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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
[ ] 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 0-26487
WOMEN FIRST HEALTHCARE, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3919601
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
12220 EL CAMINO REAL, SUITE 400, 92130
SAN DIEGO, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(858) 509-1171
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $ .001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filer pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 28, 2001, the aggregate market value of the registrant's
voting stock held by non-affiliates of the registrant was approximately
$19,337,000, based on the closing price of the Company's Common Stock on the
Nasdaq National Market on February 28, 2001 of $2.25 per share.
As of February 28, 2001, 17,606,809 shares of registrant's Common Stock,
$.001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days after the close of the fiscal
year are incorporated by reference into Part III of this report.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 14
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 16
Item 6. Selected Consolidated Financial Information................. 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 19
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 28
Item 8. Financial Statements and Supplementary Data................. 28
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 28
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 29
Item 11. Executive Compensation...................................... 29
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 29
Item 13. Certain Relationships and Related Transactions.............. 29
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 29
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PART I
ITEM 1. BUSINESS
The discussion of Women First HealthCare, Inc.'s business contained in this
Report may include certain projections, estimates and other forward-looking
statements that involve a number of risks and uncertainties. For a discussion of
factors that may affect the outcome projected in such statements, see "Risks and
Uncertainties" on pages 9 through 14 of this Report on Form 10-K. While the
forward-looking statements contained in this Report represent our current
judgment on the future direction of the business, such risks and uncertainties
could cause actual results to differ materially from any future performance
listed below. We undertake no obligation to update them or to explain why actual
results may differ based on the events and circumstances arising after the date
of this annual report.
OVERVIEW
Women First HealthCare, Inc. is a specialty pharmaceutical company
dedicated to improving the health and well-being of midlife women. Our mission
is to help midlife women make informed choices about their physical and
emotional health and to provide pharmaceutical products, self-care products and
information to help these women improve the quality of their lives. We market
these products in the United States through a number of channels including our
dedicated sales force, our direct-to-consumer marketing programs through our
internet sites, womenfirst.com and aswechange.com, and through our national As
We Change(R) catalog.
The pharmaceutical products we offer include Ortho-Est(R) Tablets, an oral
estrogen product used for hormonal replenishment therapy (HRT), and the
Esclim(TM) estradiol transdermal system, for which we have an exclusive license
from Laboratoires Fournier S.A. We distributed Ortho-Est(R) Tablets during 2000
pursuant to an agreement with Ortho-McNeil Pharmaceutical, Inc. In September
2000, we entered into agreements with Ortho-McNeil to acquire the rights to
Ortho-Est(R) Tablets effective January 1, 2001 and terminate our distribution
relationship. In 2000, we also offered Pravachol(R), a leading
cholesterol-lowering drug, that we co-promoted with Bristol-Myers Squibb U.S.
Pharmaceuticals Group, and Ortho-Prefest(R), a combination hormonal
replenishment therapy (HRT) product, which we co-promoted under a co-promotion
agreement with Ortho-McNeil Pharmaceutical, Inc. During the first quarter of
2000, we offered Ortho Tri-Cyclen(R), a leading oral contraceptive, under a
co-promotion agreement with Ortho-McNeil Pharmaceutical. We have notified
Bristol Myers Squibb of our intention to cancel our co-promotion agreement
relating to Pravachol(R) effective March 31, 2001, and we have terminated our
co-promotion agreement with Ortho-McNeil relating to Ortho-Prefest(R) and Ortho
Tri-Cyclen(R).
Our self-care products include a broad array of nutritional, skin, beauty,
herbal, exercise, libido, wellness and other products that we sell through our
national mail-order catalog, As We Change(R) and our internet retailers,
womenfirst.com and aswechange.com. During 2000, we began offering Women
First(TM) Daily Difference(TM), a line of dietary supplements developed in
consultation with the Tufts University School of Nutrition Science and Policy
and supported by the National Association of Nurse Practitioners in Women's
Health.
INDUSTRY TRENDS
We believe that the markets for pharmaceutical and self-care products for
midlife women are growing because of the following trends:
- a significant and expanding population of midlife women as the "baby
boom" generation ages,
- the expanding roles of OB/GYNs, nurse practitioners and physician's
assistants focused on women's health,
- an increasing awareness of the conditions and diseases that affect
midlife women and the development of new products to address them,
- recognition of the dissatisfaction among midlife women about their health
care,
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- the importance of information and education in helping women make
informed decisions regarding their midlife health, and
- increasing opportunities for product licensing, acquisition, co-promotion
and development by specialty pharmaceutical companies.
The U.S. Census Bureau projects that there are approximately 60 million
women in the United States between the ages of 35 and 69. That number is
expected to grow to 67 million women by the year 2010.
As women transition through menopause, their bodies begin to reduce the
production of the steroid hormones, estrogen and progesterone. Studies have
shown that with the significant loss of estrogen and progesterone production
after menopause, the long-term health care needs of women change significantly.
Among other things, women experience changes in their cardiovascular, skeletal,
neurologic, urologic and reproductive systems and may experience changes in
their sexual and emotional needs. Studies have shown that HRT alleviates the
symptoms commonly associated with menopause and may reduce the risk of
cardiovascular disease and osteoporosis. However, some women experience side
effects associated with HRT including bloating, weight gain, breast tenderness,
headaches, nausea and breakthrough bleeding. In addition, women may not initiate
HRT due to a perceived risk of breast cancer. According to IMS Health,
pharmaceutical sales for HRT in the United States were approximately $2.5
billion in 2000.
While there is no cure for osteoporosis, estrogen is approved by the FDA to
treat the disease. The National Osteoporosis Foundation estimates that 22
million women have, or are at a high risk of developing, osteoporosis which
leads to bone fragility and an increased risk of fracture of the hip, spine, and
wrist. There are approximately 250,000 hip fractures each year in women.
STRATEGY
Our objective is to become a premier marketer of health care products for
midlife women by responding to current industry trends and by establishing Women
First as a widely recognized source of pharmaceutical and self-care products
targeted at this group of women. We are implementing the following strategies in
order to achieve this goal:
Use our Health Advisory Board for guidance. Our Health Advisory Board (HAB)
is comprised of world class opinion leaders and experts in women's health. These
experts represent varied specialties and provide guidance in our selection of
pharmaceutical products. They also serve as a trusted and respected source of
information for clinicians and patients.
Enhance sales through targeted marketing efforts. We are focused on
reaching our target market of 60 million midlife women through our sales and
marketing programs to OB/GYNs, nurse practitioners and physician's assistants
focused on women's health and our direct-to-consumer internet and catalog
marketing programs. We employ our 60 sales representatives to market our
pharmaceutical products throughout the United States, with a primary emphasis on
OB/GYNs, nurse practitioners and physician's assistants focused on women's
health. Our four national account managers focus on placing our products on
formulary at managed care organizations. We market our self-care products to
midlife women through a comprehensive direct-to-consumer marketing program that
includes the As We Change(R) catalog, as well as the womenfirst.com and
aswechange.com internet sites.
Establish "womenfirst.com" as a valuable resource for midlife women. We
believe that midlife women are actively seeking credible and comprehensive
information regarding their health concerns as well as opportunities to purchase
products related to their particular needs. Our internet site, womenfirst.com,
contains extensive information for women, including a letter from the Chairman
of our Health Advisory Board that women can download and take to their clinician
as rationale for prescribing our products. Our aswechange.com internet site
contains a carefully selected array of self-care and lifestyle products. These
sites provide an effective platform to market the self-care products we
currently offer and, in the future, to promote the products of other companies
that are targeted to midlife women.
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Seek product acquisition opportunities. We plan to expand the range of
products we offer midlife women by obtaining rights to market and sell branded
pharmaceutical and self-care products to these women. We are focused on
acquiring promotion sensitive products that are currently utilized by OB/GYNs
but are no longer actively marketed by pharmaceutical companies. We are seeking
products to treat the conditions and diseases affecting midlife women, such as
menopause, reduced libido, pain, osteoporosis, depression, weight management and
infection.
PRODUCTS
Pharmaceutical Products
We began selling and distributing Ortho-Est(R) Tablets (estropipate), a
soybean-derived estrogen product, through wholesale and retail channels pursuant
to an exclusive distribution agreement with Ortho-McNeil Pharmaceutical in July
1998. Ortho-Est(R) Tablets are available on the market in the United States in
two strengths, .625mg and 1.25mg. Ortho-Est(R) Tablets replenish declining
estrogen levels in midlife women with estrone, the principal type of estrogen
that the body makes following menopause. We terminated the distribution
agreement relating to Ortho-Est(R) Tablets effective September 30, 2000 and
entered into an Ortho-Est(R) Asset Transfer and Supply Agreement pursuant to
which Ortho-McNeil transferred to us all of its right, title and interest in
Ortho-Est(R) Tablets effective January 1, 2001 and granted us an exclusive
license to use the trademark "Ortho-Est(R)." Under the new agreement, we will
have the right to continue to buy product from Ortho-McNeil until we find a
replacement manufacturer. The prices we pay for product under the new agreement
will equal Ortho-McNeil's fully burdened cost. We have until April 2002 to find
a replacement manufacturer.
