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| IDEV > SEC Filings for IDEV > Form 10-Q on 12-May-2004 | All Recent SEC Filings |
12-May-2004
Quarterly Report
Statements in this Form 10-Q that are not statements or descriptions ofhistorical facts are "forward-looking" statements under Section 21E of theSecurities Exchange Act of 1934, as amended, and the Private SecuritiesLitigation Reform Act of 1995 and are subject to numerous risks anduncertainties. These and other forward-looking statements made by us in reportsthat we file with the SEC, press releases, and public statements of ourofficers, corporate spokespersons or our representatives are based on a numberof assumptions and relate to, without limitation: our ability to successfullydevelop, obtain regulatory approval for and commercialize any products,including SANCTURA; our ability to enter into corporate collaborations or toobtain sufficient additional capital to fund operations; and the Redux™-relatedlitigation. The words "believe," "expect," "anticipate," "intend," "plan,""estimate" or other expressions which predict or indicate future events andtrends and do not relate to historical matters identify forward-lookingstatements. Readers are cautioned not to place undue reliance on theseforward-looking statements as they involve risks and uncertainties and suchforward-looking statements may turn out to be wrong. Actual results could differmaterially from those currently anticipated due to a number of factors,including those set forth under "Risk
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Factors" in the Company's Post-Effective Amendment No. 3 to RegistrationStatement on Form S-3 as filed with the SEC on March 31, 2004. These factorsinclude, but are not limited to: dependence on the success of SANCTURA; theearly stage of products under development; uncertainties relating to clinicaltrials, regulatory approval and commercialization of our products, particularlySANCTURA; risks associated with contractual agreements, including theco-promotion licensing agreement related to SANCTURA; dependence on thirdparties for manufacturing and marketing; competition; need for additional fundsand corporate partners, including for the development and commercialization ofour products; failure to acquire and develop additional product candidates;history of operating losses and expectation of future losses; product liabilityand insurance uncertainties; risks relating to the Redux-related litigation;limited patents and proprietary rights; dependence on market exclusivity;valuation of our Common Stock; risks related to repayment of debts; risksrelated to increased leverage; and other risks. The forward-looking statementsrepresent our judgment and expectations as of the date of this Form 10-Q. Weassume no obligation to update any such forward-looking statements.
The following discussion should be read in conjunction with the Company'sunaudited consolidated financial statements and notes thereto appearingelsewhere in this report and audited consolidated financial statements and notesthereto included in the Company's Annual Report on Form 10-K for the fiscal yearended September 30, 2003. Unless the context indicates otherwise, "Indevus," the"Company," "we" or "us" refer to Indevus Pharmaceuticals, Inc.
Description of the Company
Indevus is a biopharmaceutical company engaged in the development andcommercialization of a diversified portfolio of product candidates, includingmultiple compounds in late-stage clinical development. We currently have rightsto six compounds in development: SANCTURA for overactive bladder, pagoclone forpanic and generalized anxiety disorders, IP 751 for pain and inflammatorydisorders, PRO 2000 for the prevention of infection by HIV and other sexuallytransmitted pathogens, aminocandin for treatment of systemic fungal infectionsand citicoline for ischemic stroke.
Recent Product Developments
SANCTURA
Effective April 6, 2004, the Company entered into the Pliva Agreement for theU.S. commercialization of SANCTURA under review by the FDA as a treatment foroveractive bladder. The Company granted Pliva an exclusive right and license toco-promote and sell SANCTURA in the United States. The Pliva Agreement providesfor payments to Indevus from Pliva that include $30 million received uponsigning and $120 million due no later than FDA approval of SANCTURA twice daily.In addition, Indevus could receive up to $45 million in future paymentscontingent upon the achievement of certain milestones related to the developmentof a once-a-day formulation of SANCTURA, as well as a payment of $20 millionrelated to the achievement of a long-term commercialization milestone in 2013.
For at least six months following the approval of SANCTURA, Indevus will receivea commission based on net sales of SANCTURA, which may be adjusted forsettlement of the aggregate promotion and advertising costs incurred. Duringthis period, Indevus will be responsible for funding its own sales force andcertain advertising and promotional costs. Pliva and Indevus will co-promoteSANCTURA through a joint sales force of approximately 500 sales representatives.Indevus will establish a sales force initially numbering approximately 280representatives who will promote SANCTURA to urology specialists, obstetriciansand gynecologists, and certain primary care physicians.
