
-------- -------- -------- --------
Total revenues ................................... 228 287 3,855 932
Costs and expenses:
Cost of revenues ................................... 55 70 978 200
Research and development ............................ 4,210 1,461 9,957 3,660
General and administrative .......................... 1,724 2,337 5,907 6,035
Product withdrawal .................................. -- (7,480) -- (8,098)
-------- -------- -------- --------
Total costs and expenses ........................ 5,989 (3,612) 16,842 1,797
-------- -------- -------- --------
Income (loss) from operations ....................... (5,761) 3,899 (12,987) (865)
Investment income, net .............................. 234 405 760 1,478
Impairment of equity securities ..................... (487) -- (487) --
Loss on equity securities ........................... -- -- -- (43)
Minority interest ................................... (1) (4) (55) (12)
-------- -------- -------- --------
Income (loss) before cumulative effect of change in
accounting principle .......................... (6,015) 4,300 (12,769) 558
Cumulative effect of change in accounting principle . -- -- -- (10,000)
-------- -------- -------- --------
Net income (loss) ................................... $ (6,015) $ 4,300 $(12,769) $ (9,442)
======== ======== ======== ========
Income (loss) per common share:
Basic:
Income (loss) before cumulative effect of change
in accounting principle ..................... $ (0.13) $ 0.10 $ (0.28) $ 0.01
Cumulative effect of change in accounting
principle ................................... -- -- -- (0.23)
-------- -------- -------- --------
Net income (loss) .............................. $ (0.13) $ 0.10 $ (0.28) $ (0.22)
======== ======== ======== ========
Diluted:
Income (loss) before cumulative effect of change
in accounting principle ..................... $ (0.13) $ 0.09 $ (0.28) $ 0.01
Cumulative effect of change in accounting
principle ................................... -- -- -- (0.22)
-------- -------- -------- --------
Net income (loss) .............................. $ (0.13) $ 0.09 $ (0.28) $ (0.21)
======== ======== ======== ========
Weighted average common shares outstanding:
Basic .......................................... 46,431 42,970 45,583 42,843
======== ======== ======== ========
Diluted ........................................ 46,431 46,836 45,583 45,085
======== ======== ======== ========
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
4
INDEVUS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended June 30, 2002 and 2001
(Unaudited)
(Amounts in thousands)
Nine months ended June 30,
--------------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net loss ......................................................... $(12,769) $ (9,442)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Cumulative effect of change in accounting principle ........... -- 10,000
Depreciation and amortization ................................. 53 80
Minority interest in net income of consolidated subsidiary .... 55 13
Loss on equity securities ..................................... -- 43
Impairment of equity securities ............................... 487 --
Noncash compensation .......................................... 2,190 1,765
Changes in assets and liabilities:
Accounts receivable ........................................... 234 --
Insurance claim receivable .................................... -- 5,195
Settlement deposit receivable ................................. -- 1,757
Prepaid and other assets ...................................... (115) 555
Accounts payable .............................................. 446 (122)
Accrued expenses and other liabilities ........................ (311) (9,368)
-------- --------
Net cash (used in) provided by operating activities ................... (9,730) 476
-------- --------
Cash flows from investing activities:
Capital expenditures ............................................. (8) (18)
Purchases of marketable securities ............................... (22,126) (5,983)
Proceeds from maturities and sales of marketable securities ...... 5,994 9,971
-------- --------
Net cash (used in) provided by investing activities ................... (16,140) 3,970
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock ....................... 24,051 663
Distribution to minority interest stockholder .................... (54) --
Principal payments of capital lease obligations .................. -- (2)
-------- --------
Net cash provided by financing activities ............................. 23,997 661
-------- --------
Net change in cash and cash equivalents ............................... (1,873) 5,107
Cash and cash equivalents at beginning of period ...................... 24,923 24,871
-------- --------
Cash and cash equivalents at end of period ............................ $ 23,050 $ 29,978
======== ========
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
5
INDEVUS PHARMACEUTICALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation
The consolidated financial statements included herein have been prepared by
Indevus Pharmaceuticals, Inc. ("Indevus" or the "Company") without audit,
pursuant to the rules and regulations of the U.S. Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying unaudited
consolidated financial statements include all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the consolidated
financial position, results of operations and cash flows of the Company. The
unaudited consolidated financial statements included herein should be read in
conjunction with the audited consolidated financial statements and the notes
thereto included in the Company's Form 10-K for the fiscal year ended September
30, 2001.
Indevus is a biopharmaceutical company engaged in the development and
commercialization of a diversified portfolio of product candidates, including
multiple compounds in late-stage clinical development.