In November 1999, we initiated sales and distribution of the Esclim(TM)
estradiol transdermal system, an estrogen patch system that releases small
amounts of 17 Beta-estradiol, the main estrogen produced in the ovaries, through
the skin on a continuous basis. Esclim(TM) replenishes declining levels of
estradiol using a patented matrix technology. Under our distribution and license
agreement with Laboratoires Fournier S.A., as amended, Women First has the
exclusive right to promote, sell, and distribute the Esclim(TM) product line in
the United States and Puerto Rico. The product, a patch that is changed twice a
week, is available in a range of dosage strengths including 0.025, 0.0375, 0.05,
0.075 and 1.0 mg. The Esclim(TM) product, which received FDA approval in August
1998, is the leading transdermal estrogen product in France and has been
launched in a number of European countries and Canada.
In December 2000 we signed a nationwide purchasing agreement with Novation,
the largest supply cost management company in health care, for Esclim(TM). Under
terms of the agreement effective December 15, 2000, the Esclim(TM) estrogen
transdermal patch system will be available to the 7,400 health care
organizations that purchase supplies through Novation contracts. In addition, in
March 2001, we signed a formulary partnership agreement for the Esclim(TM)
product with AdvancePCS, a leading pharmacy benefit services organization. Under
the terms of the two-year agreement, all doses of the Esclim(TM) product will be
added to the Advance PCS National Formulary, distributed to nearly 400,000
practicing physicians. We expect the agreement will increase revenue
opportunities for the Esclim(TM) product and improve our ability to contract
with additional pharmacy benefit services and managed care organizations.
In January 2000, we began to co-promote Ortho-Prefest(R) (17
Beta-estradiol/norgestimate), a new oral combination estrogen and progestin HRT
product that received FDA approval in October 1999. Pursuant to our co-promotion
agreement with Ortho-McNeil Pharmaceutical, Women First promoted
Ortho-Prefest(R) to designated OB/GYNs, primary care physicians, nurse
practitioners and physician's assistants focused on women's health care in the
United States and Puerto Rico. We amended this agreement in September 2000 to
terminate our co-promotion efforts on December 31, 2000.
We obtained the right to market Pravachol(R) (pravastatin sodium), an
HMG-CoA reductase inhibitor or "statin," to designated OB/GYNs, nurse
practitioners and physician's assistants associated with OB/GYN practices
pursuant to a co-promotion agreement with Bristol-Myers Squibb in March 1999,
and began our co-promotional efforts in relation to this product in the second
quarter 1999. We amended the agreement effective April 1, 2000 to reduce the
baseline amounts and improve our chances of recognizing revenue under
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the agreement. This amendment did not significantly improve the revenue
opportunities under this arrangement, and we have notified Bristol-Myers Squibb
of our intention to cancel the agreement effective March 31, 2001.
Effective as of March 31, 2000, Women First discontinued the co-promotion
of Ortho Tri-Cyclen(R), a leading oral contraceptive, which had been offered
under a co-promotion agreement with Ortho-McNeil Pharmaceutical.
Self-Care Products
We offer a variety of self-care products to midlife women through our
subsidiary As We Change, LLC, a national mail order catalog and internet
retailer directed at midlife women, and through our internet sites,
womenfirst.com and aswechange.com. Self-care products include the Women
First(TM) Daily Difference(TM) line of dietary supplements formulated for us by
the Tufts School of Nutritional Science and Policy and supported by the National
Association of Nurse Practitioners in Women's Health. The As We Change(R)
catalog offers women a range of more than 200 products designed to meet the
needs of women at midlife.
Other Products
In September 1998, we entered into an exclusive licensing arrangement with
CHPNC, LLC, pursuant to which we have the exclusive right to manufacture, market
and sell a product entitled, "Benefit: Risk Assessment Model." We funded the
development of this product, a patient health questionnaire and software program
that assesses a woman's risk for developing heart disease, breast cancer and
osteoporosis. This product has not met our expectations and we are attempting to
sell our interest in it.
MARKETING AND SALES
Pharmaceutical Products
In August 2000, there were approximately 35,000 board certified OB/GYNs in
the United States. We have recruited and trained a direct pharmaceutical field
sales organization of 60 sales representatives to market pharmaceutical products
to these practices. We intend to hire additional sales representatives as
warranted by the growth of our business. To optimize our sales efforts, we have
prioritized OB/GYNs based on the frequency with which they prescribe hormonal
replenishment therapy products. We have also hired a staff to support the field
sales force, including a marketing and regulatory department, customer service
representatives, sales trainers and sales and contract administrators.
Internet
We shifted the focus of our Internet site in 2000 from a content site to a
commercial site that supports our pharmaceutical products. In March 2000 we
launched a Professional Gateway to provide professional materials for OB/GYNs.
Through the womenfirst.com site, we provide access to all of the products sold
through our catalog, As We Change(R). In late 2000, we made a number of
enhancements to our aswechange.com site to further support our catalog business.
As We Change
Our As We Change, LLC subsidiary offers a broad array of self-care products
including nutritional, skin, beauty, herbal, exercise, libido, wellness and
personal care products. The As We Change(R) catalog features private label
products that are tailored to meet the individual lifestyle needs of women. As
We Change(R) has developed a sophisticated infrastructure including a call
center with telephone and internet customer support capability, warehouse and
shipping, new product screening and sourcing, catalog design and production,
database and circulation management and e-commerce. We are developing an
offshoot of the catalog that supports our pharmaceutical products and can be
delivered to the clinician's office for use by midlife women.
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EDUCATIONAL AND SUPPORT PROGRAMS
The Women First(TM) Clinician Education Program. Our Health Advisory Board
has developed the content for a midlife health education program entitled
"Gateway to Midlife Health -- A Better Way(TM)" to educate OB/GYNs and primary
care physicians, nurse practitioners and physician's assistants focused on
women's health with the goal of improving the diagnosis and treatment of midlife
conditions and diseases. Three additional programs for OB/GYNs and nurse
practitioners and physician's assistants focused on women's health have also
been offered, "Managing Cardiovascular Risk in Women -- A Better Way(TM),"
"Lifetime Hormonal Management -- A Better Way(TM)" and "Lifetime Hormonal
Management -- Patient Acceptance of HRT." The first of these programs was
sponsored by Bristol-Myers Squibb and Women First, and the latter two are
supported through an educational grant from Ortho-McNeil Pharmaceutical and
Women First. The "Lifetime Hormonal Management -- A Better Way(TM)" program is
sponsored by the Keck School of Medicine of the University of Southern
California in cooperation with the Mount Sinai School of Medicine.
We have also developed a patient handbook called "A Better Way(TM) to
Midlife Health -- Your Personal Guide" that provides information to women about
midlife health issues including menopause.
MANUFACTURING AND LOGISTICS
We intend to source the products we offer through manufacturing agreements
with third-party manufacturers. The third-party manufacturers will be
responsible for receipt and storage of raw materials, production, packaging,
labeling and shipping of finished goods. With regards to our pharmaceutical
products, we currently have arrangements with Laboratoires Fournier S.A. for the
supply of the Esclim(TM) estradiol transdermal system and with Ortho-McNeil
Pharmaceutical for the supply of the Ortho-Est(R) Tablets. However, the
Ortho-Est(R) Asset Transfer and Supply Agreement contract that we negotiated in
September 2000 requires us to establish our own manufacturing capability by
April 2002. Bristol-Myers Squibb is responsible for the supply of the
Pravachol(R) product in all distribution channels. For more information about
our sources of supply, see "Risks and Uncertainties" on pages 9 through 14 of
this Report on Form 10-K.
We have engaged Livingston Healthcare Services, Inc. for the distribution
of pharmaceutical products to wholesalers, pharmacies and hospitals and to
provide logistics management for the products we distribute.
COMPETITION
The health care industry is highly competitive. Most of our competitors and
those of our collaborative partners are large, well-known pharmaceutical, life
science and health care companies that have considerably greater financial,
sales, marketing and technical resources than we have. Additionally, these
competitors have research and development capabilities that may allow them to
develop new or improved products that may compete with product lines we market
and distribute. The pharmaceutical industry is characterized by continuous
product development and technological change.
Pharmaceutical Products
The pharmaceutical products we offer face significant competition.
Ortho-Est(R) Tablets and the Esclim(TM) estradiol transdermal system compete in
the hormone replenishment therapy market. This market is dominated by
Wyeth-Ayerst Laboratories, Inc., a division of American Home Products
Corporation, which markets Premarin(R), an oral estrogen product, and
Prempro(TM) and Premphase(R), combination oral estrogen and progestin products.
