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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ____________ to ____________.
Commission file number: 0-20772
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QUESTCOR PHARMACEUTICALS, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 33-0476164
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3260 WHIPPLE ROAD
UNION CITY, CA 94587
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 400-0700
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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 [ ]
At November 1, 2001 there were 37,312,770 shares of the Registrant's common
stock, no par value, outstanding.
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As filed November 9, 2001
1
QUESTCOR PHARMACEUTICALS, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements and Notes (Unaudited)................................................ 3
Condensed Consolidated Balance Sheets - September 30, 2001 and December 31, 2000.......... 3
Condensed Consolidated Statements of Operations - for the three months and nine
months ended September 30, 2001 and 2000............................................... 4
Condensed Consolidated Statements of Cash Flows - for the nine months ended
September 30, 2001 and 2000............................................................ 5
Notes to Condensed Consolidated Financial Statements...................................... 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations..... 9
Item 3 Quantitative and Qualitative Disclosures about Market Risk................................ 12
PART II. OTHER INFORMATION
Item 1 Legal Proceedings......................................................................... 13
Item 2 Changes in Securities and Use of Proceeds................................................. 13
Item 3 Defaults upon Senior Securities........................................................... 13
Item 4 Submission of Matters to a Vote of Security Holders....................................... 13
Item 5 Other Information......................................................................... 13
Item 6 Exhibits and Reports ..................................................................... 13
Signatures................................................................................ 14
2
QUESTCOR PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED) (NOTE 1)
ASSETS
Current assets:
Cash and cash equivalents (which includes a compensating balance
of $5,000) ......................................................... $ 9,290 $ 6,818
Short-term investments ............................................... 417 1,333
Accounts receivable, net of allowance for doubtful accounts of $107
at September 30, 2001 and $56 at December 31, 2000 ................. 858 172
Inventories .......................................................... 100 56
Prepaid expenses and other current assets ............................ 308 499
-------- --------
Total current assets .......................................... 10,973 8,878
Property and equipment ................................................. 1,082 1,427
Goodwill and other intangibles, net .................................... 2,140 3,357
Other assets ........................................................... 1,163 1,307
-------- --------
Total assets .................................................. $ 15,358 $ 14,969
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................................... $ 1,001 $ 476
Accrued compensation ................................................. 490 392
Accrued development costs ............................................ -- 541
Other accrued liabilities ............................................ 957 798
Short-term debt and current portion of long-term debt ................ 5,419 5,382
Current portion of capital lease obligations ......................... 56 88
-------- --------
Total current liabilities ..................................... 7,923 7,677
Long-term debt ......................................................... 212 489
Capital lease obligations .............................................. 16 59
Other non-current liabilities .......................................... 799 736
Commitments
Preferred stock, subject to redemption ................................. 5,081 5,081
Stockholders' equity:
Common stock ......................................................... 73,077 66,152
Deferred compensation ................................................ (47) (71)
Accumulated deficit .................................................. (71,617) (65,486)
Accumulated other comprehensive income (loss) ........................ (86) 332
-------- --------
Total stockholders' equity .................................... 1,327 927
-------- --------
Total liabilities and stockholders' equity .................... $ 15,358 $ 14,969
======== ========
See accompanying notes.
3
QUESTCOR PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenues:
Net product sales ...................... $ 1,258 $ 559 $ 2,930 $ 1,581
Technology revenue ..................... -- 1,250 90 1,250
Contract research and grant revenue .... 59 -- 341 207
Royalty revenue ........................ 4 -- 9 12
-------- -------- -------- --------
Total revenues ........................... 1,321 1,809 3,370 3,050
Operating costs and expenses:
Cost of product sales .................. 369 546 1,008 1,592
Sales and marketing .................... 738 468 2,216 1,639
General and administrative ............. 1,293 1,490 3,150 4,426
Research and development ............... 639 639 2,176 4,609
Depreciation and amortization .......... 547 949 1,659 2,042
-------- -------- -------- --------
Total operating costs and
expenses ....................... 3,586 4,092 10,209 14,308
-------- -------- -------- --------
Loss from operations ..................... (2,265) (2,283) (6,839) (11,258)
Interest and other income (expense), net . (34) 37 18 102
Rental income, net ....................... 38 280 690 192
-------- -------- -------- --------
Net loss ................................. $ (2,261) $ (1,966) $ (6,131) $(10,964)
======== ======== ======== ========
Net loss per common share:
Basic and diluted ........................ $ (0.07) $ (0.08) $ (0.21) $ (0.44)
======== ======== ======== ========
Weighted average shares of common
stock outstanding ...................... 34,566 24,771 29,438 24,705
======== ======== ======== ========
See accompanying notes.