At any time beginning six months after the approval of SANCTURA, each companyhas the right to convert the Pliva Agreement into a royalty-bearing structure,whereby Indevus will receive royalties from Pliva based on net sales ofSANCTURA, and Pliva will be responsible for promotional and advertising costs.Should this right be exercised, Indevus will retain a specialty sales force,subsidized by Pliva, which will promote SANCTURA to urology specialists,obstetricians and gynecologists, and high prescribers.
Under the Pliva Agreement, Indevus will be responsible for funding thedevelopment of the once-a-day formulation of SANCTURA. The Company isresponsible for the manufacture of SANCTURA and will sell it to Pliva at cost.Pliva will be responsible for product inventory management and sales orderfulfillment including billing and collecting of customer receivables. The PlivaAgreement is subject to termination by Pliva under certain circumstances. Underthe Pliva Agreement, Indevus granted a security interest to Pliva in Indevus'rights relating to FDA rights in SANCTURA and agreed to Indemnify Pliva undercertain circumstances. The Pliva Agreement is filed as an exhibit to our Form8-K dated April 7, 2004.
We expect to record revenue pursuant to the Pliva Agreement as follows: (i) theinitial payment will be amortized into revenue over the expected duration of thePliva Agreement and future potential milestone payments will be amortized overthe remaining expected duration of the Pliva Agreement commencing at the timethe milestone was earned, (ii) for at least the first six months following theapproval of SANCTURA and prior to the conversion of the Pliva Agreement into aroyalty-bearing structure, commissions earned
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on net sales of SANCTURA and reimbursement of promotion and advertising expensesincurred by us during the co-promotion period will be reflected as revenue, netof our share of the promotion and advertising expenses incurred by Pliva, (iii)subsequent to the conversion of the Pliva Agreement into a royalty-bearingstructure royalties on net sales of SANCTURA and the sales force subsidy will berecorded as revenue when earned, and (iv) sales of SANCTURA to Pliva will bereflected as revenue upon shipment.
We submitted the New Drug Application ("NDA") for SANCTURA for overactivebladder on April 28, 2003. Pursuant to the NDA, the SANCTURA finished productwill be manufactured by our licensor, Madaus AG ("Madaus"), at theirmanufacturing facility in Germany. We continue to work with Madaus to producelaunch quantities of SANCTURA.
We submitted a second study to assess the effect of SANCTURA on the QT intervalof cardiac muscle contractility in February, 2004. Although a prior QT study,completed in 2001 and designed with the current standard at that time,demonstrated no effect of SANCTURA on the QT interval, we decided to perform asecond QT study based on a new standard recommended by the FDA for all drugs inthe pharmacological class to which SANCTURA belongs, as well as for most newdrugs. Our second trial also concluded that SANCTURA has no significant effecton the QT interval. As a result of the submission of our new QT study, wereceived a letter on February 12, 2004, from the FDA establishing a 90-dayextension to the original Prescription Drug User Fee Act (PDUFA) action date ofFebruary 27, 2004, moving that date to May 28, 2004.
We have also recently completed a successful trial designed to explore furthercertain attributes of SANCTURA. The 12-week, placebo-controlled trial enrolled658 patients at 52 sites in the U.S. Preliminary results show that the trial metall of its primary and secondary endpoints with a high degree of statisticalsignificance, including a reduction in both micturitions (urinations) andurinary incontinence episodes among patients treated with SANCTURA versusplacebo. In particular, the study confirmed a rapid onset of action within oneweek of therapy and a significant reduction in urge severity. The most frequentside effects seen in the trial were the common anti-cholinergic side effects ofdry mouth and constipation, with results consistent with our previous studies.We hope to use these findings in discussions with the FDA to support proposedstatements in the product label which may help reinforce SANCTURA's position inthe marketplace. We also intend to submit the results of the study forpresentation in scientific forums and publication in peer-reviewed journals.
Aminocandin
In February 2004, we initiated a Phase I clinical trial with aminocandin to testthe safety and tolerability of escalating single doses of aminocandinadministered in healthy volunteers. Results of the trial are expected in thesecond half of 2004.
Citicoline
Effective January 22, 2004, we entered into a new agreement with Ferrer coveringthe development, manufacture, and marketing of citicoline in the U.S. andCanada. Under the terms of the new agreement, we have granted Ferrer exclusiverights to our patents and know-how related to citicoline. In exchange, Ferreragreed to assume all future development, manufacturing, and commercializationcosts of citicoline. Indevus will receive 50% of all milestone payments made toFerrer by a third party and royalties on net sales of the product. This newagreement allows Indevus to retain significant participation in the futureeconomics of citicoline, should the product be approved and marketed in the U.S.and Canada, without incurring any further costs.