B. Basic and Diluted Income (Loss) Per Common Share
The following table sets forth the computation of the denominator for the
calculation of basic and diluted income and loss per share for the three and
nine month periods ended June 30, 2002 and 2001, respectively:
Three Months Ended June 30, Nine Months Ended June 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Denominator for basic income (loss)
per share:
Weighted average shares outstanding .............46,431,000 42,970,000 45,583,000 42,843,000
========== ========== ========== ==========
Denominator for diluted income (loss)
per share:
Weighted average shares outstanding .............46,431,000 42,970,000 45,583,000 42,843,000
Dilutive effect of:
Shares issuable in connection with
stock option plans ........................... -- 2,904,000 -- 1,206,000
Shares issued or issuable in connection
with restricted stock awards ................. -- 340,000 -- 414,000
Shares issuable in connection with
convertible preferred stock .................. -- 622,000 -- 622,000
---------- ---------- ---------- ----------
Weighted average shares outstanding -
diluted ......................................46,431,000 46,836,000 45,583,000 45,085,000
========== ========== ========== ==========
During the three month period ended June 30, 2002, securities not included
in the computation of diluted earnings per share, because their exercise price
exceeded the average market price during the period were as follows: (i) options
to purchase 3,215,431 shares of Common Stock at prices ranging from $6.00 to
$20.13 with expiration dates ranging up to May 13, 2012; and (ii) warrants to
purchase 560,000 shares of Common Stock with exercise prices ranging from $6.19
to $12.77 and with expiration dates ranging up to July 17, 2006. Additionally,
during the three month period ended June 30, 2002, securities not included in
the computation of diluted earnings per share, because they would have an
antidilutive effect due to the net loss for the period, were as follows: (i)
options to purchase 6,647,949 shares of Common Stock at prices ranging from
$1.22 to $5.00 with expiration dates ranging up to June 14, 2012; (ii) warrants
to purchase 55,000 shares of Common Stock with exercise prices ranging from
$5.00 to $5.13 and with expiration dates ranging up to February 3, 2005; (iii)
Series B and C preferred stock convertible into 622,222 shares of Common Stock;
and (iv) unvested Restricted Stock Awards of 225,000 shares of Common Stock
granted pursuant to the Company's 1997 Equity Incentive Plan.
6
During the three month period ended June 30, 2001, securities not included
in the computation of diluted earnings per share, because their exercise price
exceeded the average market price during the period were as follows: (i) options
to purchase 2,953,041 shares of Common Stock at prices ranging from $6.00 to
$20.13 with expiration dates ranging up to April 5, 2010; and (ii) warrants to
purchase 660,000 shares of Common Stock with exercise prices ranging from $6.19
to $12.77 and with expiration dates ranging up to July 17, 2006.
During the nine month period ended June 30, 2002, securities not included
in the computation of diluted earnings per share, because their exercise price
exceeded the average market price during the period were as follows: (i) options
to purchase 255,604 shares of Common Stock at prices ranging from $7.88 to
$20.13 with expiration dates ranging up to April 8, 2012; and (ii) a warrant to
purchase 500,000 shares of Common Stock with an exercise price of $9.44 and with
an expiration date of July 12, 2002. Additionally, during the nine month period
ended June 30, 2002, securities not included in the computation of diluted
earnings per share, because they would have an antidilutive effect due to the
net loss for the period, were as follows: (i) options to purchase 9,474,023
shares of Common Stock at prices ranging from $1.22 to $7.25 with expiration
dates ranging up to June 14, 2012; (ii) warrants to purchase 105,000 shares of
Common Stock with exercise prices ranging from $5.00 to $7.13 and with
expiration dates ranging up to July 17, 2006; (iii) Series B and C preferred
stock convertible into 622,222 shares of Common Stock; and (iv) unvested
Restricted Stock Awards of 225,000 shares of Common Stock granted pursuant to
the Company's 1997 Equity Incentive Plan.
During the nine month period ended June 30, 2001, securities not included
in the computation of diluted earnings per share, because their exercise price
exceeded the average market price during the period were as follows: (i) options
to purchase 5,972,042 shares of Common Stock at prices ranging from $3.56 to
$20.13 with expiration dates ranging up to March 8, 2011; and (ii) warrants to
purchase 660,000 shares of Common Stock with exercise prices ranging from $5.00
to $12.77 and with expiration dates ranging up to July 17, 2006.
Certain of the above securities contain anti-dilution provisions which may
result in a change in the exercise price or number of shares issuable upon
exercise of such securities.
C. Comprehensive Income (Loss)
Comprehensive income (loss) for the three and nine month periods ended June
30, 2002 and 2001, respectively, is as follows:
Three Months Ended June 30, Nine Months Ended June 30,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Net income (loss) ................ $(6,015,000) $ 4,300,000 $(12,769,000) $ (9,442,000)
Change in unrealized net
gain or loss on investments ...... 408,000 7,000 12,000 (654,000)
------------ ----------- ------------- --------------
Comprehensive income (loss) ...... $(5,607,000) $ 4,307,000 $(12,757,000) $ (10,096,000)
============ =========== ============= ==============
D. Equity
In December 2001, the Company completed a private placement of 3,125,000
shares of its Common Stock which resulted in net proceeds to the Company of
approximately $23,307,000.
7
E. Agreements
On June 7, 2002, the Company announced that Pfizer Inc ("Pfizer"), the
Company's licensee for pagoclone, had decided to return to the Company
exclusive, worldwide development and commercialization rights to pagoclone,
thereby terminating the development and marketing agreement entered into by the
two companies in December 1999. Pfizer had been developing pagoclone for the
treatment of anxiety disorders. Aventis, S.A. ("Aventis"), licensor of pagoclone
to the Company, has a contractual right for a period of 90 days from the
termination of the Company's agreement with Pfizer to elect to develop pagoclone
under the terms of that agreement. The Company is discussing with Aventis an
extension of the 90 day period to allow Aventis sufficient time to evaluate
pagoclone data.
