U.S. 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, 2003
| o | 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 1-14131
ALKERMES, INC.
| PENNSYLVANIA | 23-2472830 | |
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 88 Sidney Street, Cambridge, MA | 02139-4136 | |
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| (Address of principal executive offices) | (Zip Code) |
| Registrant’s telephone number including area code: | (617) 494-0171 |
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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | Shares Outstanding as of August 8, 2003 | |||
Common Stock, par value $.01 |
88,884,694 | |||
Non-Voting Common Stock, par value $.01 |
382,632 | |||
(1)
ALKERMES, INC. AND SUBSIDIARIES
INDEX
| Page No. | ||||||||
| PART I — FINANCIAL INFORMATION | ||||||||
| Item 1. | Consolidated Financial Statements |
|||||||
Condensed Consolidated Balance Sheets — June 30, 2003 and March 31, 2003 |
3 | |||||||
Condensed Consolidated Statements of Operations — Three months ended June 30, 2003 and 2002 |
4 | |||||||
Condensed Consolidated Statements of Cash Flows — Three months ended June 30, 2003 and 2002 |
5 | |||||||
Notes to Condensed Consolidated Financial Statements |
6 | |||||||
| Item 2. | Management’s Discussion and Analysis of |
13 | ||||||
Financial Condition and Results of Operations |
||||||||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
24 | ||||||
| Item 4. | Controls and Procedures |
25 | ||||||
| PART II — OTHER INFORMATION | ||||||||
| Item 2. | Changes in Securities and Use of Proceeds |
26 | ||||||
| Item 6. | Exhibits and Reports on Form 8-K |
26 | ||||||
| SIGNATURES | 28 | |||||||
| EXHIBIT INDEX | 29 | |||||||
(2)
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
ALKERMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| June 30, | March 31, | |||||||||
| 2003 | 2003 | |||||||||
ASSETS |
||||||||||
Current Assets: |
||||||||||
Cash and cash equivalents |
$ | 39,432,369 | $ | 72,478,675 | ||||||
Short-term investments |
65,247,112 | 63,615,497 | ||||||||
Receivables from collaborative arrangements |
3,150,319 | 7,300,923 | ||||||||
Prepaid expenses and other current assets |
2,140,671 | 2,166,238 | ||||||||
Inventory |
3,431,100 | 2,576,082 | ||||||||
Total current assets |
113,401,571 | 148,137,415 | ||||||||
Property, Plant and Equipment: |
||||||||||
Land |
235,000 | 235,000 | ||||||||
Building |
15,505,909 | 5,093,815 | ||||||||
Furniture, fixtures and equipment |
61,455,827 | 56,005,820 | ||||||||
Leasehold improvements |
31,762,505 | 31,603,290 | ||||||||
Construction in progress |
29,010,861 | 39,500,993 | ||||||||
| 137,970,102 | 132,438,918 | |||||||||
Less accumulated depreciation and amortization |
(43,220,406 | ) | (40,964,851 | ) | ||||||
| 94,749,696 | 91,474,067 | |||||||||
Investments |
8,950,042 | 8,945,908 | ||||||||
Other Assets |
9,211,386 | 7,141,780 | ||||||||
Total Assets |
$ | 226,312,695 | $ | 255,699,170 | ||||||
LIABILITIES AND SHAREHOLDERS’ DEFICIT |
||||||||||
Current Liabilities: |
||||||||||
Accounts payable and accrued expenses |
$ | 14,535,837 | $ | 14,252,083 | ||||||
Accrued interest |
481,058 | 2,901,984 | ||||||||
Accrued restructuring costs |