4
QUESTCOR PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
NINE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
------------- -------------
OPERATING ACTIVITIES
Net loss ................................................... $(6,131) $(10,964)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred compensation .................... 24 77
Depreciation and amortization ............................ 1,658 2,030
Deferred rent expense .................................... 78 171
Loss on the disposal of equipment ........................ 50 20
Non cash gain on sale of technology ...................... -- (500)
Changes in operating assets and liabilities:
Accounts receivable ...................................... (686) 1,641
Inventories .............................................. (44) 26
Prepaid expenses and other current assets ................ 191 (206)
Accounts payable ......................................... 525 (2,064)
Accrued compensation and employee benefits ............... 98 (1,402)
Deferred revenue ......................................... -- (45)
Accrued development costs ................................ (541) (346)
Other accrued liabilities ................................ 159 486
Other non-current liabilities ............................ (16) --
------- --------
Net cash flows used in operating activities ................ (4,635) (11,076)
------- --------
INVESTING ACTIVITIES
Proceeds from the maturity of short-term investments, net .. 499 7,298
Proceeds from sale of equipment ............................ 37 --
Purchase of property and equipment ......................... (183) (30)
Decrease in other assets ................................... 144 4
------- --------
Net cash flows provided by investing activities ............ 497 7,272
------- --------
FINANCING ACTIVITIES
Issuance of common stock, net .............................. 6,925 637
Repayment of long-term debt ................................ (240) (302)
Repayments of capital lease obligations .................... (75) (180)
------- --------
Net cash flows provided by financing activities ............ 6,610 155
------- --------
Increase (decrease) in cash and cash equivalents ........... 2,472 (3,649)
Cash and cash equivalents at beginning of period ........... 6,818 10,912
------- --------
Cash and cash equivalents at end of period ................. $ 9,290 $ 7,263
======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest ..................................... $ 359 $ 513
======= ========
See accompanying notes.
5
QUESTCOR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Questcor Pharmaceuticals, Inc. (the "Company") have been prepared in accordance
with generally accepted accounting principles and applicable Securities and
Exchange Commission regulations for interim financial information. These
financial statements do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The unaudited financial statements should be read in conjunction
with the audited financial statements and related footnotes included in the
Company's Annual Report on Form 10-K/A for the year ended December 31, 2000, as
filed on April 30, 2001 with the Securities and Exchange Commission. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for fair presentation of interim financial
information have been included. Operating results for the interim periods
presented are not necessarily indicative of the results that may be expected for
the year ending December 31, 2001.
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
2. MATTERS AFFECTING ONGOING OPERATIONS
In May 2000, the Company's sole customer for its Neoflo(TM) product, NutraMax
Products, Inc., filed a voluntary petition under Chapter 11 of the U.S.
Bankruptcy Code. The NutraMax bankruptcy filing had a negative impact on the
Company's sales and cash flow during calendar year 2000 and first quarter 2001.
On April 2, 2001, the U.S. Bankruptcy Court granted NutraMax a motion to
terminate the Company's supply agreement effective that date. In May 2001, the
Company closed its Lee's Summit manufacturing facility where the NutraMax
product was being produced and is currently in negotiations for the sale of the
NeoFlo(TM) product and related assets. Assuming the successful completion of
these negotiations at the proposed terms, the Company expects that no loss will
be incurred on the disposition of these assets.