On June 28, 2002, the Company licensed exclusive, worldwide rights from
Atlantic Technology Ventures, Inc. ("Atlantic") to CT-3, a novel
anti-inflammatory and analgesic compound currently in clinical development, in
exchange for an up-front licensing payment, development milestones and royalty
payments. A director of the Company is a shareholder of Atlantic. The
transaction was approved by all of the disinterested directors of Indevus.
F. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" ("SFAS No. 141") and SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"). SFAS No. 141 requires that all business combinations
be accounted for under the purchase method only and that certain acquired
intangible assets in a business combination be recognized as assets apart from
goodwill. SFAS No. 142 requires that ratable amortization of goodwill be
replaced with periodic tests of the goodwill's impairment and that intangible
assets other than goodwill be amortized over their useful lives. SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001 and for
all business combinations accounted for by the purchase method for which the
date of acquisition is after June 30, 2001. The provisions of SFAS No. 142 are
effective for fiscal years beginning after December 15, 2001, and will thus be
adopted by the Company, as required, in fiscal year 2003. The Company does not
expect the adoption of SFAS No. 141 and SFAS No. 142 to have a material effect
on the Company's financial condition or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," and provides a single
accounting model for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. The provisions of SFAS No. 144 are
effective for fiscal years beginning after December 15, 2001, and, generally,
its provisions are to be applied prospectively and will thus be adopted by the
Company in fiscal year 2003. The Company does not expect SFAS No. 144 will have
a material effect on its financial position or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations:
--------------------------------------------------------------------------------
Statements in this Form 10-Q that are not statements or descriptions of
historical facts are "forward-looking" statements under Section 21E of the
Securities Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995 and are subject to numerous risks and
uncertainties. These and other forward-looking statements made by the Company in
reports that we file with the Securities and Exchange Commission, press
releases, and public statements of our officers, corporate spokespersons, or our
representatives are based on a number of assumptions and relate to, without
limitation: the Company's ability to successfully develop, obtain regulatory
approval for and commercialize any products; the Company's ability to enter into
corporate collaborations or obtain sufficient additional capital to fund
operations; and the Redux(TM)-related litigation. The words "believe," "expect,"
"anticipate," "intend," "plan," "estimate" or other expressions which are
predictions of or indicate future events and trends and do not relate to
historical matters identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements as they involve
risks and uncertainties, and such forward-looking statements may turn out to be
wrong. Actual results could differ materially from those currently anticipated
due to a number of factors, including those set forth under "Risk Factors" and
elsewhere in, or incorporated by reference into, the Company's Form 10-K for its
fiscal year ended September 30, 2001. These factors include, but are not limited
to: uncertainties relating to clinical trials, including the ongoing
8
Phase III trial with trospium, regulatory approval and commercialization of our
products; the early stage of products under development; need for additional
funds and corporate partners; history of operating losses and expectation of
future losses; product liability and insurance uncertainties; risks relating to
the Redux-related litigation; dependence on third parties for manufacturing and
marketing; competition; risks associated with contractual arrangements,
including those for the development of pagoclone; limited patent and proprietary
rights; and other risks. The forward-looking statements represent our judgement
and expectations as of the date of this Form 10-Q. We assume no obligation to
update any such forward-looking statements.
The following discussion should be read in conjunction with the Company's
unaudited consolidated financial statements and notes thereto appearing
elsewhere in this report and audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 2001. Unless the context indicates otherwise, "Indevus" or
the "Company" refer to Indevus Pharmaceuticals, Inc.
General
Description of the Company
Indevus is a biopharmaceutical company engaged in the development and
commercialization of a diversified portfolio of product candidates, including
multiple compounds in late stage clinical development. The Company is currently
developing or has certain rights to seven compounds: trospium for the treatment
of overactive bladder, pagoclone for panic and generalized anxiety disorders, IP
501 for the treatment of cirrhosis of the liver, citicoline for the treatment of
ischemic stroke, PRO 2000 for the prevention of infection by the human
immunodeficiency virus and other sexually transmitted pathogens, dersalazine for
the treatment of inflammatory bowel disease, and CT-3 for the treatment of
inflammatory conditions and pain.
Major Products
Pagoclone is a novel GABA (gamma amino butyric acid) receptor agonist in
development for the treatment of anxiety disorders. On June 7, 2002, the Company
announced that Pfizer Inc ("Pfizer"), the Company's licensee for pagoclone, had
decided to return to the Company exclusive, worldwide development and
commercialization rights to pagoclone thereby terminating the development and
marketing agreement between the two companies. Pfizer informed the Company of
the results of its most recent clinical trials with pagoclone in generalized
anxiety disorder and panic disorder which did not achieve the level of efficacy
established in previous trials. Accordingly, Pfizer elected not to pursue
further development of the compound. As demonstrated in previous clinical
trials, pagoclone was well tolerated in these latest trials, with no significant
differences from placebo with respect to adverse events, including sedation and
withdrawal effects. Decisions regarding the continued clinical development and
partnering of pagoclone for generalized anxiety and panic disorders will be
based on additional analyses of a total data package from six clinical trials.