The HRT products we market also compete with HRT products marketed by
Parke-Davis, a division of Pfizer, Solvay Pharmaceuticals, Inc., Duramed
Pharmaceuticals, Inc., Pharmacia Corporation, and others, as well as generic HRT
products. The HRT products we market also compete with non-hormonal
replenishment therapy products marketed by Merck & Co., Inc. and Eli Lilly &
Company. In addition, the Esclim(TM) estradiol transdermal system competes with
estrogen and combination estrogen/progestin patch products marketed by Berlex
Laboratories, Watson Laboratories, Inc., Novogyne Pharmaceuticals and Aventis
Pharma AG. Each of these competitors has substantially greater marketing, sales
and financial resources than we do.
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In addition to our industry competitors, we compete against the non-use of
HRT by women caused by fears of cancer.
Self-Care Products
Competition for the self-care products we offer is significant. As We
Change(R) competes with a number of catalog companies and internet retailers
focusing on self-care products. Transitions for Women(R) offers a range of
nutritional and herbal products for midlife women and Well & Good(TM), Feel
Good(TM), Solutions(R), InteliHealth HealthyHome(TM) and Harmony(TM) market and
sell general lifestyle and personal care products.
Our Daily Difference(TM) dietary supplements face substantial competition
from products such as Centrum(R), marketed by Whitehall-Robins Healthcare,
Natrol(R) marketed by Natrol, Inc., Nature Made(R), marketed by Nature Made
Nutritional Products, One-A-Day(R), marketed by Bayer Corporation, Theragran(R)
and Theragran-M(R), marketed by Bristol-Myers Squibb, Viactiv(R), marketed by
Mead Johnson Nutritionals and Myadec(R), marketed by Parke-Davis. Each of these
competitors has substantially greater marketing, sales and financial resources
than we do.
Other Education and Support Programs
Our educational programs will compete with programs that have been
developed by medical professionals and non-professionals alike. Our internet
site, womenfirst.com, will compete with other internet sites focused on women's
health as well as sites focused on health care issues in general, such as
cbs.medscape.com, nih.gov, healthfinder.gov, reutershealth.com, drkoop.com, and
webmd.com.
PRODUCT AGREEMENTS
Ortho-Est(R) Tablets. In July 1998, we entered into a distribution
agreement with Ortho-McNeil Pharmaceutical, Inc. for Ortho-Est(R) Tablets that
we market and distribute exclusively in the United States and Puerto Rico. The
distribution agreement required us to make minimum aggregate payments totaling
$47.5 million to Ortho-McNeil over the life of the contract regardless of the
actual sales performance of the product. If our annual purchases of Ortho-Est(R)
Tablets exceeded our minimum payments, we were entitled to the amount of this
excess less specified royalties and manufacturing costs. This agreement was
terminated effective September 30, 2000 and we entered into a new agreement, the
Ortho-Est(R) Asset Transfer & Supply Agreement, with Ortho-McNeil. Under terms
of the new agreement, Ortho-McNeil transferred to us all of its right, title and
interest in Ortho-Est(R) Tablets effective January 1, 2001 and granted us an
exclusive license to use the "Ortho-Est(R)" trademark effective January 1, 2001
until June 1, 2008. The new agreement reduced the minimum payment in 2000 from
$5.4 million to $4.7 million. No further payments are required under the new
agreement. Under the new agreement, we will have the right to continue to buy
product from Ortho-McNeil until we find a replacement manufacturer. The prices
we pay for product under the new agreement will equal Ortho-McNeil's fully
burdened cost. We have until April 2002 to find a replacement manufacturer.
Esclim(TM). In July 1999, we entered into a distribution and license
agreement with Laboratoires Fournier S.A. under which we have been granted the
exclusive right (subject to exceptions) to market, use, distribute and sell the
Esclim(TM) estradiol transdermal system in various dosages in the United States
and Puerto Rico. The agreement requires us to pay Fournier a non-refundable
license fee of $1.45 million payable over a two-year period, of which $0.75
million was paid in 1999, $0.35 million was scheduled for payment in November
2000, and $0.35 million is scheduled for payment in November 2001. In November
2000, we and Laboratoires Fournier revised the contract to improve our ability
to contract with managed care and group purchasing organizations, and to delay
the November 2000 milestone payment for one year, subject to our implementing a
Phase IV study. We implemented the Phase IV study in March 2001. The agreement
provides that Fournier is solely responsible for the manufacture of the product
and for quality assurance, quality control and other aspects of manufacturing
the product, except that after payment of the initial license fees, Fournier has
transferred to us responsibility for the New Drug Application filed with the FDA
with respect to the product. We are solely responsible for U.S. customs
clearance, sales, marketing, advertising, distribution of the product and for
handling product complaints.
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Ortho-Prefest(R) and Ortho Tri-Cyclen(R). We obtained the right to
co-promote the Ortho-Prefest(R) and Ortho Tri-Cyclen(R) products in the United
States and Puerto Rico to designated physicians and nurse practitioners in the
field of women's health care pursuant to a co-promotion agreement with
Ortho-McNeil Pharmaceutical effective July 1, 1999 and continuing through
December 31, 2002 unless earlier terminated. We amended the co-promotion
agreement in March 2000 to remove Ortho Tri-Cyclen(R) and amended the agreement
in September 2000 to terminate our efforts on behalf of Ortho-Prefest(R)
effective December 31, 2000.
Under the terms of the September 2000 amendment, Ortho-McNeil compensated
us for sales calls made in 2000 in support of Ortho-Prefest(R). We were
responsible for our costs in promoting the product covered by the agreement and
our out-of-pocket expenses in training our sales force, except for the costs of
certain promotional materials, training materials and expenses and product
samples which were provided by Ortho-McNeil. The amended agreement prohibits us
from marketing, promoting, selling or distributing any prescription
contraceptive or prescription hormonal replenishment therapy product other than
Ortho-Est(R) and an estrogen patch product. This non-compete clause expires
March 31, 2001.
Pravachol(R). We amended our agreement with Bristol-Meyers Squibb for the
co-promotion of Pravachol(R), a cholesterol lowering drug, in April 2000 to
improve our revenue opportunities. Our efforts to further amend the agreement
were not successful, and we have notified Bristol-Myers Squibb of our intention
to cancel the contract effective March 31, 2001 under the agreement.
Benefit:Risk Assessment Model. In September 1998 we entered into a license
agreement with CHPNC, LLC to develop a patient health questionnaire and software
program related to hormonal replenishment therapy. Under the agreement, we have
paid a development fee in the amount of $900,000, of which we charged $275,000
to operations in 1998 and $625,000 in 1999. The agreement provides for minimum
royalties of $100,000 per year beginning in 2001 to retain exclusive rights. The
license also contains a non-competition provision that prohibits us from
manufacturing, promoting, publishing or selling any product directly competitive
with the Benefit:Risk Assessment Model. We have engaged a third party to help us
sell our interest in this product.
Daily Difference(TM). In April 1999, we entered into a development and
license agreement with Tufts University School of Nutrition Science and Policy
to formulate nutritional products for midlife women, which are marketed by Women
First under the trade name, Daily Difference(TM). We introduced this product in
June 2000 and sell it through our As We Change(R) catalog and internet site. We
are solely responsible for the manufacturing, marketing and sale of the product.
We pay a license fee equal to a certain percentage of net sales of the product
for fifteen years or the term of the patent, if any, whichever is greater.
INTELLECTUAL PROPERTY
We regard the protection of patents, copyrights, trademarks and other
proprietary rights that we own or license as material to our success and
competitive position. We rely on a combination of laws and contractual
restrictions such as confidentiality agreements to establish and protect our
proprietary rights. Laws and contractual restrictions, however, may not be
sufficient to prevent misappropriation of our technology or deter others from
independently developing products that are substantially equivalent or superior.
Patents. Due to the length of time and expense associated with bringing new
pharmaceutical products to market, we recognize the considerable benefits
associated with acquiring or licensing products that are protected by existing
patents or for which patent protection can be obtained. However, we do not
currently own any issued patents. We have a patent pending for our Daily
Difference(TM) nutritional product. The Esclim(TM) product is patented, but most
of our self-care products are not protected by patents.
Copyrights. We have received copyright registration for the Women First
HealthCare logo. We own all the copyrights in the Strong Women Stay Young video.
Copyrights for the source code of the womenfirst.com internet site that we
created with SF Interactive have been assigned to us.
Trademarks and Domain Names. We own the registered U.S. trademark
ViAmor(R), a vaginal lubricant. Our subsidiary, As We Change, LLC, owns the
registered U.S. trademark As We Change(R). In addition, we
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have applied for U.S. trademark registrations for a number of key trademarks,
including Women First HealthCare(TM), Women First(TM), and Daily Difference(TM).
Some of our agreements also include rights to use the manufacturer's trademarks,
such as the Ortho-Est(R) and Esclim(TM) trademarks during the term of these
agreements. We intend to introduce new trademarks, service marks and brand names
and to maintain registrations on trademarks that remain valuable to the
business. We have no trademark registrations or applications pending outside the
United States.