The Company has experienced recurring operating losses since inception. From
inception to September 30, 2001, the Company incurred cumulative net losses of
approximately $71.6 million. The Company had cash and cash equivalents at
September 30, 2001 of $9.3 million (including a compensating balance of $5
million, see Note 6).
While historical losses have been significant, the Company expects that based
upon funds received from equity financings together with expected sales from its
marketed products, it will have sufficient capital to fund its operating
requirements through the end of 2002. If the Company's sales forecasts are not
met, and the Company does not receive additional funding, the existing capital
will not be sufficient to fund its operating requirements through the end of
2002.
3. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers highly liquid investments with maturities from the date
of purchase of three months or less to be cash equivalents. At September 30,
2001, the Company had cash, cash equivalents and short-term investments of
$9,707,000, (including a compensating balance of $5,000,000, see Note 6).
The Company determines the appropriate classification of investment
securities at the time of purchase and reaffirms such designation as of each
balance sheet date. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, if any, reported in a separate component
of stockholders' equity. The cost of securities sold is based on the specific
identification method. Realized gains and losses, if any, are included in the
statement of operations, in interest and other income, net.
4. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and at September 30, 2001 are comprised of finished goods of $100,000.
6
5. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
companies to recognize all derivatives as either assets or liabilities on the
balance sheet and measure those instruments at fair value. The Company's
adoption of SFAS 133 as of January 1, 2001, did not have a material impact on
its financial statements.
In July 2001, the Financial Accounting Standards Board issued Statement No.
141, Business Combinations ("SFAS 141") and Statement No. 142, Goodwill and
Other Intangible Assets ("SFAS 142"). SFAS 141 establishes new standards for
accounting and reporting for business combinations and will require that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Use of the pooling-of-interests method will be prohibited.
SFAS 142 establishes new standards for goodwill, including the elimination of
goodwill amortization to be replaced with methods of periodically evaluating
goodwill for impairment. The Company will adopt these statements during the
first quarter of fiscal 2002. The Company is currently evaluating the provisions
of SFAS 141 and 142 related to $617,000 of unamortized goodwill and workforce at
September 30, 2001.
6. NOTE PAYABLE
In December 1998, RiboGene borrowed $5.0 million pursuant to a long-term note
payable to a bank. The note requires monthly interest only payments at prime
plus 1.0%. The rate at September 30, 2001 was 7.0 %. In November 2000, the $5.0
million long-term note payable was converted into a $5.0 million cash secured
facility. The minimum $5.0 million compensatory balance, which is invested in a
certificate of deposit, is included in cash and cash equivalents. The principal
is due March 24, 2002 at which time the Company intends to pay the note in full.
7. NET LOSS PER SHARE
Under SFAS No. 128, Earnings Per Share, basic and diluted loss per share is
based on net loss for the relevant period, divided by the weighted average
number of common shares outstanding during the period. Diluted earnings per
share gives effect to all potential dilutive common shares outstanding during
the period such as options, warrants, convertible preferred stock, and
contingently issuable shares. Diluted net loss per share has not been presented
separately as, due to the Company's net loss position, it is anti-dilutive. Had
the Company been in a net income position at September 30, 2001, shares used in
calculating diluted earnings per share would have included the dilutive effect
of an additional 6,450,437 stock options, 2,155,715 convertible preferred
shares, placement unit options for 986,898 shares and warrants to purchase
1,395,149 shares of common stock.
8. STOCK, STOCK OPTIONS AND WARRANTS
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company has elected
to account for stock options and purchase rights granted to employees using the
intrinsic value method and, accordingly, does not recognize compensation expense
for options and purchase rights granted to employees with exercise prices which
are not less than fair value of the underlying common stock.
For equity awards to non-employees, including lenders and lessors, the
Company applies the Black-Scholes method to determine the fair value of such
instruments. The fair value of awards that vest over a performance period are
periodically revalued over their term and recognized as expense over the period
of services received.