Aventis, S.A. ("Aventis") has a contractual right for a period of 90 days from
the termination of the agreement between Pfizer and the Company to elect to
develop pagoclone under the terms established in that agreement. The Company is
discussing with Aventis an extension of the 90 day period to allow Aventis
sufficient time to evaluate pagoclone data.
Trospium is a muscarinic receptor antagonist in development as a treatment
for overactive bladder. The Company is currently conducting, and has completed
enrollment in, a Phase III, double-blind, placebo-controlled study in 524
patients, comparing the number of micturitions and incontinence episodes among
trospium-treated patients versus placebo-treated patients during a twelve week
treatment period. The trial is expected to be completed in the fall of 2002. If
the trial is successful, the Company currently plans to file a U.S. New Drug
Application ("NDA") as soon as practicable thereafter.
PRO 2000 is a topical microbicide in development for the prevention of the
sexual transmission of HIV and other sexually-transmitted pathogens. Multiple
clinical trials with PRO 2000 in HIV prevention are expected to begin in 2002
and 2003, including a Phase II trial sponsored by the European Commission and a
Phase II/III trial to be conducted by the National Institutes of Health in
approximately 10,000 women in Africa and India. In February 2002, an
international research collaboration received a grant of approximately $22.7
million from the U.K.'s Department for International Development to test the
safety and efficacy of vaginal microbicides, including PRO 2000. This grant will
support a broad, five-year program that will include a multi-national, Phase III
clinical trial of candidate microbicides.
9
Dersalazine is an anti-inflammatory compound in clinical development to
treat inflammatory bowel disease, which includes ulcerative colitis and Crohn's
disease. The Company commenced a multiple-dose Phase I clinical study with
dersalazine in March 2002. Plans for future testing in ulcerative colitis will
be dependent on the successful completion of this trial.
New Product
On June 28, 2002, the Company licensed exclusive, worldwide rights from
Atlantic Technology Ventures, Inc. ("Atlantic") to CT-3, a novel
anti-inflammatory and analgesic compound currently in clinical development, in
exchange for an up-front licensing payment, development milestones and royalty
payments.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements that have been
prepared in accordance with generally accepted accounting principles in the U.S.
The preparation of these financial statements requires us to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenue and
expense during the reported periods. These items are constantly monitored and
analyzed by management for changes in facts and circumstances, and material
changes in these estimates could occur in the future. Changes in estimates are
recorded in the period in which they become known. We base our estimates on
historical experience and various other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ from our estimates
if past experience or other assumptions do not turn out to be substantially
accurate.
In December 2001, the SEC requested that all registrants discuss their
"critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. A critical accounting policy is a
policy that is both important to the portrayal of the Company's financial
conditions and results, and requires management's most difficult, subjective or
complex judgements and estimates. While our significant accounting policies are
more fully described in the notes to our audited consolidated financial
statements included in our Form 10-K for the fiscal year ended September 30,
2001, we consider our revenue recognition policy critical and therefore we state
it below.
Revenue Recognition: Contract and license fee revenue is primarily
generated through collaborative license and development agreements with
strategic partners for the development and commercialization of the Company's
product candidates. The terms of the agreements typically include non-refundable
license fees, funding of research and development, payments based upon
achievement of certain milestones and royalties on net product sales.
Non-refundable license fees are recognized as contract and license fee revenue
when the Company has a contractual right to receive such payment, provided a
contractual arrangement exists, the contract price is fixed or determinable, the
collection of the resulting receivable is reasonably assured and the Company has
no further performance obligations under the license agreement.
Revenues from milestone payments related to arrangements under which the
Company has no continuing performance obligations are recognized upon
achievement of the related milestone. Revenues from milestone payments related
to arrangements under which the Company has continuing performance obligations
are recognized as revenue upon achievement of the milestone only if all of the
following conditions are met: the milestone payments are non-refundable;
achievement of the milestone was not reasonably assured at the inception of the
arrangement; substantive effort is involved in achieving the milestone; and the
amount of the milestone is reasonable in relation to the effort expended or the
risk associated with achievement of the milestone. If any of these conditions
are not met, the milestone payments are deferred and recognized as revenue over
the term of the arrangement as the Company completes its performance
obligations.
Royalty revenue consists of payments received from licensees for a portion
of sales proceeds from products that utilize the Company's licensed technologies
and is recognized when the amount of and basis for such royalty payments are
reported to the Company in accurate and appropriate form and in accordance with
the related license agreement.
10
Cash received in advance of revenue recognition is recorded as deferred
revenue.
Results of Operations
Total revenues decreased to $228,000 in the three month period ended June
30, 2002 from $287,000 in the three month period ended June 30, 2001 and
increased to $3,855,000 in the nine month period ended June 30, 2002 from
$932,000 in the nine month period ended June 30, 2001. Royalty revenue was
derived from sales of Sarafem by Eli Lilly and Company ("Lilly") and decreased
$61,000, or 21%, to $226,000 in the three month period ended June 30, 2002 from
$287,000 in the three month period ended June 30, 2001. The substantial increase
in Sarafem royalties in the nine month period ended June 30, 2002 resulted from
approximately $3,199,000 of royalties recognized in the first quarter of fiscal
2002 from higher sales of Sarafem. Lilly has notified the Company that the
Company should not expect to receive future Sarafem royalties. The Company and
Lilly differ in the interpretation of certain provisions of the Sarafem license
agreement, including the contractual duration of the Sarafem royalties, and are
currently discussing a resolution of these differences. Contract and license fee
revenue reflects funding of certain PRO 2000 development costs from a research
grant, the full amount of which has been recognized.