3,001,341 | 3,537,010 | ||||||||
Deferred revenue |
14,600,956 | 12,253,338 | ||||||||
Derivative liability related to convertible senior subordinated notes |
17,064,437 | 13,300,000 | ||||||||
Long-term obligations — current portion |
6,825,000 | 7,800,000 | ||||||||
Total current liabilities |
56,508,629 | 54,044,415 | ||||||||
Deferred Revenue |
6,741,426 | 10,114,032 | ||||||||
Convertible Senior Subordinated Notes |
166,130,997 | 165,910,429 | ||||||||
Convertible Subordinated Notes |
676,000 | 676,000 | ||||||||
Convertible Preferred Stock, par value $.01 per share: authorized and issued, 3,000
shares at June 30, 2003 and March 31, 2003, respectively (at liquidation preference) |
30,000,000 | 30,000,000 | ||||||||
Shareholders’ Deficit: |
||||||||||
Capital stock, par value $.01 per share: authorized, 4,550,000 shares; none issued;
includes 2,997,000 shares of preferred stock |
||||||||||
Common stock, par value $.01 per share: authorized, 160,000,000 shares; issued, 64,776,830 and
64,692,848 shares at June 30, 2003 and March 31, 2003, respectively |
647,769 | 646,929 | ||||||||
Non-voting common stock, par value $.01 per share:
authorized, 450,000 shares; issued, 382,632 at June 30, 2003 and
March 31, 2003 |
3,826 | 3,826 | ||||||||
Additional paid-in capital |
447,663,033 | 447,103,721 | ||||||||
Deferred compensation |
(1,304,109 | ) | (1,864,281 | ) | ||||||
Accumulated other comprehensive income (loss) |
580,292 | (173,104 | ) | |||||||
Accumulated deficit |
(481,335,168 | ) | (450,762,797 | ) | ||||||
Total shareholders’ deficit |
(33,744,357 | ) | (5,045,706 | ) | ||||||
Total Liabilities and Shareholders’ Deficit |
$ | 226,312,695 | $ | 255,699,170 | ||||||
See notes to condensed consolidated financial statements.
(3)
ALKERMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months | Three Months | |||||||||
| Ended | Ended | |||||||||
| June 30, | June 30, | |||||||||
| 2003 | 2002 | |||||||||
Revenues: |
||||||||||
Manufacturing and royalty revenues |
$ | 1,544,754 | $ | — | ||||||
Research and development revenue under collaborative arrangements |
2,756,706 | 10,291,391 | ||||||||
Total revenues |
4,301,460 | 10,291,391 | ||||||||
Expenses: |
||||||||||
Cost of goods manufactured |
2,560,670 | — | ||||||||
Research and development |
21,672,964 | 24,599,673 | ||||||||
General and administrative |
5,780,598 | 6,016,040 | ||||||||
Total expenses |
30,014,232 | 30,615,713 | ||||||||
Net operating loss |
(25,712,772 | ) | (20,324,322 | ) | ||||||
Other income (expense): |
||||||||||
Interest income |
975,161 | 1,365,936 | ||||||||
Other income, net |
1,409,478 | — | ||||||||
Derivative loss related to convertible senior subordinated notes |
(3,764,437 | ) | — | |||||||
Interest expense |
(3,479,801 | ) | (2,081,134 | ) | ||||||
Total other (expense) income |
(4,859,599 | ) | (715,198 | ) | ||||||
Equity in losses of Reliant Pharmaceuticals, LLC |
— | (24,212,900 | ) | |||||||
Net loss |
($30,572,371 | ) | ($45,252,420 | ) | ||||||
Basic and diluted loss per common share |
($0.47 | ) | ($0.70 | ) | ||||||
Weighted average number of common shares outstanding |
64,736,097 | 64,260,903 | ||||||||
See notes to condensed consolidated financial statements.