We currently hold the internet domain names "womenfirsthealthcare.com,"
"womenfirst.com," and "dailydifference.net" and our subsidiary, As We Change,
LLC, holds the internet domain name "aswechange.com." Domain names are regulated
by internet regulatory bodies while trademarks are enforceable under local law.
As a result, we may not acquire or be able to maintain our domain names in all
of the countries in which we conduct business, and we could be unable to prevent
third parties from acquiring domain names that infringe or otherwise decrease
the value of our domain names or trademarks.
GOVERNMENT REGULATION
The manufacturing, processing, formulation, clinical investigation,
packaging, labeling, storage, promotion, distribution and advertising of the
products we offer are subject to extensive regulation by one or more federal
agencies including the FDA, DEA, Environmental Protection Agency, Federal Trade
Commission, Occupational Safety and Health Administration, Consumer Product
Safety Commission, the United States Customs Service, and the United States
Postal Service. These activities are also regulated by various agencies of the
states and localities in which our products are sold. For both currently
marketed and future products, failure to comply with applicable regulatory
requirements could limit or prevent our ability to market and distribute such
products and would harm our business.
Pharmaceuticals. All pharmaceutical firms, including manufacturers from
whom we license or for whom we distribute products, are subject to regulation by
the FDA. Any restriction or prohibition applicable to sales of products we
market could materially and adversely affect our business.
We market prescription drug products that have been approved by the FDA.
The FDA has the authority to revoke existing approvals, or to review the status
of currently exempt pharmaceuticals and require application and approval, of
prescription drugs if new information reveals that they are not safe or
effective. The FDA also regulates the promotion, including advertising, of
prescription drugs.
Drug products must be manufactured, packaged, and labeled in accordance
with their approvals and in conformity with standards known as current Good
Manufacturing Practices and other requirements. Drug manufacturing facilities
must be registered with and approved by FDA and must list with the FDA the drug
products they intend to distribute. The manufacturer is subject to inspections
by the FDA and periodic inspections by other regulatory agencies. The FDA has
extensive enforcement powers over the activities of pharmaceutical
manufacturers, including authority to seize and prohibit the sale of unapproved
or non-complying products, and to halt manufacturing operations that are not in
compliance with current Good Manufacturing Practices. Also, the FDA regulates
the distribution of samples of drugs. Both FDA and DEA may impose criminal
penalties arising from non-compliance with applicable regulations.
Dietary Supplements. The manufacturing and production of dietary
supplements historically has been subject to less intensive regulation than
pharmaceutical products. Under the Dietary Supplement Health & Education Act of
1994, the FDA may exercise authority over the labeling and sales of dietary
supplements. In addition, the United States Postal Service regulates claims with
respect to products sold or marketed through the mail, and the FTC regulates
dietary supplement advertising.
The FDA and other federal authorities are reviewing alternative approaches
to assure the safety of vitamins, minerals, herbals and other products sold as
dietary supplements. Increased regulatory oversight could subject us and other
manufacturers and distributors of dietary supplements to increased production
and compliance costs and possibly require capital expenditures. Future
regulation affecting dietary supplements could result in a recall or
discontinuance of certain products.
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Cosmetics Regulations. We market cosmetic products through our As We
Change(R) catalog and www.aswechange.com internet site. The FDA regulates the
labeling on cosmetic products but does not require cosmetics to be approved
before products are released to the marketplace. The FDA does not have the
authority to require manufacturers to register their cosmetic establishments,
file data on ingredients, or report cosmetic-related injuries. The FDA maintains
a voluntary data collection program, however, and companies wishing to
participate in the program may do so. The FDA may inspect cosmetics
manufacturing facilities, collect samples for examination, and take action to
remove adulterated and misbranded cosmetics from the market.
EMPLOYEES
As of February 28, 2001, we employed 118 full-time people, of whom 89 were
employed in sales and marketing, two were employed in education and program
development and 27 were employed in administration. None of our employees is
represented by a labor union, and we consider our relations with our employees
to be good. Our ability to achieve our financial and operational objectives
depends in large part upon the continued service of our senior management and
key personnel and our continuing ability to attract and retain highly qualified
managerial personnel. Competition for such qualified personnel in the
pharmaceutical and health care industry is intense.
SEASONALITY
Catalog sales are typically higher in the first calendar quarter due to
larger catalog circulation, merchandising improvements during the year, and some
increase in consumer buying as springtime nears. We anticipate this trend will
continue.
RISKS AND UNCERTAINTIES
WE HAVE BEEN IN BUSINESS A SHORT TIME AND HAVE EXPERIENCED SIGNIFICANT LOSSES
SINCE OUR INCEPTION. IF MIDLIFE WOMEN DON'T USE AND THEIR CLINICIANS DON'T
PRESCRIBE THE PRODUCTS WE OFFER, WE WILL CONTINUE TO EXPERIENCE SIGNIFICANT
LOSSES.
We are an early stage company with a history of losses. Through December
31, 2000, we have generated $54.4 million in net revenues. We have incurred
significant losses since we were founded in November 1996, accumulating a
deficit of $65.4 million through December 31, 2000, and we expect to incur
losses at least through the third quarter of 2001. We may not successfully
complete the transition to successful operations or profitability. Early stage
companies such as ours frequently encounter problems, delays and expenses. These
include, but are not limited to, unanticipated problems and additional costs
related to marketing, competition and product acquisitions and development.
These problems may be beyond our control, and in any event, could adversely
affect our results of operations.
Esclim(TM) and Ortho-Est(R) Tablets may not achieve wide market acceptance.
Products we may acquire, if any, likewise may not achieve wide market
acceptance. The market acceptance of these products will depend on, among other
factors:
- their advantages over existing competing products,
- their perceived efficacy and safety,
- the actual or perceived side effect profile of our products, and
- the reimbursement policies of the government and third-party payors.
Our model assumes that our marketing programs and the growth in our target
market will result in increased demand for the products we offer. If our
marketing programs do not succeed in generating a substantial increase in demand
for our products, we will be unable to realize our operating objectives. If the
clinicians we target do not recommend and prescribe the products we offer or if
midlife women do not regularly use these products, we will continue to
experience significant losses and our business will be adversely affected.
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OUR BUSINESS MODEL REQUIRES THE DEVELOPMENT AND PROFITABILITY OF TWO DISTINCT
AREAS, PHARMACEUTICAL AND CONSUMER. IF WE FAIL TO IMPLEMENT KEY ELEMENTS OF OUR
BUSINESS PLAN, WE MAY NOT SUCCEED.
We have embarked on an ambitious plan to provide products -- prescription
and non-prescription -- and support systems to women to help them make more
informed decisions regarding their health care in midlife. There is a limited
market awareness of our company and the products and services we offer. To be
successful, we must continue to develop, coordinate and balance various elements
of our business. We must generate expanded market demand for the products we
offer by convincing OB/GYNs, nurse practitioners and physician's assistants
focused on women's health to prescribe and recommend the products we offer, as
well as manage different distribution channels for the products we offer.
If we fail to implement either of these key elements of our business plan,
our business may not succeed.
OUR GROSS MARGINS WILL BE NEGATIVELY IMPACTED IF WE FAIL TO FIND A REPLACEMENT
MANUFACTURER FOR ORTHO-EST(R) TABLETS BY APRIL 2002.
Under our Ortho-Est(R) Asset Transfer and Supply Agreement with
Ortho-McNeil Pharmaceutical, Inc. we are required to find a replacement
manufacturer for Ortho-Est(R) Tablets by April 2002. If we do not have a new
manufacturer by that date, Ortho-McNeil will continue to manufacture product for
us but at a much higher cost. This will negatively affect our gross margins.
WE ARE UNCERTAIN OF OUR ABILITY TO OBTAIN ADDITIONAL FINANCING AT FAVORABLE
TERMS FOR OUR FUTURE CAPITAL NEEDS. IF WE ARE UNABLE TO OBTAIN FINANCING, WE MAY
NOT BE ABLE TO CONTINUE TO OPERATE OR GROW OUR BUSINESS.
We believe that our existing cash balances will be sufficient to meet our
working capital, capital expenditure requirements and minimum purchase
commitments for Esclim(TM) through the end of year 2001. Our future capital
requirements will depend on many factors including:
- the costs of our sales and marketing activities,
- the costs of acquiring or developing new products,
- the costs of expanding our operations, and
- our ability to generate positive cash flow from our sales.
Additional funding, if needed, may not be available on acceptable terms, if
at all. If adequate funds are needed and not available, we may be required to
curtail significantly or defer one or more of our marketing programs or to limit
or postpone obtaining new products through license or acquisition or
co-promotion agreements. If we need and raise additional funds through the
issuance of equity securities, the percentage ownership of our then-current
stockholders may be reduced and such equity securities may have rights,
preferences or privileges senior to those of the holders of our common stock. If
we need and raise additional funds through the issuance of debt securities,
these new securities would have certain rights, preferences and privileges
senior to those of the holders of our common stock, and the terms of these debt
securities could impose restrictions on our operations.