Significant Judgments and Estimates
The discussion and analysis of our financial condition and results of operationsis based upon our consolidated financial statements that have been prepared inaccordance with generally accepted accounting principles in the U.S. Thepreparation of these financial statements requires us to make certain estimatesand assumptions that affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of revenue and expense during thereported periods. These items are constantly monitored and analyzed bymanagement for changes in facts and circumstances, and material changes in theseestimates could occur in the future. Changes in estimates are recorded in theperiod in which they become known. We base our estimates on historicalexperience and various other assumptions that we believe to be reasonable underthe circumstances. Actual results may differ from our estimates if pastexperience or other assumptions do not turn out to be substantially accurate.
Insurance Claim Receivable
As of March 31, 2004, we had an outstanding insurance claim of approximately$3,700,000, for services rendered through May 30, 2001 by the group of law firmsdefending us in the Redux-related product liability litigation. The full amountof our current outstanding insurance claim is made pursuant to our productliability policy issued to us by Reliance Insurance Company
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("Reliance"), which is in liquidation proceedings. Based upon discussions withour attorneys and other consultants regarding the amount and timing of potentialcollection of our claim on Reliance, we previously recorded a reserve againstour outstanding and estimated claim receivable from Reliance to reduce thebalance to the estimated net realizable value of $1,258,000 reflecting our bestestimate given the available facts and circumstances. We believe our reserve ofapproximately $2,400,000 against the insurance claim on Reliance as of March 31,2004 is a significant estimate reflecting management's judgment. To the extentwe do not collect the insurance claim receivable of $1,258,000, we would berequired to record additional charges. Alternatively, if we collect amounts inexcess of the current receivable balance, we would record a credit for theadditional funds received in the statement of operations.
Results of Operations
Our net loss increased $8,404,000 to $(11,370,000), or $(0.24) per share, basic,in the second quarter of fiscal 2004 from $(2,966,000), or $(0.06) per share,basic, in the second quarter of fiscal 2003 and increased $14,997,000 to$(23,394,000) in the six month period ended March 31, 2004 from $(8,397,000) inthe six month period ended March 31, 2003. These increased net losses areprimarily the result of our continuing development and pre-marketing activitiesrelated to SANCTURA.
Total revenues decreased $1,995,000, or 69%, to $876,000 in the three monthperiod ended March 31, 2004 from $2,871,000 in the three month period endedMarch 31, 2003 and decreased $1,890,000, or 51%, to $1,803,000 in the six monthperiod ended March 31, 2004 from $3,693,000 for the six month period ended March31, 2003. These decreases are primarily the result of contract revenue andaccelerated sales milestones recognized as royalty revenue in the fiscal 2003periods from the renegotiated agreement with Eli Lilly and Company ("Lilly") forSarafem. Royalty revenue in the three and six month periods ended March 31, 2004and 2003 includes royalties received from Lilly for sales of Sarafem and the sixmonth period ended March 31, 2003 includes $2,184,000 of accelerated salesmilestones which were one-time payments and do not recur. Contract and licensefee revenue decreased $672,000, or 80%, to $164,000 in the six month periodended March 31, 2004 from $836,000 in the six month period ended March 31, 2003primarily due to a $777,000 initial payment received in fiscal 2003 from Lillyrelated to the renegotiated agreement with Lilly for Sarafem.
Cost of revenues in the three and six month periods ended March 31, 2004 and2003 consists primarily of amounts due or paid to Massachusetts Institute ofTechnology for their portion of the royalties and contractual payments receivedfrom Lilly and decreased in the fiscal 2004 three and six month periods as aresult decreased revenue from Sarafem as described above.
Research and development expense increased $1,902,000, or 59%, to $5,142,000 inthe three month period ended March 31, 2004 from $3,240,000 in the three monthperiod ended March 31, 2003 and increased $5,679,000, or 81%, to $12,696,000 inthe six month period ended March 31, 2004 from $7,017,000 in the six monthperiod ended March 31, 2003. These increases are primarily related to SANCTURA.SANCTURA-related research and development expenses in the three and six monthperiods ended March 31, 2004 include clinical trial costs, costs related to thedevelopment of extended release formulations of SANCTURA and other developmentcosts. Additionally, fiscal 2004 research and development expenses include costsrelated to the development of IP 751 and aminocandin. We expect to continue toincur costs related to SANCTURA for the development of extended releaseformulations and other development.
Marketing, general and administrative expense increased $3,622,000, or 168%, to$5,782,000 in the three month period ended March 31, 2004 from $2,160,000 in thethree month period ended March 31, 2003 and increased $5,181,000, or 112%, to$9,798,000 in the six month period ended March 31, 2004 from $4,617,000 in thesix month period ended March 31, 2003. These increases are primarily due toincreased pre-marketing activities related to SANCTURA. We are continuing toexpend substantial amounts on pre-marketing activities related to SANCTURA.