(4)
ALKERMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months | Three Months | |||||||||||
| Ended | Ended | |||||||||||
| June 30, | June 30, | |||||||||||
| 2003 | 2002 | |||||||||||
Cash flows from operating activities: |
||||||||||||
Net loss |
($30,572,371 | ) | ($45,252,420 | ) | ||||||||
Adjustments to reconcile net loss to net cash used by
operating activities: |
||||||||||||
Depreciation and amortization |
2,426,522 | 2,315,760 | ||||||||||
Other noncash charges |
1,046,228 | 755,275 | ||||||||||
Equity in losses of Reliant Pharmaceuticals, LLC |
— | 24,212,900 | ||||||||||
Other noncash income |
(1,409,478 | ) | — | |||||||||
Derivative loss related to convertible senior subordinated notes |
3,764,437 | — | ||||||||||
Changes in assets and liabilities: |
||||||||||||
Receivables from collaborative arrangements |
4,150,604 | (462,201 | ) | |||||||||
Prepaid expenses and other current assets |
(829,988 | ) | (400,779 | ) | ||||||||
Accounts payable, accrued expenses and accrued interest |
(2,127,162 | ) | 3,823,187 | |||||||||
Accrued restructuring costs |
(535,669 | ) | — | |||||||||
Deferred revenue |
(1,024,988 | ) | (276,341 | ) | ||||||||
Net cash used by operating activities |
(25,111,865 | ) | (15,284,619 | ) | ||||||||
Cash flows from investing activities: |
||||||||||||
Additions to property, plant and equipment |
(5,531,184 | ) | (16,626,892 | ) | ||||||||
Purchases of available-for-sale short-term investments |
(39,514,266 | ) | (35,290,276 | ) | ||||||||
Sales of available-for-sale short-term investments |
37,797,890 | 71,241,888 | ||||||||||
Increase in other assets |
(150,022 | ) | — | |||||||||
Net cash (used by) provided by investing activities |
(7,397,582 | ) | 19,324,720 | |||||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from issuance of common stock |
455,591 | 480,681 | ||||||||||
Payment of long-term obligations |
(975,000 | ) | (1,100,000 | ) | ||||||||
Repayment of loan |
— | (10,000,000 | ) | |||||||||
Net cash used by financing activities |
(519,409 | ) | (10,619,319 | ) | ||||||||
Effect of exchange rate changes on cash |
(17,450 | ) | 44,939 | |||||||||
Net decrease in cash and cash equivalents |
(33,046,306 | ) | (6,534,279 | ) | ||||||||
Cash and cash equivalents, beginning of period |
72,478,675 | 16,023,074 | ||||||||||
Cash and cash equivalents, end of period |
$ | 39,432,369 | $ | 9,488,795 | ||||||||
Supplementary information: |
||||||||||||
Cash paid for interest |
$ | 5,418,375 | $ | 213,428 | ||||||||
Cash paid for income taxes |
$ | 37,534 | $ | — | ||||||||
Conversion of 6.52% Convertible Senior Subordinated Notes into common stock |
$ | 100,861 | $ | — | ||||||||
See notes to condensed consolidated financial statements.
(5)
ALKERMES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements of Alkermes, Inc. (the “Company”) for the three months ended June 30, 2003 and 2002 are unaudited and include all adjustments which, in the opinion of management, are necessary to present fairly the results of operations for the periods then ended. Such adjustments, consisting of normal recurring items, included approximately $3.8 million in non-recurring expenses in the three months ended June 30, 2003 related to the embedded derivative in the Company’s 6.52% Convertible Senior Subordinated Notes due December 31, 2009 (the “6.52% Senior Notes”). These financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the years ended March 31, 2003, 2002 and 2001, which are contained in Company’s Annual Report for the year ended March 31, 2003 filed on Form 10-K. In addition, the financial statements include the accounts of Alkermes Controlled Therapeutics, Inc., Alkermes Controlled Therapeutics Inc. II, Advanced Inhalation Research, Inc. (“AIR®”), Alkermes Investments, Inc., Alkermes Europe, Ltd. and Alkermes Development Corporation II (“ADC II”), wholly owned subsidiaries of the Company.
The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year.
The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2. COMPREHENSIVE LOSS
Comprehensive loss is comprised of net loss and other comprehensive income (loss). Other comprehensive income (loss) includes certain changes in the shareholders’ equity of the Company that are excluded from net loss. Specifically, other comprehensive income (loss) includes unrealized holding gains and losses on the Company’s “available-for-sale” securities and changes in cumulative foreign currency translation adjustments.
(6)
2. COMPREHENSIVE LOSS (Continued)
Comprehensive loss for the three months ended June 30, 2003 and 2002 is as follows:
| Three Months | Three Months | |||||||
| Ended | Ended | |||||||
| June 30, 2003 | June 30, 2002 | |||||||
Net loss |
$ | (30,572,371 | ) | $ | (45,252,420 | ) | ||
Foreign currency translation adjustments |
(7,977 | ) | 49,908 | |||||
Unrealized gain (loss) on marketable securities |
761,373 | (977,251 | ) | |||||
Comprehensive loss |
$ | (29,818,975 | ) | $ | (46,179,763 | ) | ||
3. NET LOSS PER SHARE
Basic and diluted net loss per share are computed using the weighted average number of common shares outstanding during the period. Basic net loss per share excludes any dilutive effect from stock options and awards, convertible preferred stock, convertible senior subordinated notes and convertible subordinated notes. Certain common shares potentially issuable were not included in the computation of diluted net loss per share for the three months ended June 30, 2003 and 2002 because they would have an antidilutive effect due to net losses for such periods.