Cost of revenues for each period includes amounts due to Massachusetts
Institute of Technology for their portion of the Sarafem royalty revenue and
development costs related to the PRO 2000 research grant.
Research and development expense increased $2,749,000, or 188%, to
$4,210,000 in the three month period ended June 30, 2002 from $1,461,000 in the
three month period ended June 30, 2001 and increased $6,297,000, or 172%, to
$9,957,000 in the nine month period ended June 30, 2002 from $3,660,000 in the
nine month period ended June 30, 2001. These increases are primarily due to
expenses incurred by the Company for its Phase III clinical trial for trospium
which commenced in September 2001, the initial fee for the license of CT-3 from
Atlantic, and expenses for the Phase I clinical trial for dersalazine, partially
offset by decreased expenses relating to PRO 2000 and IP 501. Additionally, the
nine month period ended June 30, 2002 included noncash expense related to a
stock option grant and modification of a stock option grant to an executive
officer of the Company. Total research and development expenses for the three
month period ended June 30, 2002 substantially relate to the Company's major
compounds currently being developed as follows: trospium $3,120,000, dersalazine
$330,000 and PRO 2000 $141,000.
General and administrative expense decreased $613,000, or 26%, to
$1,724,000 in the three month period ended June 30, 2002 from $2,337,000 in the
three month period ended June 30, 2001 and decreased $128,000, or 2%, to
$5,907,000 in the nine month period ended June 30, 2002 from $6,035,000 in the
nine month period ended June 30, 2001. The decrease in expenses in the three
month period is primarily due to reduced noncash expense related to stock
options granted to consultants to the company in lieu of cash compensation. The
decrease in expenses in the nine month period is primarily due to the absence in
fiscal 2002 of expense related to the Company's lawsuit against American Home
Products Corp. (now "Wyeth") which was dismissed in 2001 pursuant to the
Company's indemnification agreement with Wyeth (the "AHP Indemnity and Release
Agreement") and reduced noncash expense related to stock options granted to
consultants to the company in lieu of cash compensation substantially offset by
noncash expense related to modifications of stock option grants to a director
and executive officers of the Company.
As a result of the AHP Indemnity and Release Agreement in the third quarter
of fiscal 2001, the Company reversed approximately $8,041,000 of certain
liabilities related to the market withdrawal of Redux in the three month period
ended June 30, 2001 and reflected the reversal as a credit in product withdrawal
in the Company's statements of operations. This credit was offset by a noncash
charge of $561,000 for the fair value of stock options granted to attorneys
involved in negotiating the AHP Indemnity and Release Agreement, resulting in a
net credit of $7,480,000 in product withdrawal for the three month period ended
June 30, 2001. Product withdrawal for the nine month period ended June 30, 2001
was a credit of $8,089,000 and additionally included $618,000 of insurance
reimbursements for other Redux-related expenses.
Investment income decreased $171,000, or 42%, to $234,000 in the three
month period ended June 30, 2002 from $405,000 in the three month period ended
June 30, 2001 and decreased $718,000, or 49%, to $760,000 in the nine month
period ended June 30, 2002 from $1,478,000 in the nine month period ended June
30, 2001. Despite higher average invested cash balances, these decreases
resulted from substantially reduced market interest rates for the fiscal 2002
periods compared to the fiscal 2001 periods.
11
Impairment of equity securities of $487,000 in the three and nine month
periods ended June 30, 2002 reflects the write down of the Company's investment
in Incara, Inc. ("Incara") to fair value as the decline in Incara common stock
was deemed other than temporary.
The charge for the cumulative effect of the change in accounting principle
of $10,000,000 in the nine month period ended June 30, 2001 is related to the
Company's adoption in fiscal 2001 of the SEC's Staff Accounting Bulletin No. 101
"Revenue Recognition in Financial Statements."
For the three month period ended June 30, 2002, the Company had a net loss
of $(6,015,000), or $(0.13) per share, diluted, compared to net income of
$4,300,000, or $0.09 per share, diluted, for the three month period ended June
30, 2001. For the nine month period ended June 30, 2002, the Company had a net
loss of $(12,769,000), or $(0.28) per share, diluted, compared to a net loss of
$(9,442,000), or $(0.21) per share, diluted, for the nine month period ended
June 30, 2001. The Company expects to report losses for its consolidated
operations for fiscal 2002.
Liquidity and Capital Resources
Cash, Cash Equivalents and Marketable Securities
At June 30, 2002, the Company had consolidated cash, cash equivalents and
marketable securities of $46,443,000 compared to $32,171,000 at September 30,
2001. This increase of $14,272,000 is primarily due to receipt of approximately
$23,307,000 of net proceeds from the Company's December 2001 private placement
of 3,125,000 shares of Common Stock, offset primarily by $9,730,000 of cash used
in operating activities.