ANY FAILURE BY US TO OBTAIN RIGHTS TO ADDITIONAL PRODUCTS AND SUCCESSFULLY
INTEGRATE THEM MAY LIMIT OUR ABILITY TO GROW.
We plan to obtain rights to additional products through license or
acquisition agreements. Our failure to obtain rights to market products or to
acquire products on acceptable terms or to integrate these products into our
organization may limit our growth opportunities if our current sales do not grow
as anticipated. We may not be able to identify appropriate licensing or
acquisition candidates in the future. Even if we identify an appropriate
candidate, competition for it may be intense. We may not be able to successfully
negotiate the terms of a license or acquisition agreement on commercially
acceptable terms. The negotiation of agreements to obtain rights to additional
products could divert our management's time and resources from our existing
business. Moreover, we may be unable to finance an acquisition or integrate a
new product or company into
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our existing business. If we use shares of our common stock as consideration for
one or more significant acquisitions, our stockholders could suffer significant
dilution of their ownership interests.
OUR QUARTERLY FINANCIAL RESULTS MAY FAIL TO MEET OR EXCEED THE EXPECTATIONS OF
INVESTORS, WHICH COULD CAUSE THE PRICE OF OUR STOCK TO DECLINE SIGNIFICANTLY.
Our quarterly operating results may fail to meet or exceed the expectations
of investors based on factors such as:
- changes in the acceptance or availability of the products we offer,
- the timing of new product offerings, acquisitions or other significant
events by us or our competitors,
- regulatory approvals and legislative changes affecting the products we
offer or those of our competitors,
- the productivity of our sales force,
- general economic and market conditions and conditions specific to the
health care industry.
Due to our short operating history and the difficulty of predicting demand
for the products we offer, we are unable to accurately forecast our revenues.
Because of these factors, our operating results in one or more future quarters
may fail to meet the expectations of investors, which could have a material
adverse effect on our stock price.
THE HEALTH CARE INDUSTRY AND THE MARKETS FOR THE PRODUCTS WE OFFER ARE VERY
COMPETITIVE. WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY, ESPECIALLY AGAINST
ESTABLISHED INDUSTRY COMPETITORS WITH SIGNIFICANTLY GREATER FINANCIAL RESOURCES.
The health care industry is highly competitive. Most of our competitors and
those of our collaborative partners are large, well-known pharmaceutical, life
science and health care companies that have considerably greater financial,
sales, marketing and technical resources than we have. Additionally, these
competitors have research and development capabilities that may enable them to
develop new or improved products that may compete with product lines we market
and distribute. The pharmaceutical industry is characterized by continuous
product development and technological change. The pharmaceutical products we
market and distribute could be rendered obsolete or uneconomical by
pharmaceutical products developed by competitors, technological advances
affecting the cost of production, or marketing or pricing action by one or more
competitors. Our business, financial condition and results of operations could
be materially and adversely affected by any one or more of such developments.
The pharmaceutical products we offer face significant competition.
Ortho-Est(R) Tablets and the Esclim(TM) estradiol transdermal system compete in
the hormone replenishment therapy market. This market is dominated by
Wyeth-Ayerst Pharmaceuticals, Inc., a division of American Home Products, which
markets Premarin(R), an oral estrogen product, and Prempro(TM) and Premphase(R),
combination oral estrogen and progestin products. The HRT products we market
also compete with HRT products marketed by Parke-Davis, a division of Pfizer,
Solvay Pharmaceuticals, Inc., Duramed Pharmaceuticals, Inc., Pharmacia
Corporation, and others, as well as generic HRT products. Esclim(TM) is not
available generically but there is a generic patch available. Ortho-Est(R)
Tablets do have generic competition. The HRT products we market also compete
with non-hormonal replacement therapy products marketed by Merck & Co., Inc. and
Eli Lilly & Company. In addition, the Esclim(TM) estradiol transdermal system
competes with estrogen and combination estrogen/ progestin patch products
marketed by Berlex Laboratories, Watson Laboratories, Inc., Novogyne
Pharmaceuticals and Rhone-Poulenc Rorer Pharmaceuticals, Inc. Each of these
competitors has substantially greater marketing, sales and financial resources
than we do.
Competition for the self-care products we offer is significant. As We
Change(R) competes with a number of catalog companies and internet retailers
focusing on self-care products. Transitions for Women(R) offers a range of
nutritional and herbal products for midlife women and Well & Good(TM), Feel
Good(TM), Solutions(R), InteliHealth HealthyHome(TM) and Harmony(TM) market and
sell general lifestyle and personal care products.
Our Daily Difference(TM) nutritional products face substantial competition
from products such as Centrum(R), marketed by Whitehall-Robins Healthcare,
Natrol(R) marketed by Natrol, Inc., Nature Made(R),
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marketed by Nature Made Nutritional Products, One-A-Day(R), marketed by Bayer
Corporation, Theragran(R) and Theragran-M(R), marketed by Bristol-Myers Squibb,
Viactiv(R), marketed by Mead Johnson Nutritionals and Myadec(R), marketed by
Parke-Davis. Each of these competitors has substantially greater marketing,
sales and financial resources than we do.
Our educational programs will compete with programs that have been
developed by medical professionals and non-professionals alike. Our internet
site, womenfirst.com, will compete with other internet sites focused on women's
health as well as sites focused on health care issues in general, such as
cbs.medscape.com, nih.gov, healthfinder.gov, reutershealth.com, drkoop.com, and
webmd.com.
Our failure to adequately respond to the competitive challenges faced by
the products we offer could have a material adverse effect on our business,
financial condition and results of operations.
WE MAY NOT BE ABLE TO OBTAIN REIMBURSEMENT FOR THE PHARMACEUTICAL PRODUCTS WE
OFFER. ANY FAILURE TO OBTAIN REIMBURSEMENT COULD REQUIRE US TO DISCONTINUE SALES
OF A PARTICULAR PRODUCT AND COULD HARM OUR RESULTS OF OPERATIONS.
Our ability to market new and existing pharmaceutical products depends in
part on whether health care payors, including government authorities, private
health insurers, health maintenance organizations and managed care organizations
will provide sufficient reimbursement for the products we offer. Third-party
payors are increasingly challenging the prices of pharmaceutical products and
demanding data to justify the inclusion of new or existing products in their
formularies. Significant uncertainty exists regarding the reimbursement status
of pharmaceutical products, and we cannot predict whether additional legislation
or regulation affecting third-party coverage and reimbursement will be enacted
in the future or what effect such legislation or regulation would have on our
business. Reimbursement may not be available for the products we offer and
reimbursement granted may not be maintained. In particular, sales of
Ortho-Est(R) Tablets may be adversely affected by formularies that require
substitution of generics on prescriptions written for these products unless the
physician indicates "dispense as written" on the prescription. Moreover, limits
on reimbursement available from third-party payors may reduce the demand for, or
adversely affect the price of, the products we offer. The unavailability or
inadequacy of third-party reimbursement for the products we offer would have a
material adverse effect on our results of operations.
TECHNOLOGICAL CHANGE COULD RENDER THE PHARMACEUTICAL PRODUCTS WE OFFER OBSOLETE.
The pharmaceutical products that we market and distribute could be rendered
obsolete or uneconomical by the development of new drugs or devices to treat the
conditions that they address. Technological advances affecting costs of
production or marketing also could adversely affect our ability to sell
products. In addition, our own licensing or acquisition of additional products
could adversely affect the demand for the products we currently offer if the new
product has the same or similar indications as one or more of the products we
currently offer.
WE ARE DEPENDENT ON A SINGLE SOURCE OF SUPPLY FOR THE PHARMACEUTICAL PRODUCTS WE
OFFER. IF ONE OF OUR SUPPLIERS FAILS TO SUPPLY ADEQUATE AMOUNTS OF A PRODUCT WE
OFFER, OUR SALES MAY SUFFER AND WE COULD BE REQUIRED TO ABANDON A PRODUCT LINE.
We are dependent on single sources of supply for the pharmaceutical
products we offer, Ortho McNeil Pharmaceutical, Inc. for Ortho-Est(R) Tablets
and Laboratories Fournier S.A. for Esclim(TM). With respect to these products,
we cannot guarantee that these third parties will be able to provide adequate
supplies of products in a timely fashion. We also face the risk that one of our
suppliers could lose its production facilities in a disaster, be unable to
comply with applicable government regulations or lose the governmental permits
necessary to manufacture the products it supplies to us. If a third-party
supplier cannot meet our needs for a product, we may not be able to obtain an
alternative source of supply in a timely manner or at all. In these
circumstances, we may be unable to continue to market products as planned and
could be required to abandon or divest ourselves of a product line on terms that
would materially adversely affect us.