On April 12, 2001, the Company issued and sold to Sigma-Tau Finance Holding
S.A. ("Sigma-Tau") an aggregate of 2,873,563 shares of Company common stock. The
purchase price was $0.522 per share, for an aggregate purchase price of $1.5
million. The Company also sold a warrant to Sigma-Tau to purchase an additional
2,873,563 shares of the Company's common stock. The purchase price of the
warrant was $100,000. On July 30, 2001, Sigma-Tau assigned and transferred the
warrant to purchase 2,873,563 shares of the Company's common stock to certain
majority shareholders of Sigma-Tau (the "Assignees"). On July 30, 2001, the
Assignees exercised the warrant in full to purchase these common stock shares
for an aggregate purchase price of $1.4 million. On July 31, 2001, in a separate
transaction, the Company sold an additional 5,279,034 shares of common stock at
$0.663 per share to Sigma-Tau for a total purchase price of $3.5 million. Based
upon SEC filings, Sigma-Tau and its affiliates now own approximately 28% of the
voting power of the Company's issued and outstanding capital stock.
7
On April 30, 2001, the Company closed a financing which totaled $442,000.
This investment came from a group of individual investors. The Company issued an
aggregate of 816,800 shares of common stock and sold warrants to purchase an
additional 408,400 shares of common stock with an exercise price of these
warrants of $0.64 per share. The warrants are exercisable through April 30,
2006.
9. SALE OF TECHNOLOGY
In February 2001, the Company announced that it had exclusively licensed
certain antifungal drug research technology to Tularik, Inc. In exchange, the
Company received an upfront cash payment, reimbursement of patent expenses and
is entitled to future potential milestone and royalty payments. In addition, the
Company has transferred to Tularik certain biological and chemical reagents to
be used in the discovery and development of novel antifungal agents.
10. PRODUCT ACQUISITION
On July 31, 2001, the Company announced that it had signed an Asset Purchase
agreement with Aventis Pharmaceuticals Inc. ("Aventis") to acquire the worldwide
rights to HP Acthar(R) Gel ("Acthar") as well as inventory and certain assets
used to manufacture Acthar. Acthar is a corticotropin product that has been
used, as part of a special program administered by the National Organization for
Rare Disorders (NORD), to treat seriously ill children with a seizure complex,
referred to as West Syndrome or infantile spasm, a potentially fatal disorder,
and patients with multiple sclerosis who experience severe and painful episodes
of "flare". The Company paid an upfront fee, has agreed to pay an annual royalty
on net sales above a predetermined amount and has agreed to acquire certain
remaining inventory at a predetermined price. Aventis has also agreed to supply
Acthar at the predetermined price until the earlier of the transfer of the
manufacturing process to another vendor or July 27, 2002.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, this discussion
contains forward-looking statements that involve risks and uncertainties. Such
statements are subject to certain factors, which may cause our results to
differ. Factors that may cause such differences include, but are not limited to,
our need for additional funding, our ability to obtain sufficient quantities of
product from third party manufacturers, uncertainties regarding our intellectual
property and other research, development, marketing and regulatory risks, and,
our ability to implement our strategy and acquire products and, if acquired, to
market them successfully, as well as the risks discussed in our annual report on
Form 10-K/A for the fiscal year ended December 31, 2000 and other documents
filed with the Securities and Exchange Commission. The risk factors and other
information contained in these documents should be considered in evaluating our
prospects and future financial performance.
OVERVIEW
We are a specialty pharmaceutical company that serves the needs of the acute
care and critical care hospital markets with our proprietary products. We were
founded in 1990 as Cypros Pharmaceutical Corporation, commenced research and
development activities in 1991, completed an initial public offering (the "IPO")
in November 1992, acquired two FDA approved products, Glofil(TM)-125 and Inulin,
in August 1995, and acquired a third FDA approved product, Ethamolin(R), in
November 1996. On November 17, 1999, Cypros merged with RiboGene, Inc. to form
Questcor Pharmaceuticals, Inc. In July 2001, we acquired HP Acthar(R) Gel, a
marketed product used to treat neurological and autoimmune disorders. We have
sustained an accumulated deficit of $71.6 million from inception through
September 30, 2001. While these historical losses are significant, based upon
funds received from equity financings together with expected sales revenues from
our marketed products, we believe we will have sufficient capital to fund our
operating requirements at least through the end of 2002. If sales forecasts are
not met, and we do not receive additional funding, the existing capital will not
be sufficient to fund our operating requirements through the end of 2002.