The Company believes it has sufficient cash for currently planned
expenditures for at least the next twelve months. Based on certain assumptions
relating to operations and other factors, the Company may require additional
funds after such time. The Company does not currently have sufficient funds to
fully develop and commercialize any of its current products and product
candidates and will require additional funds or corporate collaborations for the
development and commercialization of its compounds in development, as well as
any new businesses, products or technologies acquired or developed in the
future. The Company has no commitments to obtain such funds. There can be no
assurance that the Company will be able to obtain additional financing to
satisfy future cash requirements or that any financing will be available on
terms favorable or acceptable, or at all.
Product Development
The Company expects to continue to expend substantial additional amounts
for the development of its products. In particular, the Company expects to
expend a substantial amount during the next twelve months to fund development,
including its ongoing Phase III clinical trial, regulatory and pre-marketing
activities, for trospium. There can be no assurance that results of any ongoing
or future pre-clinical or clinical trials will be successful, that additional
trials will not be required, that any drug or product under development will
receive U.S. Food and Drug Administration ("FDA") approval in a timely manner or
at all, or that such drug or product could be successfully manufactured in
accordance with current Good Manufacturing Practices ("cGMP") or successfully
marketed in a timely manner, or at all, or that the Company will have sufficient
funds to develop or commercialize any of its products.
In particular, if the Company's Phase III clinical trial for trospium is
not successful, it could have a material adverse effect on the Company.
Additionally, the Company expects to rely on Madaus to manufacture trospium for
commercial use. The Company believes that Madaus' manufacturing facility for
trospium does not currently meet cGMP requirements. Although Madaus is
endeavoring to bring its manufacturing facility into compliance with cGMP,
failure to do so in a timely manner could cause a material delay in the NDA
submission, FDA approval, if any, and commercialization of trospium. While the
Company may seek a second source for trospium if Madaus is unable to meet all
regulatory requirements or provide the necessary quantities of trospium in a
timely manner, this could also cause a material delay in the NDA submission, FDA
approval, if any, and commercialization of trospium.
Total research and development expenses incurred by the Company through
June 30, 2002 on the major compounds currently being developed, except
pagoclone, including allocation of corporate general and administrative
expenses, are approximately as follows: trospium $21,700,000, PRO 2000
$6,100,000, and dersalazine $1,300,000. On June 7, 2002, the Company re-aquired
rights to pagoclone from Pfizer. Since December 1999, Pfizer and Warner Lambert
and Company have conducted and funded all development activities for pagoclone.
The Company's expenses, including allocation of corporate general and
administrative expenses, for pagoclone are approximately $14,700,000. Estimating
costs and time to complete development of a compound is difficult due to the
uncertainties of the development process and the requirements of the FDA which
could necessitate additional and unexpected clinical trials or other
development, testing and analysis. Results of any testing could result in a
decision to alter or terminate development of a compound, in which case
estimated future costs could change substantially. Certain compounds could
benefit from subsidies, grants or government- or agency-sponsored studies that
could reduce the Company's development costs. In the event the Company were to
enter into a licensing or other collaborative agreement with a corporate partner
involving sharing,
12
funding or assumption by such corporate partner of development costs, the
estimated development costs incurred by the Company could be substantially less
than the estimates below. Additionally, research and development costs are
extremely difficult to estimate for early-stage compounds due to the fact that
there is generally less comprehensive data available for such compounds to
determine the development activities that would be required prior to the filing
of an NDA. Given these uncertainties and other risks, variables and
considerations related to each compound and regulatory uncertainties in general,
the Company estimates remaining research and development costs, excluding
allocation of corporate general and administrative expenses, through the
preparation of an NDA for its major compounds currently being developed as
follows: approximately $7,000,000 for trospium, approximately $15,000,000 for
PRO 2000 and approximately $38,000,000 for dersalazine. The Company is currently
planning for the further development of pagoclone but is unable to estimate the
future development costs for pagoclone at this time. The Company cannot
reasonably estimate date of completion for any compound that is not at least in
Phase III clinical development due to the uncertainty of the number of required
trials and size of such trials and the duration of development. If the Company's
ongoing Phase III trial for trospium is successful, the Company plans to file an
NDA for the compound as soon as practicable thereafter. Actual costs and time to
complete may differ significantly from the estimates.
Analysis of Cash Flows
Cash used in operating activities during fiscal 2002 of $9,730,000
consisted primarily of the net loss of $12,769,000 offset by noncash
compensation related to stock option grants and modifications of stock options.
Cash used in investing activities in fiscal 2002 of $16,140,000 consisted
primarily of net outflows from purchases of marketable securities.
Cash provided by financing activities in fiscal 2002 of $23,997,000
consisted primarily of net proceeds from the Company's December 2001 private
placement of 3,125,000 shares of its Common Stock.
Insurance Claim Receivable
As of June 30, 2002, the Company had an outstanding insurance claim of
approximately $3,693,000, which the Company paid through June 30, 2002 to the
group of law firms defending the Company in the Redux-related product liability
litigation, for services rendered by such law firms through May 30, 2001. The
full amount of the Company's current outstanding insurance claim is made
pursuant to the Company's product liability policy issued to the Company by
Reliance Insurance Company ("Reliance").