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WE MAY BE EXPOSED TO PRODUCT AND PROFESSIONAL LIABILITY CLAIMS NOT COVERED BY
INSURANCE THAT WOULD HARM OUR BUSINESS.
We may be exposed to product or professional liability claims. Although we
believe that we currently carry and intend to maintain appropriate product and
professional liability insurance, we cannot guarantee that this insurance will
be sufficient to cover all possible liabilities or that such insurance will
continue to be available in the future at acceptable costs. A successful suit
against us could have an adverse effect on our business and financial condition
if the amounts involved are material.
OUR INABILITY TO OBTAIN NEW PROPRIETARY RIGHTS OR TO PROTECT AND RETAIN OUR
EXISTING RIGHTS COULD IMPAIR OUR COMPETITIVE POSITION AND ADVERSELY AFFECT OUR
SALES.
We believe that the patents, trademarks, copyrights and other proprietary
rights that we own or license, or that we will own or license in the future,
will continue to be important to our success and competitive position. If we
fail to maintain our existing rights or cannot acquire additional rights in the
future, our competitive position may be harmed. Due to the length of time and
expense associated with bringing new pharmaceutical products to market, there
are benefits associated with acquiring or licensing products that are protected
by existing patents or for which patent protection can be obtained. While the
Esclim(TM) estradiol transdermal system incorporates patented technology, most
of the self-care products we sell are not protected by patents. We have applied
for registration of a number of key trademarks and intend to introduce new
trademarks, service marks and brand names. We intend to take the actions that we
believe are necessary to protect our proprietary rights, but we may not be
successful in doing so on commercially reasonable terms, if at all. In addition,
parties that license their proprietary rights to us may face challenges to their
patents and other proprietary rights and may not prevail in any litigation
regarding those rights. Moreover, our trademarks and the products we offer may
conflict with or infringe upon the proprietary rights of third parties. If any
such conflicts or infringements should arise, we would have to defend ourselves
against such challenges. The resolution of any such infringement claims may
result in protracted and costly litigation, regardless of the merits of such
claims. We also may have to obtain a license to use those proprietary rights or
possibly cease using those rights altogether. Any of these events could harm our
business.
MUCH OF OUR BUSINESS IS SUBJECT TO REGULATION. REGULATORY BODIES COULD IMPAIR OR
ELIMINATE OUR ABILITY TO CONDUCT PORTIONS OF OUR BUSINESS.
Many of our activities are subject to extensive regulation by one or more
federal, state or local agencies. These regulatory bodies have the power to
restrict or eliminate many of our business activities and to seek civil and
criminal penalties for noncompliance with applicable laws and regulations.
Changes in existing laws and regulations could adversely affect our business.
For further discussion of these regulatory matters, see "Item
1: Business -- Government Regulation."
OUR FAILURE TO RETAIN THE PRINCIPAL MEMBERS OF OUR MANAGEMENT TEAM OR TO HIRE
ADDITIONAL QUALIFIED EMPLOYEES WOULD ADVERSELY AFFECT OUR ABILITY TO IMPLEMENT
OUR BUSINESS PLAN.
Our success depends upon the retention of the principal members of our
management, technical and marketing staff, particularly Edward F. Calesa, the
President, CEO and Chairman of the Board. The loss of the services of Mr. Calesa
or other key members of our management team might significantly delay or prevent
the achievement of our development and strategic objectives. We have entered
into an employment contract with Mr. Calesa. We are the beneficiary of life
insurance policies on the life of Mr. Calesa in the amount of $2.0 million. We
do not have life insurance policies on the lives of any other members of our
management team. Our success also depends on our ability to attract additional
qualified employees. Our inability to retain our existing personnel or to hire
additional qualified employees would have a material adverse effect on our
company.
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OUR MANAGEMENT AND EXISTING STOCKHOLDERS HAVE SUBSTANTIAL CONTROL OVER OUR
VOTING STOCK AND CAN MAKE DECISIONS THAT COULD ADVERSELY AFFECT OUR BUSINESS AND
OUR STOCK PRICE.
As of February 28, 2001, Edward F. Calesa and members of his family
beneficially owned approximately 42.5% of our common stock. Johnson & Johnson
Development Corporation, a subsidiary of Johnson & Johnson, beneficially owned
approximately 12.0% of our common stock. Our present directors, executive
officers and principal stockholders as a group beneficially own approximately
54.1% of our outstanding common stock. Accordingly, if all or certain of such
stockholders were to act together, they would be able to exercise significant
influence over or control the election of our Board of Directors, the management
and policies of Women First and the outcome of certain corporate transactions or
other matters submitted to our stockholders for approval, including mergers,
consolidations and the sale of all or substantially all of our assets.
Our directors and management, acting together, may be able to prevent or
effect a change in control of Women First and are able to amend certain
provisions of our Certificate of Incorporation and Bylaws at any time. The
interests of this group may conflict with the interests of our other holders of
common stock, and this concentration of ownership may discourage others from
initiating potential merger, takeover or other change in control transactions.
THE PUBLIC MARKET FOR OUR COMMON STOCK IS VOLATILE, AND THE PRICE OF OUR STOCK
CAN FLUCTUATE FOR REASONS UNRELATED TO OUR OPERATING PERFORMANCE.
The market prices and trading volumes for securities of emerging companies,
like Women First, historically have been highly volatile and have experienced
significant fluctuations both related and unrelated to the operating performance
of those companies. The price of the common stock may fluctuate widely,
depending on many factors, including factors that may cause our quarterly
operating results to fluctuate as well as market expectations and other factors
beyond our control.
WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS THAT COULD PREVENT AN ACQUISITION
OF OUR COMPANY AT A PREMIUM PRICE.
Provisions of our Amended and Restated Certificate of Incorporation and
Amended and Restated Bylaws may make it difficult for a third party to acquire
us and could discourage a third party from attempting to acquire us at a premium
price. These include provisions classifying our Board of Directors, prohibiting
stockholder action by written consent and requiring advance notice for
nomination of directors and stockholders' proposals. In addition, Section 203 of
the Delaware General Corporation Law also imposes restrictions on mergers and
other business combinations between us and any holders of 15% or more of our
common stock. Moreover, our Certificate of Incorporation allows our Board of
Directors to issue, without further stockholder approval, preferred stock that
could have the effect of delaying, deferring or preventing a change in control.
The issuance of preferred stock also could adversely affect the voting power of
the holders of our common stock, including the loss of voting control to others.
In 2001, we adopted a Change in Control/ Severance Policy that may have the
effect of discouraging a third party from attempting to acquire us. Our option
plans provide that unvested options will become fully vested and exercisable
upon a change in control of Women First. The provisions of our Certificate of
Incorporation and Bylaws, our option plans, as well as certain provisions of
Delaware law, may have the effect of discouraging or preventing an acquisition,
or disposition, of our business. These provisions also may diminish the
opportunities for a stockholder to participate in certain tender offers,
including tender offers at prices above the then-current fair market value of
our common stock. Some of our key contracts contain provisions that would allow
the other party to the agreement to terminate the agreement upon a change in
control.
ITEM 2. PROPERTIES
We are headquartered in facilities consisting of approximately 13,392
square feet in San Diego, California, pursuant to a lease expiring in August
2003. As We Change, LLC is headquartered in facilities consisting of
approximately 12,880 square feet in San Diego, California, pursuant to a lease
expiring in September 2002.
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ITEM 3. LEGAL PROCEEDINGS
We are the defendant in a case brought by Consumer Cause, Inc. alleging
that we are violating California's Proposition 65 (also known as the Safe
Drinking Water and Toxic Enforcement Act) by selling a product called Nugest 900
through our As We Change(R) catalog. Progesterone, a chemical known to
California to cause cancer, is a key ingredient in Nugest 900, a topical
cream-gel. We do not expect this matter to have a material adverse effect on our
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
(a) Our Common Stock, $.001 par value per share, has traded on the Nasdaq
National Market under the symbol "WFHC" since June 29, 1999. The following table
sets forth the high and low sales price for the Common Stock as reported by the
Nasdaq National Market during the periods indicated:
QUARTER ENDING HIGH LOW
-------------- ------ ------
June 30, 1999 (beginning June 29, 1999).................... $13.75 $11.00
September 30, 1999......................................... $14.63 $ 6.25
December 31, 1999.......................................... $ 9.19 $ 4.13
March 31, 2000............................................. $ 7.44 $ 4.31
June 30, 2000.............................................. $ 4.84 $ 0.81
September 30, 2000......................................... $ 1.38 $ 0.47
December 31, 2000.......................................... $ 4.13 $ 0.44
As of February 28, 2001, there were 17,606,809 shares of Common Stock
outstanding held by approximately 89 holders of record.