Results of operations may vary significantly from quarter to quarter depending
on, among other factors, the results of our clinical testing, the timing of
certain expenses, the establishment of strategic alliances and corporate
partnering.
In February 2001, we announced that we had exclusively licensed certain
antifungal drug research technology to Tularik, Inc. In exchange, we received an
upfront cash payment, reimbursement of patent expenses and are entitled to
future potential milestone and royalty payments. In addition, we transferred to
Tularik certain biological and chemical reagents to be used in the discovery and
development of novel antifungal agents.
In June 2001, we signed a Letter of Understanding with Fabre Kramer
Pharmaceuticals, Inc. ("Fabre Kramer") of Houston, TX, to jointly pursue the
worldwide development and commercialization of Hypnostat(TM) (intranasal
triazolam) for insomnia and Panistat(TM) (intranasal alprazolam) for panic
disorders, two of our product candidates. The Letter of Understanding
anticipates the formation of a joint venture, with funding of all joint venture
development costs by Fabre Kramer.
In July 2001, we signed an agreement with Aventis Pharmaceuticals Inc. to
acquire the worldwide rights to HP Acthar(R) Gel ("Acthar"). Acthar is a
corticotropin product that has been used, as part of a special program
administered by the National Organization for Rare Disorders (NORD), to treat
seriously ill children with a seizure complex, referred to as West Syndrome or
infantile spasm, a potentially fatal disorder, and patients with multiple
sclerosis who experience severe and painful episodes of "flare". In September
2001 we began shipments of Acthar.
RESULTS OF OPERATIONS
Three months ended September 30, 2001 compared with the three months ended
September 30, 2000:
During the third quarter ended September 30, 2001, we incurred a net loss of
$2,261,000 (or $0.07 per share) compared with a loss of $ 1,966,000 (or $0.08
per share) for the quarter ended September 30, 2000.
During the quarter ended September 30, 2001 product revenue increased 125% to
$1,258,000 from $559,000 over the comparable quarter ended September 30, 2000.
The increase was due in part to higher sales of existing products (Ethamolin(R),
Glofil(TM)-125 and Inulin) and the introduction of Acthar in September 2001,
offset by a decrease in revenue from Neoflo which was discontinued in April
2001.
9
Total revenues of $1,321,000 for the quarter ended September 30, 2001
decreased 27% from the $1,809,000 reported in the comparable period in the prior
year principally due to the inclusion of a one-time technology fee of $1,250,000
for the sale of our antiviral research to Rigel Pharmaceuticals, Inc., in the
quarter ended September 2000.
Cost of product sales decreased to $369,000 during the quarter ended
September 30, 2001 versus $546,000 in the comparable quarter ended September 30,
2000. These costs decreased while product sales increased by 125% due to a
reduction in overhead and material costs associated with the manufacturing of
Neoflo(TM) and improved gross margins over the comparable prior year period.
Gross margin on product sales in the quarter ended September 30, 2001 was 71% as
compared with 2% in the prior year quarter.
Sales and marketing expense increased 58% to $738,000 during the quarter
ended September 30, 2001 from $468,000 in the comparable quarter ended September
30, 2000. The increase is primarily due to salary and other costs associated
with the expansion of our sales force in late 2000 from seven to twelve sales
representatives. We do not expect sales and marketing expenses to increase
appreciably through the end of 2001 nor to increase appreciably as a percentage
of revenue in 2002.
