(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, 2003 |
| [ ] | Transition
report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the
transition period from _______ to _______ |
Commission File Number 0-24760
Orphan Medical, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 41-1784594 |
| (State or other jurisdiction of | (I.R.S. Employer Identification Number) |
| incorporation or organization) | |
| 13911 Ridgedale Drive, Suite 250, Minnetonka, MN 55305 | (952) 513-6900 |
| (Address of principal executive office | (Registrant’s telephone number, |
| and zip code) | including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
Yes _X_ No __
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes _X_ No __
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
| Common Stock, $.01 par value | 10,744,703 |
| (Class) | (Outstanding at November 1, 2003) |
INDEX
| Page No. | |
|---|---|
| PART I. FINANCIAL INFORMATION | |
| Item 1. Financial Statements (Unaudited) | |
| Balance Sheets – September 30, 2003 and December 31, 2002 | 3 |
| Statements of Operations – Three and nine months ended September 30, 2003 and September 30, 2002 | 4 |
| Statements of Cash Flows – Nine months ended September 30, 2003 and September 30, 2002 | 5 |
| Notes to Financial Statements | 6 |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 |
| Item 3. Quantitative and Qualitative Disclosures about Market Risk | 27 |
| Item 4. Controls and Procedures | 27 |
| PART II. OTHER INFORMATION | |
| Items 1 through 5 have been omitted since all items are inapplicable or answers negative. | |
| Item 6. Exhibits and Reports on Form 8-K | 29 |
Antizol®, Antizol-Vet®, Cystadane®, Xyrem®, MedExpand™, “The” Orphan Drug Company™, Orphan Medical®, Inc. and Dedicated to Patients with Uncommon Diseases® are trademarks of the Company.
2
ITEM 1. Financial Statements
| September 30, 2003 | December 31, 2002 | |||||||
|---|---|---|---|---|---|---|---|---|
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 26,680 | $ | 6,921 | ||||
| Restricted cash | 127 | 251 | ||||||
| Accounts receivable, less allowance for doubtful accounts of | ||||||||
| $56 and $25, respectively | 1,480 | 2,215 | ||||||
| Inventories | 1,232 | 2,020 | ||||||
| Prepaid expenses and other | 715 | 576 | ||||||
Total current assets | 30,234 | 11,983 | ||||||
Property and equipment, net | 855 | 1,156 | ||||||
Total assets | $ | 31,089 | $ | 13,139 | ||||
| Liabilities and shareholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 763 | $ | 1,380 | ||||
| Accrued royalties | 133 | 235 | ||||||
| Accrued compensation | 1,080 | 1,795 | ||||||
| Accrued expenses | 2,348 | 1,901 | ||||||
Total current liabilities | 4,324 | 5,311 | ||||||
Capital lease obligation-less current maturities | 66 | 78 | ||||||
Commitments | ||||||||
Shareholders’ equity: | ||||||||
| Senior Convertible Preferred Stock, $.01 par value; | ||||||||
| 14,400 shares authorized; 8,706 shares issued and outstanding | — | — | ||||||
| Series B Convertible Preferred Stock, $.01 par value; | ||||||||
| 5,000 shares authorized; 3,957 and 3,677 shares issued | ||||||||
| and outstanding | — | — | ||||||
| Series C Convertible Preferred Stock, $.01 par value; | ||||||||
| 4,000 shares authorized; 0 shares issued and outstanding | — | — | ||||||
| Series D Convertible Preferred Stock, $.01 par value; | ||||||||
| 1,500,000 shares authorized; 0 shares issued and | — | — | ||||||
| outstanding | ||||||||
| Common stock, $.01 par value; 25,000,000 shares authorized; | ||||||||
| 10,744,703 and 10,460,283 issued and outstanding | 108 | 105 | ||||||
| Additional paid-in capital | 76,665 | 74,033 | ||||||
| Accumulated deficit | (50,074 | ) | (66,388 | ) | ||||
Total shareholders’ equity | 26,699 | 7,750 | ||||||
Total liabilities and shareholders’ equity | $ | 31,089 | $ | 13,139 | ||||
Note: The Balance Sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
See Accompanying Notes.