(b) In March 1999, Women First filed a registration statement under the
Securities Act of 1933 to sell up to 4.5 million shares of common stock in its
Initial Public Offering ("IPO"). The effective date of the registration
statement was June 28, 1999, under Commission File No. 333-74367. The offering
was managed by Allen & Company Incorporated and Needham & Company, Inc. and
closed on July 1, 1999 after Women First sold an aggregate of 4.5 million shares
of common stock at an initial public offering price per share of $11.00. On July
21, 1999, Women First sold an additional 675,000 shares of common stock at an
initial public offering price per share of $11.00 upon the underwriters'
exercise in full of their over-allotment option. The IPO, including the
underwriters' exercise of their over-allotment option, resulted in gross
proceeds to us of $56.9 million, $4.0 million of which was applied toward the
underwriting discount. Other expenses related to the offering totaled
approximately $1.5 million. Our net proceeds totaled $51.4 million, all of which
were deposited into our accounts in July 1999. Since the completion of our
offering in July 1999, the net offering proceeds have been applied to
approximately $7.5 million to repay short-term notes issued in March 1999, $0.8
million to develop and acquire rights to additional products, $0.7 million to
purchase machinery, equipment and leasehold improvements, and $37.4 million for
working capital and other general corporate purposes. John Simon, a former
Director of Women First who resigned in June 2000, is a managing director with
Allen & Company Incorporated.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected financial information set forth below with respect to our
consolidated financial statements has been derived from our audited financial
statements. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the related notes
included elsewhere in this report.
PERIOD FROM
NOVEMBER 1, 1996
(INCEPTION)
THROUGH
2000 1999 1998 1997 DECEMBER 31, 1996
----------- ----------- ---------- ---------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenue.................. $ 27,085 $ 22,502 $ 4,834 $ -- $ --
Costs and expenses:
Cost of sales............. 10,529 12,327 2,648 -- --
Marketing and sales....... 31,765 26,827 5,478 791 --
General and
administrative.......... 7,541 10,793 5,912 975 --
Research and
development............. 539 1,697 573 -- --
Write-down of assets and
other charges........... -- 1,639 -- -- --
Restructuring charges..... 735 -- -- -- --
Total costs and
expenses........... 51,109 53,283 14,611 1,766 --
----------- ----------- ---------- ---------- ----------
Loss from operations......... (24,024) (30,781) (9,777) (1,766) --
Interest income, net......... 1,458 646 395 39 --
----------- ----------- ---------- ---------- ----------
Net loss..................... (22,566) (30,135) (9,382) (1,727) --
Accretion of beneficial
conversion feature related
to convertible preferred
stock..................... (3,362) -- -- --
----------- ----------- ---------- ---------- ----------
Net loss available to common
stockholders.............. $ (22,566) $ (33,497) $ (9,382) $ (1,727) $ --
=========== =========== ========== ========== ==========
Net loss per share (basic and
diluted).................. $ (1.29) $ (2.67) $ (1.22) $ (0.23) $ --
=========== =========== ========== ========== ==========
Weighted average shares used
in computing net loss per
share (basic and
diluted).................. 17,467,517 12,547,154 7,685,993 7,551,484 6,806,353
=========== =========== ========== ========== ==========
AT DECEMBER 31,
-------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ---- ------
(DOLLARS IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 9,508 $32,719 $ 4,438 $567 $1,000
Working capital.................................... 9,534 30,499 3,364 394 967
Total assets....................................... 20,044 43,648 12,504 776 1,033
Total stockholders' equity......................... 15,035 36,719 8,436 531 1,000
17
20
QUARTERLY COMPARISONS
The following tables set for the consolidated statements of operations for
each of our last eight quarters. This quarterly information is unaudited and has
been prepared on the same basis as the annual consolidated financial statements.
In our opinion, this quarterly information reflects all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
information for the periods presented. The operating results for any quarter are
not necessarily indicative of results for any future period.
FISCAL 2000
-----------------------------------------------------
Q1 Q2 Q3 Q4
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues............. $ 7,519 $ 5,826 $ 7,349 $ 6,390
Cost of sales............ 2,326 4,092 3,000 1,111
Marketing and sales...... 10,916 9,878 5,678 5,293
General and
administrative......... 2,390 1,993 1,436 1,722
Research and
development............ 269 119 87 64
Write-down of assets and
other charges.......... -- -- -- --
Restructuring charges.... -- 735 -- --
----------- ----------- ----------- -----------
Total operating
expenses........... 15,901 16,817 10,201 8,190
Loss from operations..... (8,382) (10,991) (2,852) (1,800)
Interest and other income
(expense), net......... 384 327 306 442
----------- ----------- ----------- -----------
Net loss................. (7,998) (10,664) (2,546) (1,358)
Accretion of beneficial
conversion feature to
convertible preferred
stock.................. -- -- -- --
----------- ----------- ----------- -----------
Net loss available to
common stockholders.... $ (7,998) $ (10,664) $ (2,546) $ (1,358)
=========== =========== =========== ===========
Net loss per share....... $ (0.46) $ (0.61) $ (0.15) $ (0.08)
=========== =========== =========== ===========
Weighted average shares
used to calculate net
loss................... 17,371,465 17,479,867 17,492,279 17,525,549
=========== =========== =========== ===========
FISCAL 1999
---------------------------------------------------
Q1 Q2 Q3 Q4
---------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues............. $ 4,303 $ 5,064 $ 6,055 $ 7,079
Cost of sales............ 2,783 3,462 3,332 2,750
Marketing and sales...... 4,985 5,315 6,875 9,651
General and
administrative......... 2,599 2,379 2,888 2,927
Research and
development............ 291 335 634 435
Write-down of assets and
other charges.......... -- -- 1,639 --
Restructuring charges.... -- -- --
---------- ---------- ----------- -----------
Total operating
expenses........... 10,658 11,491 15,368 15,763
Loss from operations..... (6,355) (6,427) (9,313) (8,684)
Interest and other income
(expense), net......... 18 (169) 313 483
---------- ---------- ----------- -----------
Net loss................. (6,337) (6,596) (9,000) (8,201)
Accretion of beneficial
conversion feature to
convertible preferred
stock.................. (3,362) -- -- --
---------- ---------- ----------- -----------
Net loss available to
common stockholders.... $ (9,699) $ (6,596) $ (9,000) $ (8,201)
========== ========== =========== ===========
Net loss per share....... $ (1.26) $ (0.83) $ (0.53) $ (0.48)
========== ========== =========== ===========
Weighted average shares
used to calculate net
loss................... 7,685,993 7,979,015 17,112,993 17,255,284
========== ========== =========== ===========
18
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
report. This discussion may contain forward-looking statements that involve
risks and uncertainties. Our actual results may differ materially from the
results discussed in such forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Item I:
Business -- Risks and Uncertainties." We undertake no obligation to release
publicly the results of any revisions to these forward-looking statements or to
reflect events or circumstances arising after the date hereof.
OVERVIEW
Women First HealthCare, Inc. is a specialty pharmaceutical company
dedicated to improving the health and well-being of midlife women. Our mission
is to help midlife women make informed choices about their physical and
emotional health and to provide pharmaceutical products, self-care products and
information to help these women improve the quality of their lives. We market
these products in the United States through a number of channels including our
dedicated sales force, our direct-to-consumer marketing programs through our
internet sites, womenfirst.com and aswechange.com, and through our national As
We Change(R) catalog. We went public in July 1999 and raised approximately $51.4
million, net of underwriting discounts and expenses.
RESULTS OF OPERATIONS
We were engaged in development stage operations from November 1, 1996 (the
date of inception) through December 31, 1997 and did not earn any revenue during
this period. Operations during this period consisted primarily of formulating a
marketing plan, conducting market research, developing strategic relationships,
acquiring equipment, performing administrative functions and raising capital. In
January and May 1998, we entered agreements to sell an aggregate of 2,200,000
shares of Series A Preferred Stock for gross proceeds of $22 million. Upon
completing the initial phase of the financing, we began to implement our plans
for growth by actively recruiting management, staff and sales personnel,
consummating distribution agreements, launching products and developing
educational programs and support systems. We began selling Ortho-Est(R) Tablets,
an oral estrogen product, in July 1998 and acquired As We Change, LLC in October
1998.
In July 1998, we entered into a distribution agreement with Ortho-McNeil
Pharmaceuticals, Inc. for Ortho-Est(R) Tablets, an oral estropipate product,
which gave us exclusive rights to market and distribute the product. The
distribution agreement required us to make minimum aggregate payments totaling
$47.5 million to Ortho-McNeil over the life of the contract regardless of the
actual sales performance of the product. This agreement was terminated effective
September 30, 2000, and we entered into a new agreement, the Ortho-Est(R) Asset
Transfer & Supply Agreement, with Ortho-McNeil. Under terms of the new
agreement, Ortho-McNeil transferred to us all of its right, title and interest
in Ortho-Est(R) Tablets effective January 1, 2001 and granted us an exclusive
license to use the trademark "Ortho-Est(R)" until June 2008. The new agreement
reduced the minimum payment in 2000 from $5.4 million to $4.7 million. No
further payments are required under the new agreement. Under the new agreement,
we will have the right to continue to buy product from Ortho-McNeil until we
find a replacement manufacturer. The prices we pay for product under the new
agreement will equal Ortho-McNeil's fully burdened cost. We have until April
2002 to find a replacement manufacturer.