General and administrative expense decreased 13% to $1,293,000 during the
quarter ended September 30, 2001 from $1,490,000 in the comparable quarter ended
September 30, 2000. This decrease is principally a result of lower professional
fees, insurance expense, and personnel related costs, partially offset by an
increase in legal fees incurred as the result of the acquisition of Acthar.
Research and development expense remained constant at $639,000 during the
quarter ended September 30, 2001 versus $639,000 in the comparable quarter ended
September 30, 2000. We expect to fund future clinical trials and additional
research and development from our anticipated revenues. Should our revenue
projections differ from actual results, we would expect our research and
development costs to increase or decrease accordingly.
Depreciation and amortization expense decreased 42% to $547,000 during the
quarter ended September 30, 2001 from $949,000 in the comparable quarter ended
September 30, 2000. This decrease is primarily due to an additional charge of
$303,000 to depreciation during the third quarter of 2000 in order to reflect a
change in the estimated useful life of certain laboratory and manufacturing
equipment.
Interest expense exceeded interest income by $34,000 during the quarter ended
September 30, 2001, compared with net interest income of $37,000 in the
comparable quarter ended September 30, 2000, primarily due to a lower return on
invested cash.
Net rental income decreased to $38,000 during the quarter ended September 30,
2001 from $280,000 in the comparable quarter ended September 30, 2000, primarily
due to the complete sublease of the Hayward facility, for which all related
costs are now classified in rental income.
Nine months ended September 30, 2001 compared with the nine months ended
September 30, 2000:
During the nine months ended September 30, 2001, we incurred a loss of
$6,131,000 (or $0.21 per share) compared with a loss of $10,964,000 (or $0.44
per share) for the nine months ended September 30, 2000.
During the nine months ended September 30, 2001 product revenue increased 85%
to $2,930,000 from $1,581,000 over the comparable period ended September 30,
2000. The increase was due in part to higher sales of existing products
(Ethamolin(R), Glofil(TM)-125 and Inulin) and the introduction of HP Acthar(R)
Gel in September 2001, offset by a decrease in revenue from Neoflo(TM) which was
discontinued in April 2001.
Total revenues of $3,370,000 for the nine months ended September 30, 2001
increased 10% from the $3,050,000 in the comparable period in the prior year.
This was principally due to increased product sales, partially offset by a
one-time technology fee of $1,250,000 for the sale of our antiviral research to
Rigel Pharmaceuticals, Inc. in the comparable period ended September 30, 2000.
Cost of product sales decreased 37% to $1,008,000 during the nine months
ended September 30, 2001 from $1,592,000 in the comparable period ended
September 30, 2000. These costs decreased while product sales increased by 85%
due to a reduction in overhead and material costs associated with the
manufacturing of Neoflo(TM) and improved gross margins over the comparable prior
year period. Gross margin on product sales in the nine months ended September
30, 2001 was 66%, while the cost of product sales exceeded product revenues by
$10,000 in the prior year period.
10
Sales and marketing expense increased 35% to $2,216,000 during the nine
months ended September 30, 2001 from $1,639,000 in the comparable period ended
September 30, 2000. The increase is principally due to salary and recruiting
costs associated with the expansion of the sales force from seven to twelve
sales representatives and expenses for promotional activities and related
materials.
General and administrative expense decreased 29% to $3,150,000 during the
nine months ended September 30, 2001 from $4,426,000 in the comparable period
ended September 30, 2000. This decrease is principally a result of lower
professional fees, legal fees, bad debt expense and personnel related costs. In
the nine months ended September 30, 2000, we took a charge of $175,000 for the
settlement of the A.R. Baron litigation.
Research and development expense decreased 53% to $2,176,000 during the nine
months ended September 30, 2001 from $4,609,000 in the comparable period ended
September 30, 2000. This was principally due to lower clinical and development
expenses for Emitasol(R).
Depreciation and amortization expense decreased 19% to $1,659,000 during the
nine months ended September 30, 2001 from $2,042,000 in the comparable period
ended September 30, 2000, due to an additional charge of $303,000 to
depreciation in order to reflect a change in the estimated useful life of
certain laboratory and manufacturing equipment.