In October 2001, the Commonwealth Court of Pennsylvania granted an Order of
Liquidation to the Insurance Commissioner of Pennsylvania to begin liquidation
proceedings against Reliance. Based upon discussions with the Company's
attorneys and other consultants regarding the amount and timing of potential
collection of its claim against Reliance, the Company reduced the balance to an
estimated net realizable value of $1,258,000 reflecting the Company's best
estimate given the available facts and circumstances. The amount the Company
collects could differ from the $1,258,000 reflected as a noncurrent insurance
claim receivable at June 30, 2002. There can be no assurance that the Company
will collect any of the $3,692,000 claim. If the Company incurs additional
product liability defense and other costs within the remaining limits of the
$5,000,000 Reliance product liability policy, the Company will have to pay such
costs without expectation of reimbursement and will incur charges to operations
for all or a portion of such payments.
Commitments and Contingencies
Below are the Company's future minimum payments under non-cancellable lease
arrangements as of September 30, 2001:
Operating
Fiscal Year Leases
----------- ----------
2002 .................... $ 470,000
2003 .................... 534,000
2004 .................... 536,000
2005 .................... 553,000
2006 .................... 568,000
Thereafter ............... 313,000
-------------
Total lease payments ..... $2,974,000
13
Other
Recent Accounting Pronouncements: In June 2001, the FASB issued SFAS No.
141, "Business Combinations" ("SFAS No. 141") and SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires that all
business combinations be accounted for under the purchase method only and that
certain acquired intangible assets in a business combination be recognized as
assets apart from goodwill. SFAS No. 142 requires that ratable amortization of
goodwill be replaced with periodic tests of the goodwill's impairment and that
intangible assets other than goodwill be amortized over their useful lives. SFAS
No. 141 is effective for all business combinations initiated after June 30, 2001
and for all business combinations accounted for by the purchase method for which
the date of acquisition is after June 30, 2001. The provisions of SFAS No. 142
are effective for fiscal years beginning after December 15, 2001, and will thus
be adopted by the Company as required, in fiscal year 2003. The Company does not
expect the adoption of SFAS No. 141 and SFAS No. 142 to have a material effect
on the Company's financial condition or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of", and provides a single
accounting model for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. The provisions of SFAS No. 144 are
effective for fiscal years beginning after December 15, 2001, and, generally,
its provisions are to be applied prospectively and will thus be adopted by the
Company in fical year 2003. The Company does not expect SFAS No. 144 will have a
material effect on its financial position or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
------------------------------------------------------------------
Indevus owns financial instruments that are sensitive to market risks as
part of its investment portfolio. The investment portfolio is used to preserve
Indevus' capital until it is required to fund operations, including Indevus'
research and development activities. None of these market-risk sensitive
instruments are held for trading purposes. Indevus does not own derivative
financial instruments in its investment portfolio.
Interest Rate Risk
Indevus invests its cash in a variety of financial instruments, principally
securities issued by the U.S. government and its agencies, investment grade
corporate and money market instruments. These investments are denominated in
U.S. dollars. These bonds are subject to interest rate risk, and could decline
in value if interest rates fluctuate. Indevus' investment portfolio includes
only marketable securities with active secondary or resale markets to help
ensure portfolio liquidity. Also, Indevus has implemented guidelines limiting
the duration of its investments. Due to the conservative nature of these
instruments, Indevus does not believe that it has a material exposure to
interest rate risk.
PART II. Other Information
Item 1. Legal Proceedings
--------------------------
Product Liability Litigation: Subsequent to the market withdrawal of Redux
in September 1997, the Company has been named, together with other
pharmaceutical companies, as a defendant in approximately 3,200 legal actions,
many of which purport to be class actions, in federal and state courts relating
to the use of Redux. The actions generally have been brought by individuals in
their own right or on behalf of putative classes of persons who claim to have
suffered injury or who claim that they may suffer injury in the future due to
use of one or more weight loss drugs including Pondimin (fenfluramine),
phentermine and Redux. Plaintiffs' allegations of liability are based on various
theories of recovery, including, but not limited to, product liability, strict
liability, negligence, various
14
breaches of warranty, conspiracy, fraud, misrepresentation and deceit. These
lawsuits typically allege that the short or long-term use of Pondimin and/or
Redux, independently or in combination (including the combination of Pondimin
and phentermine popularly known as "fen-phen"), causes, among other things,
primary pulmonary hypertension, valvular heart disease and/or neurological
dysfunction. In addition, some lawsuits allege emotional distress caused by the
purported increased risk of injury in the future. Plaintiffs typically seek
relief in the form of monetary damages (including economic losses, medical care
and monitoring expenses, loss of earnings and earnings capacity, other
compensatory damages and punitive damages), generally in unspecified amounts, on
behalf of the individual or the class. In addition, some actions seeking class
certification ask for certain types of purportedly equitable relief, including,
but not limited to, declaratory judgments and the establishment of a research
program or medical surveillance fund. On December 10, 1997, the federal Judicial
Panel on Multidistrict Litigation issued an Order allowing for the transfer or
potential transfer of the federal actions to the Eastern District of
Pennsylvania for coordinated or consolidated pretrial proceedings. To date,
there have been no judgments against the Company, nor has the Company paid any
amounts in settlement of any of these claims.