Investment income increased $21,000, or 13%, to $180,000 in the three monthperiod ended March 31, 2004 from $159,000 in the three month period ended March31, 2003 and increased $52,000, or 15%, to $402,000 in the six month periodended March 31, 2004 from $350,000 in the six month period ended March 31, 2004.While average invested balances are higher, market interest rates havesubstantially decreased from the fiscal 2003 periods resulting in a modestincrease in investment income.
Interest expense of $1,293,000 and $2,585,000 in the three and six month periodsended March 31, 2004 results from our July 2003 issuance of $72,000,000 of 6.25%Convertible Senior Notes due 2008 (the "Notes"). Annual interest expense isexpected to be approximately $5,200,000, which includes approximately $700,000of amortization of debt issuance costs.
If SANCTURA is approved for marketing by the FDA, we will significantly increaseour costs and expenses by hiring a sales force of approximately 280representatives and incurring significantly increased shared promotion andadvertising costs with Pliva. We have commenced building our organizationalinfrastructure to meet the demands of creating and supporting a sales force topromote SANCTURA by hiring and recruiting employees for corporate support andsales functions. We expect to
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record increased revenue in the second half of fiscal 2004 due to theamortization into revenue of the initial $30 million payment received fromPliva. The $120 million due no later than FDA approval of SANCTURA twice daily,if received, will also be amortized into revenue as earned. We expect to reportlosses from our current consolidated operations for fiscal 2004; if SANCTURA isapproved for marketing by the FDA, we expect such losses would be increased dueprimarily to significantly increased sales and marketing costs.
Liquidity and Capital Resources
Cash, Cash Equivalents and Marketable Securities
At March 31, 2004, we had consolidated cash, cash equivalents and marketablesecurities of $57,636,000 compared to $84,087,000 at September 30, 2003. Thisdecrease of $26,451,000, including a decrease of $15,943,000 in the three monthperiod ended March 31, 2004, resulted primarily from $28,032,000 of cash used byoperating activities offset by $1,591,000 of net proceeds from the issuance ofcommon stock upon the exercise of stock options.
In April 2004, we received the initial $30 million payment from Pliva. Inaddition, pursuant to the Pliva Agreement, a $120 million payment will becomedue no later than FDA approval of SANCTURA twice daily. Although we arecontinuing to invest substantial amounts in the ongoing development andpre-commercialization activities related to SANCTURA, we believe that theamounts received from Pliva under the Pliva Agreement will be sufficient to meetour obligations for the commercialization of SANCTURA. We believe we havesufficient cash for currently planned expenditures for the next twelve months.
We may require additional funds or corporate collaborations for the developmentand commercialization of our other compounds in development, as well as any newbusinesses, products or technologies acquired or developed in the future. Wehave no commitments to obtain such funds. There can such be no assurance that,if such funds are required, we will be able to obtain additional financing tosatisfy future cash requirements on acceptable terms, or at all. If suchadditional funds are not obtained, we may be required to delay productdevelopment and business development activities.
Product Development
We expect to continue to expend substantial additional amounts for thedevelopment of our products. In particular, we are continuing to expendsubstantial funds for SANCTURA, including clinical trials to explore furthercertain attributes of SANCTURA and the development of extended releaseformulations and other development efforts. There can be no assurance thatresults of any ongoing or future pre-clinical or clinical trials will besuccessful, that additional trials will not be required, that any drug orproduct under development will receive FDA approval in a timely manner or atall, or that such drug or product could be successfully manufactured inaccordance with current Good Manufacturing Practices ("cGMP") or successfullymarketed in a timely manner, or at all, or that we will have sufficient funds todevelop or commercialize any of our products.
We have entered into an agreement with Madaus under which we anticipate Madauswill manufacture SANCTURA for commercial use provided that it can deliveracceptable product to satisfy U.S. regulatory and market requirements. In orderto manufacture the product for sale in the United States, Madaus' manufacturingfacility must comply with cGMP. Failure to meet cGMP requirements in a timelymanner could cause a material delay in FDA approval, if any, andcommercialization of SANCTURA. While we may seek a second source for SANCTURA ifMadaus is unable to meet all regulatory requirements or provide the necessaryquantities of SANCTURA in a timely manner, this could also cause a materialdelay in FDA approval, if any, and commercialization of SANCTURA.