Net interest and other income for the period ended September 30, 2001
decreased 83% to $18,000 from $102,000 in the prior-year period, principally due
to a lower return on invested cash, partially offset by reduced interest
expense.
Net rental income increased to $690,000 during the nine months ended
September 30, 2001 from $192,000 in the comparable period ended September 30,
2000 due to the receipt of a one-time payment for vacating our Hayward facility
and the sublease of the entire premises, commencing in May 2001. From July 2000
through April 2001, only a portion of the facility was subleased. Additionally,
during the nine months ended September 30, 2000, we incurred expenses associated
with the sublease of our Hayward facility.
LIQUIDITY AND CAPITAL RESOURCES
We have principally funded our activities to date through various issuances
of equity securities and to a lesser extent through product sales and
collaborative research efforts.
At September 30, 2001, we had cash, cash equivalents and short-term
investments of $9.7 million compared with $8.1 million at December 31, 2000,
including a compensating balance of $5.0 million in each period. At September
30, 2001, working capital was $3.1 million, compared with $1.2 million at
December 31, 2000. The increase in working capital was principally due to the
Sigma-Tau investments made in 2001. This increase was partially offset by the
loss from operations for the current year.
For the nine months ended September 30, 2001, cash used in operating
activities was $4.6 million as compared with $11.1 million for the comparable
period in 2000, a decrease of 58%. The decrease was primarily due to the net
loss from operations in 2001 improving as compared with the net loss in 2000. In
addition, in the nine months ended September 30, 2000, we also remitted payments
for accrued compensation costs resulting from the acquisition of RiboGene, Inc.
On April 12, 2001, we issued and sold to Sigma-Tau Finance Holding S.A.
("Sigma-Tau") an aggregate of 2,873,563 shares of common stock. We also sold a
warrant to Sigma-Tau to purchase an additional 2,873,563 shares of common stock.
On July 30, 2001, Sigma-Tau assigned and transferred the warrant to purchase
2,873,563 shares of our common stock to certain majority shareholders of
Sigma-Tau (the "Assignees"). On July 30, 2001, the Assignees exercised the
warrant in full. On July 31, 2001, in a separate transaction, we sold an
additional 5,279,034 shares of common stock to Sigma-Tau. The cash proceeds from
those investments total $6.5 million (see Sigma-Tau Investment).
On April 30, 2001, we closed a financing that totaled $442,000. This
investment came from a group of individual investors. We issued an aggregate of
816,800 shares of common stock and sold warrants to purchase an additional
408,400 shares of common stock with an exercise price of these warrants of $0.64
per share. The warrants are exercisable through April 30, 2006.
As a result of the merger with RiboGene, we assumed $5.0 million of long-term
debt financing with a bank. The note requires monthly interest only payments at
prime plus 1.0%. The rate at September 30, 2001 was 7.0 %. The principal is due
on March 24, 2002 at which time we intend to pay the note in full. In November
2000, the $5.0 million long-term note payable was converted into a
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$5.0 million cash secured facility. The minimum $5.0 million compensatory
balance, which is invested in a certificate of deposit, is included in cash and
cash equivalents.
We lease four buildings with lease terms ranging from three to fifteen years
and annual rent payments for 2001 are estimated to be $1,332,000. Additionally,
we have equipment lease commitments with estimated 2001 payments of $96,000. We
have subleased our Hayward research facility and laboratory equipment under a
sublease with a term of six years, representing estimated sublease revenue of
$757,000 for 2001.
Based upon funds received from equity financings together with expected sales
revenues from our marketed products, we believe we will have sufficient capital
to fund our operating requirements at least through the end of 2002. If sales
forecasts are not met, and we do not receive additional funding, the existing
capital will not be sufficient to fund our operating requirements through the
end of 2002.