The Company entered into the AHP Indemnity and Release Agreement on May 30,
2001 pursuant to which Wyeth agreed to indemnify the Company against certain
classes of product liability cases filed against Indevus related to Redux. The
Company's indemnification covers existing plaintiffs who have already opted out
of Wyeth's national class action settlement of diet drug claims and claimants
alleging primary pulmonary hypertension. In addition, Wyeth has agreed to fund
all future legal costs related to the Company's defense of Redux-related product
liability cases. The agreement also provides for Wyeth to fund additional
insurance coverage to supplement the Company's existing product liability
insurance. The Company believes this total insurance coverage is sufficient to
address its potential remaining Redux product liability exposure. However, there
can be no assurance that uninsured or insufficiently insured Redux-related
claims or Redux-related claims for which the Company is not otherwise
indemnified or covered under the AHP Indemnity and Release Agreement will not
have a material adverse effect on the Company's future business, results of
operations or financial condition or that the potential of any such claims would
not adversely affect the Company's ability to obtain sufficient financing to
fund operations. Up to the date of the AHP Indemnity and Release Agreement, the
Company's defense costs were paid by, or subject to reimbursement to the Company
from, the Company's product liability insurers. To date, there have been no
Redux-related product liability settlements or judgments paid by the Company or
its insurers. In exchange for the indemnification, defense costs, and insurance
coverage provided to Indevus by Wyeth, the Company agreed to dismiss its suit
against Wyeth filed in January 2000, its appeal from the order approving Wyeth's
national class action settlement of diet drug claims, and its cross-claims
against Wyeth related to Redux product liability legal actions.
Insurance Litigation: On August 7, 2001, Columbia Casualty Company, one of
the Company's insurers for the period May 1997 through May 1998, filed an action
in the United States District Court for the District of Columbia against the
Company. The lawsuit has been transferred to the U.S. District Court for the
District of Massachusetts. The lawsuit is based upon a claim for breach of
contract and declaratory judgment, seeking damages against the Company in excess
of $20,000,000, the amount that the plaintiff has paid to the Company under its
insurance policy. The plaintiff alleges that under the policy it was subrogated
to any claim for indemnification that Indevus may have had against Wyeth related
to Redux and that such claim was compromised without its consent when the
Company entered into the AHP Indemnity and Release Agreement. The Company is
vigorously defending this litigation.
General: Pursuant to agreements between the parties and related to the
diet-drug litigation, under certain circumstances, the Company may be required
to indemnify Les Laboratoires Servier, Boehringer Ingelheim Pharmaceuticals,
Inc. and other parties.
Although the Company maintains certain product liability and director and
officer liability insurance and intends to defend these and similar actions
vigorously, the Company has been required and may continue to be required to
devote significant management time and resources to these legal actions. In the
event of successful uninsured or insufficiently insured claims, or in the event
a successful indemnification claim were made against the Company and its
officers and directors, the Company's business, financial condition and results
of operations could be materially adversely affected. The uncertainties and
costs associated with these legal actions have had, and may continue to have, an
adverse effect on the market price of the Company's Common Stock and on the
Company's ability to obtain corporate collaborations or additional financing to
satisfy cash requirements, to retain and attract qualified personnel, to develop
and commercialize products on a timely and adequate basis, to acquire rights to
additional products, or to obtain product liability insurance for other products
at costs acceptable to the Company, or at all, any or all of which may
materially adversely affect the Company's business, financial condition and
results of operations.
15
Item 6. Exhibits and Reports on Form 8-K
----------------------------------------
(a) Exhibits
10.125 License Agreement by and between Atlantic Technology Ventures,
Inc. and Indevus Pharmaceuticals, Inc. dated June 28, 2002 (1)
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by
Glenn L. Cooper, Chief Executive Officer
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by
Michael W. Rogers, Chief Financial Officer
----------------------
(1) Confidential treatment requested for a portion of this Exhibit
(b) Reports on Form 8-K
On April 8, 2002, the Company filed a current report on Form 8-K
reporting that on April 2, 2002 the Company changed its name from
Interneuron Pharmaceuticals, Inc. to Indevus Pharmaceuticals, Inc.
and effective as of April 3, 2002 the common stock of the Corporation
began trading on the Nasdaq National Market under the trading symbol
"IDEV."
On June 7, 2002, the Company filed a Current Report on Form 8-K
announcing that Pfizer Inc ("Pfizer") has elected not to pursue further
development of pagoclone and decided to return to the Company exclusive,
worldwide rights to pagoclone and that Pfizer informed the Company that
recent clinical trials with pagoclone in generalized anxiety disorder and
panic disorder did not achieve the level of efficacy established in
previous trials.
16
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.
INDEVUS PHARMACEUTICALS, INC.
Date: August 13, 2002 By: /s/ Glenn L. Cooper
-------------------------------------
Glenn L. Cooper, M.D., President,
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 2002 By: /s/ Michael W. Rogers
--------------------------------------
Michael W. Rogers, Executive Vice
President, Chief Financial Officer and
Treasurer (Principal Financial Officer)
Date: August 13, 2002 By: /s/ Dale Ritter
--------------------------------------
Dale Ritter, Senior Vice President,
Finance (Principal Accounting Officer)
17