Common shares potentially issuable but excluded from the calculation of net loss per share consist of the following as of June 30:
| 2003 | 2002 | |||||||
Stock options and awards |
14,618,925 | 11,368,201 | ||||||
Shares issuable on conversion of
3.75% Convertible Subordinated Notes |
9,978 | 2,952,030 | ||||||
Shares issuable on conversion of
6.52% Convertible Senior
Subordinated Notes |
22,713,226 | — | ||||||
Shares issuable on conversion of
Convertible Preferred Stock |
2,824,859 | — | ||||||
| 40,166,988 | 14,320,231 | |||||||
(7)
4. INVENTORY
Inventory is stated at the lower of cost or market and consists of currently marketed products. Cost is determined in a manner that approximates the first-in, first-out method. Inventory consists of the following at June 30, 2003 and March 31, 2003:
| June 30, | March 31, | |||||||
| 2003 | 2003 | |||||||
Raw materials |
$ | 675,705 | $ | 620,653 | ||||
Work in process |
1,900,368 | 1,955,429 | ||||||
Finished goods |
855,027 | — | ||||||
| $ | 3,431,100 | $ | 2,576,082 | |||||
5. DERIVATIVES
The Company has recorded a derivative liability related to the 6.52% Senior Notes. Pursuant to the terms of the 6.52% Senior Notes, the Company will pay additional interest equal to two full years of interest on the 6.52% Senior Notes (the “Two-Year Interest Make-Whole”) if the 6.52% Senior Notes are automatically converted on or prior to December 30, 2004 or if the holders voluntarily convert prior to December 30, 2004. The Two-Year Interest Make-Whole represents an embedded derivative which is required to be accounted for apart from the underlying 6.52% Senior Notes. On June 18, 2003, the Company announced that it exercised its automatic conversion right for the 6.52% Senior Notes. The embedded derivative was adjusted to the value of the remaining balance of the Two-Year Interest Make-Whole payment, or approximately $17.1 million, at June 30, 2003 and is accounted for as a liability on the consolidated balance sheets. A $3.8 million noncash charge to “Derivative loss related to convertible senior subordinated notes” has been recorded in the consolidated statements of operations in the quarter ended June 30, 2003 to account for the increase of this derivative liability. On July 18, 2003, upon conversion of the then outstanding 6.52% Senior Notes and payment of the Two-Year Interest Make-Whole, the embedded derivative was settled in full and the balance was reduced to zero.
The Company has recorded a gain of approximately $1.4 million in other income in the consolidated statements of operations in connection with the changes in the fair value of warrants held by the Company in connection with licensing arrangements. The recorded value of such warrants can fluctuate significantly based on fluctuations in the market value of the underlying securities of the issuer of the warrants.
6. INVESTMENT IN RELIANT PHARMACEUTICALS, LLC
In December 2001, the Company purchased approximately 63% of an offering by Reliant of its Series C Convertible Preferred Units, representing approximately 19% of the equity interest in Reliant, for a purchase price of $100,000,000. The investment has been accounted for under the equity method of accounting because Reliant is organized as a limited liability company, which is
(8)
6. INVESTMENT IN RELIANT PHARMACEUTICALS, LLC (Continued)
treated in a manner similar to a partnership. Because, at the time of the Company’s investment, Reliant had an accumulated deficit from operations and a deficit in members’ capital, under applicable accounting rules, the Company’s share of Reliant’s losses from the date of the Company’s investment has been recognized in proportion to the Company’s percentage participation in the Series C financing, and not in proportion to the Company’s percentage ownership interest in Reliant. The Company recorded its equity in the income or losses of Reliant three months in arrears. For the three months ended June 30, 2003 and 2002, this charge amounted to $0 and approximately $24,213,000, respectively, and is recorded in the Company’s consolidated statements of operations under the caption “Equity in losses of Reliant Pharmaceuticals, LLC.”
Reliant is a privately held company over which the Company does not exercise control and the Company has relied on the unaudited and audited financial statements prepared by Reliant’s management and provided to the Company to calculate the Company’s share of Reliant’s losses. The Company’s $100,000,000 investment was reduced to $0 during the fiscal year ended March 31, 2