Our future funding requirements will depend on many factors, including: the
timing and extent of product sales, our ability to receive product timely from
our contract manufacturers, any expansion or acceleration of our development
programs; the acquisition and licensing of products, technologies or compounds,
if any; the results of preclinical studies and clinical trials conducted by us
or our collaborative partners or licensees, if any; our ability to manage
growth; competing technological and market developments; costs involved in
filing, prosecuting, defending and enforcing patent and intellectual property
claims; the receipt of licensing or milestone fees from current or future
collaborative and license agreements, if established; the timing of regulatory
approvals; and other factors.
We may seek additional funds through public or private equity financings or
from other sources. Should this occur, there can be no assurance that additional
funds can be obtained on desirable terms or at all. We may seek to raise
additional capital whenever conditions in the financial markets are favorable,
even if we do not have an immediate need for additional cash at that time.
SIGMA-TAU INVESTMENT
On April 12, 2001, we issued and sold to Sigma-Tau an aggregate of 2,873,563
shares of common stock. The purchase price was $0.522 per share, for an
aggregate purchase price of $1.5 million. We also sold a warrant to Sigma-Tau to
purchase an additional 2,873,563 shares of common stock. The purchase price of
the warrant was $100,000. On July 30, 2001, Sigma-Tau assigned and transferred
the warrant to purchase 2,873,563 shares of our common stock to certain majority
shareholders of Sigma-Tau (the "Assignees"). On July 30, 2001, the Assignees
exercised the warrant in full to purchase these common stock shares for an
aggregate purchase price of $1.4 million. On July 31, 2001, in a separate
transaction, we sold an additional 5,279,034 shares of common stock at $0.663
per share to Sigma-Tau for a total purchase price of $3.5 million. Based upon
SEC filings, Sigma-Tau and its affiliates now own approximately 28% of the
voting power of our issued and outstanding capital stock.
HP ACTHAR(R) GEL ACQUISITION
In July 2001, we signed an Asset Purchase agreement with Aventis
Pharmaceuticals Inc. ("Aventis") to acquire the worldwide rights to HP Acthar(R)
Gel ("Acthar") as well as inventory and certain assets used to manufacture
Acthar. Acthar is a corticotropin product that has been used, as part of a
special program administered by the National Organization for Rare Disorders
(NORD), to treat seriously ill children with a seizure complex, referred to as
West Syndrome or infantile spasm, a potentially fatal disorder, and patients
with multiple sclerosis who experience severe and painful episodes of "flare".
We paid an upfront fee, agreed to pay an annual royalty on net sales above a
predetermined amount and agreed to acquire certain remaining inventory at a
predetermined price. Aventis has also agreed to supply Acthar at the
predetermined price until the earlier of the transfer of the manufacturing
process to another vendor or July 27, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk at September 30, 2001 has not changed materially
from December 31, 2000, and reference is made to the more detailed disclosures
of market risk included in our 2000 Form 10-K/A as filed with the Securities and
Exchange Commission on April 30, 2001.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
In July 1998, we granted to Roberts Pharmaceuticals (which subsequently was
acquired by Shire Pharmaceuticals Group plc) an option to acquire an exclusive
license to market Emitasol(R) in North America. That option expired in July
2001. While Shire agrees the option has expired and that the Emitasol(R) data
should be returned to Questcor, we now disagree with Shire over the scope of the
data and rights to be returned to us as a result of expiration of the option. In
addition, Shire claims that we are obligated to reimburse approximately $348,000
of development costs. We believe that we are not obligated to pay such amount.
We are no longer discussing with Shire a future collaboration on Emitasol(R),
and there may also be other disputes arising out of this relationship. We can
offer no assurance regarding the outcome of this matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
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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 hereunto duly authorized.
QUESTCOR PHARMACEUTICALS, INC.
By: /s/ Charles J. Casamento
-------------------------------------
Date: November 9, 2001 Charles J. Casamento
Chairman, President & CEO
By: /s/ Timothy E. Morris
-------------------------------------
Date: November 9, 2001 Timothy E. Morris
Principal Financial and
Chief Accounting Officer
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