3
(Unaudited)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2003 | 2002 | |||||||||||
| Revenues, net | $ | 2,982 | $ | 4,155 | $ | 11,898 | $ | 11,337 | ||||||
| Cost of sales | 501 | 609 | 1,965 | 1,661 | ||||||||||
| Gross Profit | 2,481 | 3,546 | 9,933 | 9,676 | ||||||||||
| Operating expenses: | ||||||||||||||
| Research and development | 2,540 | 2,254 | 6,135 | 4,668 | ||||||||||
| Sales and marketing | 3,316 | 3,539 | 11,103 | 7,262 | ||||||||||
| General and administrative | 1,542 | 1,922 | 5,247 | 4,484 | ||||||||||
| Total operating expenses | 7,398 | 7,715 | 22,485 | 16,414 | ||||||||||
| Loss from operations | (4,917 | ) | (4,169 | ) | (12,552 | ) | (6,738 | ) | ||||||
| Interest income, net | 40 | 64 | 27 | 215 | ||||||||||
| Other income | — | — | 30,267 | — | ||||||||||
| Net (loss) income before taxes | (4,877 | ) | (4,105 | ) | 17,742 | (6,523 | ) | |||||||
| Income tax expense | (251 | ) | — | (509 | ) | — | ||||||||
| Net (loss) income | (5,128 | ) | (4,105 | ) | 17,233 | (6,523 | ) | |||||||
| Less: Preferred stock dividends | 238 | 235 | 704 | 688 | ||||||||||
| Net (loss) income attributable to common shareholders |
$ | (5,366 | ) | $ | (4,340 | ) | $ | 16,529 | ($ 7,211 | ) | ||||
| (Loss) earnings per common share | ||||||||||||||
| Basic | $ | (0.50 | ) | $ | (0.42 | ) | $ | 1.56 | $ | (0.70 | ) | |||
| Diluted | $ | (0.50 | ) | (0.42 | ) | 1.33 | (0.70 | ) | ||||||
| Weighted average number of shares outstanding | ||||||||||||||
| Basic | 10,682 | 10,373 | 10,573 | 10,331 | ||||||||||
| Diluted | 10,682 | 10,373 | 12,912 | 10,331 | ||||||||||
See Accompanying Notes.
4
(Unaudited)
| For the Nine Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| September 30, 2003 | September 30, 2002 | |||||||
| Operating activities | ||||||||
| Net income (loss) | $ | 17,233 | $ | (6,523 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating | ||||||||
| activities: | ||||||||
| Depreciation and amortization | 394 | 165 | ||||||
| Gain on disposition of products | (30,267 | ) | — | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable and current assets | 596 | (649 | ) | |||||
| Inventories | 787 | (634 | ) | |||||
| Accounts payable and accrued expenses | (871 | ) | 2,041 | |||||
| Net cash used in operating activities | (12,128 | ) | (5,600 | ) | ||||
Investing activities | ||||||||
| Purchase of office equipment | (33 | ) | (668 | ) | ||||
| Decrease in restricted cash | 124 | — | ||||||
| Net proceeds on disposition of products | 30,267 | — | ||||||
| Net cash provided (used in) by investing activities | 30,358 | (668 | ) | |||||
Financing activities | ||||||||
| Employee stock purchase plan | 35 | 31 | ||||||
| Stock option exercise proceeds | 1,507 | 335 | ||||||
| Payments on capital lease | (12 | ) | — | |||||
| Private common stock placement | — | (8 | ) | |||||
| Cash dividends | (1 | ) | (1 | ) | ||||
| Net cash provided by financing activities | 1,529 | 357 | ||||||
Increase (decrease) in cash and cash equivalents | 19,759 | (5,911 | ) | |||||
Cash and cash equivalents at beginning of period | 6,921 | 19,011 | ||||||
Cash and cash equivalents at end of period |
$ | 26,680 | $ | 13,100 | ||||
See Accompanying Notes.
5
| 1. | Basis of Presentation |
Business
Orphan Medical acquires, develops, and markets products of high medical
value intended to treat sleep disorders, pain and other central nervous
disorders that are addressed by physician specialists. A drug has high medical
value if it offers a major improvement in the safety or efficacy of patient
treatment and has no substantially equivalent substitute. The Company has had
six pharmaceutical products approved for marketing by the United States Food and
Drug Administration (FDA). While three have been divested, the Company is
focusing its resources on Xyrem®(sodium oxybate) oral solution, a medication
approved for cataplexy, a significant and debilitating symptom of narcolepsy.
The Company is conducting clinical trials to assess Xyrem in treating excessive
daytime sleepiness and fragmented nighttime sleep, the other prominent symptoms
of narcolepsy. A new compound, Butamben (butyl-p-aminobenzoate) suspension for
injection, is being evaluated for development as a treatment of pain. The
Company is seeking other approved or development-stage products in the specialty
areas it serves.
Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, these financial statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal, recurring accruals) considered necessary for fair
presentation have been included. Operating results for the three-month and
nine-month period ended September 30, 2003 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2003. For further
information, refer to the audited financial statements and accompanying notes
contained in the Company’s Annual Report filed on Form 10-K for the year ended
December 31, 2002.
| 2. | Disposition of Products |
On June 10, 2003, the Company announced the disposition of Busulfex®(busulfan) Injection to ESP Pharma, Inc. for $29.3 million plus the book value of inventory, approximately $0.2 million. The Company announced the sale of the product Sucraid®(sacrosidase) oral solution to a specialty pharmaceutical company on May 6, 2003 for $1.5 million. The Company also divested a third product, Elliotts B Solution®to the same specialty company for proceeds that were not material. Proceeds from these dispositions will be used for further development and marketing of Xyrem and for the creation of a stronger presence in the sleep and central nervous system (CNS) markets.
| 3. | Use of Estimates |
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
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| 4. | Stock-Based Compensation |
At September 30, 2003 the Company has a stock-based employee compensation plan. The Company accounts for its plan under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. No stock-based compensation cost is reflected in the net loss for the three or nine month periods ended September 30, 2003 or 2002, as all options granted under this plan had an exercise price equal to market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands except per share data) | 2003 | 2002 | 2003 | 2002 | ||||||||||
| Net income (loss) as reported | $ | (5,366 | ) | $ | (4,340 | ) | $ | 16,529 | $ | (7,211 | ) | |||
| Deduct total stock-based employee compensation expense | ||||||||||||||
| determined under fair value-based method for all awards | (791 | ) | (489 | ) | (2,049 | ) | (1,457 | ) | ||||||
| Pro forma net income (loss) | $ | (6,157 | ) | $ | (4,829 | ) | $ | 14,480 | $ | (8,668 | ) | |||
| Earnings (loss) per share | ||||||||||||||
| Basic – as reported | $ | (0.50 | ) | $ | (0.42 | ) | $ | 1.56 | $ | (0.70 | ) | |||
| Basic – as pro forma | $ | (0.58 | ) | $ | (0.47 | ) | $ | 1.37 | $ | (0.84 | ) | |||
| Diluted – as reported | $ | (0.50 | ) | $ | (0.42 | ) | $ | 1.33 | $ | (0.70 | ) | |||
| Diluted – as pro forma | $ | (0.58 | ) | $ | (0.47 | ) | $ | 1.24 | $ | (0.84 | ) | |||
| 5. | Revenue Recognition |
Sales for all products, except Xyrem, are recognized at the time a product is shipped to the Company’s customers and are recorded net of reserves for discounts for prompt payment. Sales of Xyrem are recognized at the time product is shipped from the specialty pharmacy to the patient and are recorded net of discounts for prompt payment. Except for Xyrem, the Company is obligated to accept, for exchange, from all domestic customers products that have reached their expiration date, which range from two to four years depending on the product. The Company is not obligated to accept exchange of outdated product from its international distribution partners. The Company establishes a reserve for the estimated cost of the exchanges. The Company monitors the exchange of product and modifies its reserve as necessary. Management bases these reserves on historical experience and these estimates are subject to change.
7
| 6. | Inventories |
Inventories are valued at the lower of cost or market determined using the first-in, first-out (FIFO) method. The Company’s policy is to establish an excess and obsolete reserve for its products in excess of the expected demand for such products.
| September 30, 2003 | December 31, 2002 | |||||||
|---|---|---|---|---|---|---|---|---|
| Raw materials and packaging | $ | 311 | $ | 1,023 | ||||
| Finished goods | 921 | 997 | ||||||
| $ | 1,232 | $ | 2,020 | |||||
8
| 7. | Earnings Per Share |
Earnings per share is computed in accordance with SFAS No. 128, “Earnings Per Share”. Basic earnings (loss) per share is computed based on the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed based on the weighted average shares outstanding and the dilutive impact of common stock equivalents outstanding during the period. The dilutive effect of employee stock options and warrants is measured using the treasury stock method. The dilutive effect of both series of convertible preferred stock is computed using the “if-converted” method. Common stock equivalents are not included in periods where there is a loss, as they are antidilutive. The following is a reconciliation of net income (loss) and weighted average common shares outstanding for purposes of calculating basic and diluted earnings (loss) per share:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands except per share data) | 2003 | 2002 | 2003 | 2002 | ||||||||||
Numerator |
||||||||||||||
| Numerator for basic earnings per share – | ||||||||||||||
| income available to common shareholders | $ | (5,366 | ) | $ | (4,340 | ) | $ | 16,529 | $ | (7,211 | ) | |||
| Add back to effect assumed conversions: | ||||||||||||||
| Preferred stock dividends | — | — | 704 | — | ||||||||||
| Numerator for diluted earnings per share | ||||||||||||||