Total research and development expenses incurred by us through March 31, 2004 onthe major compounds currently being developed, including allocation of corporategeneral and administrative expenses, are approximately as follows: $62,600,000for SANCTURA, $18,500,000 for pagoclone, $82,500,000 for citicoline, $10,100,000for PRO 2000, $2,100,000 for aminocandin and $2,400,000 for IP 751. In June2002, we re-acquired rights to pagoclone from Pfizer Inc. During the periodPfizer had rights to pagoclone, Pfizer conducted and funded all developmentactivities for pagoclone. Estimating costs and time to complete development of acompound is difficult due to the uncertainties of the development process andthe requirements of the FDA which could necessitate additional and unexpectedclinical trials or other development, testing and analysis. Results of anytesting could result in a decision to alter or terminate development of acompound, in which case estimated future costs could change substantially.Certain compounds could benefit from subsidies, grants or government oragency-sponsored studies that could reduce our development costs. In the eventwe were to enter into a licensing or other collaborative agreement with acorporate partner involving sharing, funding or assumption by such corporatepartner of development costs, the estimated development costs to be incurred byus could be substantially less than the estimates below. Additionally, researchand development costs are extremely difficult to estimate for early-stagecompounds due to the fact that there is generally less comprehensive dataavailable for such compounds to determine the development activities that wouldbe required prior to the filing of an NDA. Given these uncertainties and otherrisks, variables and considerations related to each compound and
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regulatory uncertainties in general, we estimate remaining research anddevelopment costs, excluding allocation of corporate general and administrativeexpenses, from March 31, 2004 through the preparation of an NDA for our majorcompounds currently being developed as follows: approximately $15,000,000 forPRO 2000, approximately $45,000,000 for IP 751, approximately $30,000,000 foraminocandin, and approximately $38,000,000 for pagoclone. Pursuant to our newagreement with Ferrer regarding citicoline, Ferrer is responsible for all futurecosts for the development of citicoline. We cannot reasonably estimate the dateof completion for any compound that is not at least in Phase III clinicaldevelopment due to the uncertainty of the number of required trials and size ofsuch trials and the duration of development. We are unable to estimate the dateof development completion for citicoline because Ferrer is now responsible forits development. We are unable to estimate the date of development completionfor pagoclone due to the scope complexity and cost of the type of clinicaltrials necessary which may require the financial assistance of a partner tocomplete. Actual costs and time to complete any of our products may differsignificantly from the estimates.
Analysis of Cash Flows
Cash used in operating activities for the six month period ended March 31, 2004of $28,032,000 consisted primarily of the net loss of $23,394,000 and a$3,178,000 increase in prepaid and other assets due primarily to the $2,000,000deposit paid to Madaus (see "Commitments") and other SANCTURA-related marketingand advertising. We paid $2,238,000 of interest due on our convertible notes inJanuary 2004 and will make a similar payment in July 2004.
Net cash from investing activities of $16,087,000 is primarily due to netmaturities and sales of marketable securities. We expect to purchase marketablesecurities with a portion of the proceeds from the Pliva Agreement and useproceeds from maturities and sales of such securities to fund operations.
Net cash provided from financing activities of $1,591,000 resulted from netproceeds from the issuance of common stock upon the exercise of stock options.We cannot predict if or when stock options will be exercised in the future.
Commitments
In February 2004, we issued a purchase order to Madaus, pursuant to the supplyagreement between our two companies, to purchase from Madaus manufacturedSANCTURA tablets in bulk form to be used for a potential launch of the product.The current value of this purchase order is approximately $7,500,000, based uponrecent exchange rates. In March 2004, we paid $2,000,000 to Madaus as a depositon this order. If SANCTURA is approved for marketing by the FDA and we launchSANCTURA in the United States, we will be committed to purchase from Madaussignificant additional quantities of manufactured SANCTURA tablets in bulk formduring the initial launch year. Pliva agreed to purchase from us commercialquantities of SANCTURA and to be responsible for commercial product procurementcosts, including costs to manufacture SANCTURA.
Other
Recent Accounting Pronouncement
In January 2003, the FASB issued FIN 46. FIN 46 requires that if an entity has acontrolling financial interest in a VIE, the assets, liabilities and results ofactivities of the VIE should be included in the consolidated financialstatements of the entity. FIN 46 requires that its provisions are effectiveimmediately for all arrangements entered into after January 31, 2003. We do nothave any financial interests in VIE's created after January 31, 2003. For thosearrangements entered into prior to January 31, 2003, FIN 46 requires itsprovisions, as amended by FIN 46R which was issued by the FASB in December 2003,be adopted by us in the second quarter of fiscal 2004. The adoption of FIN 46Rdid not have a material impact on our financial position or results ofoperations.
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