In March 1999, we entered into a co-promotion agreement with Bristol-Myers
Squibb U.S. Pharmaceuticals Group relating to Pravachol(R), a
cholesterol-lowering drug. This agreement requires us to achieve minimum
performance levels to receive compensation or to prevent contract termination.
We amended the agreement effective April 1, 2000 to reduce the minimum
performance levels. This amendment did not significantly improve the revenue
opportunities under this arrangement, and we have notified Bristol-Myers Squibb
of our intention to cancel the agreement effective March 31, 2001. For the year
ending December 31, 2000, we recognized revenue of $0.3 million for our
co-promotion of Pravachol(R).
19
22
In May 1999, we entered into a co-promotion agreement with Ortho-McNeil
Pharmaceutical, Inc. relating to Ortho Tri-Cyclen(R), an oral contraceptive
product, and Ortho-Prefest(R), an oral combination hormonal replenishment
therapy (HRT) product. An amendment effective as of March 31, 2000 discontinued
the co-promotion agreement of Ortho Tri-Cyclen(R), allowing us to focus our
selling efforts on the launch of Ortho-Prefest(R). Under the amendment
Ortho-McNeil agreed to pay us $1.5 million for our sales efforts made through
the first quarter of 2000 with respect to Ortho Tri-Cyclen(R). We recognized
this payment as related party revenue in the first quarter 2000. In addition,
Ortho McNeil agreed to pay us $0.5 million for our agreement to add a limited
non-compete provision to the agreement to expire three months following contract
termination. This amount is being recognized as other income on a straight-line
basis over the remaining term of the agreement. Effective September 30, 2000, we
and Ortho-McNeil revised the co-promotion agreement to provide that it would
terminate on December 31, 2000. The revision requires Ortho-McNeil to compensate
Women First for sales calls made during 2000 plus a royalty on sales of
Ortho-Prefest(R). The Company has recorded revenue of $7.0 million under this
arrangement for the year ended December 31, 2000. In addition, the Company's
Trialogue(TM) division received a $1 million contract to provide a medical
education program in support of Ortho-Prefest(R). We recognized this revenue and
the related expenses in the fourth quarter 2000.
In July 1999, we entered into a distribution and license agreement with
Laboratoires Fournier S.A. under which we have the exclusive right (subject to
exceptions) to market, use, distribute and sell the Esclim(TM) estradiol
transdermal system in various dosages in the United States and Puerto Rico. We
began selling and distributing the Esclim(TM) estradiol transdermal system in
November 1999. The agreement requires us to pay Fournier a non-refundable
license fee of $1.45 million payable over a two-year period, of which $0.75
million was paid in 1999, $0.35 million was scheduled for payment in November
2000, and $0.35 million is scheduled for payment in November 2001. In November
2000, we and Laboratoires Fournier revised the contract to improve our ability
to contract with managed care and group purchasing organizations and to delay
the November 2000 milestone payment for one year subject to our implementing a
Phase IV study.
In December 2000 we signed a nationwide purchasing agreement with Novation,
the largest supply cost management company in health care, for Esclim(TM). Under
terms of the agreement effective December 15, 2000, the Esclim(TM) estrogen
transdermal patch system will be available to the 7,400 health care
organizations that purchase supplies through Novation contracts. In addition, in
March 2001, we signed a formulary partnership agreement for the Esclim(TM)
product with AdvancePCS, a leading pharmacy benefit services organization. Under
the terms of the two-year agreement, all doses of the Esclim(TM) product will be
added to the Advance PCS National Formulary, distributed to nearly 400,000
practicing physicians. We expect the agreement will increase revenue
opportunities for the Esclim(TM) product and improve our ability to contract
with additional pharmacy benefit services and managed care organizations.
In June 2000, we announced our reorganization into three distinct operating
divisions: pharmaceutical, consumer, and corporate marketing. The pharmaceutical
division is responsible for marketing and sales of prescription products. The
consumer division is responsible for marketing and sales of self-care products
including the Daily Difference(TM) dietary supplements. The corporate marketing
division, now called Trialogue(TM), is responsible for providing access to our
network of opinion leaders and practicing clinicians through strategic marketing
programs for sale to major pharmaceutical companies. Also as part of the
restructuring, we announced the reduction of our sales force by approximately
50% to 75 field sales territories and incurred charges of $0.7 million related
primarily to reduction in staff. Based on a detailed cost/benefit analysis of
sales and marketing, we have further reduced the sales force to 60 field sales
territories through which we are maintaining primary national coverage.
We have incurred significant losses since we were founded in November 1996.
We had an accumulated deficit of $65.4 million as of December 31, 2000, and we
expect to incur losses at least through the first nine months of 2001. Due to
our limited operating history we are unable to accurately predict our future
results of operations. Accordingly, our operating results should not be relied
upon as an indication of future performance. We review the operating results of
our business as a specialty pharmaceutical business with three operating
segments -- pharmaceutical, consumer and corporate marketing. The results of
operations include the results of our operations since our inception and the
actual results of operations of As We Change, LLC from its acquisition date on
October 21, 1998 in accordance with the purchase method of accounting.
20
23
YEARS ENDED DECEMBER 31, 2000 AND 1999
Net Revenue. For 2000, total net revenue was $27.1 million as compared to
$22.5 million in 1999, an increase of 20.3%. Revenue for 2000 was derived
primarily from a related party, Ortho-McNeil Pharmaceutical, for our efforts on
behalf of Ortho-Prefest(R) and Ortho Tri-Cyclen(R) of $12.4 million ($2.3
million in sales in 1999), pharmaceutical product sales of Ortho-Est(R) Tablets
and Esclim(TM) estradiol transdemal system of $5.5 million ($12.6 million in
1999), sales from our subsidiary As We Change LLC, a national mail order catalog
and internet retailer of $8.5 million ($6.8 million in 1999) and revenues from
other education programs and co-promotion of Pravachol(R) of $0.7 million ($0.8
million in 1999).
Costs and Expenses. Costs and expenses decreased $2.2 million or 4.1% to
$51.1 million for 2000 from $53.3 million in 1999. Improvements in gross margin,
61.1% in 2000 as compared to 45.2% in 1999, and reductions in general and
administrative expenses and research and development expenses were offset by a
$4.9 million increase in marketing and sales expenses and restructuring charges
of $0.7 million.
Cost of sales was $10.5 million in 2000, a 14.6% decrease from $12.3
million in 1999. Cost of sales consists primarily of amounts we pay to suppliers
for products plus inventory valuation adjustments. Increases and decreases in
cost of sales are primarily due to differences in the revenue mix in these
periods and inventory adjustments and are therefore not directly comparable from
one period to another. We recorded a lower of cost or market reserve for
pharmaceutical products of $0.5 million in 2000.
Marketing and sales expenses were $31.8 million in 2000 compared to $26.8
million for the prior year, an increase of $5.0 million or 18.4%. The increase
reflects the build up of infrastructure and sales force in the first half of
2000 in accordance with the original co-promotion agreement for
Ortho-Prefest(R). As noted above, we took steps in June 2000 to reduce these
expenses by implementing cost reduction activities and eliminating certain
direct and indirect corporate overhead expenses and reducing the sales
organization by approximately 50%. In addition, this increase reflects increased
costs associated with education programs focused on hormone replenishment
therapy, catalog production, market research, product literature and
professional samples.
General and administrative expense decreased $3.3 million to $7.5 million
in 2000 from $10.8 million in 1999. The decrease in these expenses was primarily
due to decreases in incentive compensation, other employee related costs, and
legal expenses.
Research and development expense was $0.5 million in 2000 as compared to
$1.7 million in 1999. Research and development expense consists primarily of
salaries and regulatory costs associated with our product applications.
Specifically, we incurred charges of $0.7 million in 1999 for the development of
a patient health questionnaire and related software and $0.3 million for costs
associated with the development of our line of Daily Difference(TM) dietary
supplements.
We recorded restructuring charges of $0.7 million in 2000. These charges
reflect our efforts to increase effectiveness and efficiency by restructuring
Women First into three operating divisions. The charges pertain primarily to the
termination or resignation of approximately 65 management and sales employees.
All payments have been made as of December 31, 2000.
Loss from Operations. The loss from operations decreased $6.8 million to
$24.0 million in 2000 from $30.8 million in 1999. Factors contributing to the
decreased loss include increased revenue attributable to our efforts on behalf
of Ortho-Prefest(R) and an increase in the revenues of our national mail order
catalog coupled with a reduction in costs and expenses resulting from cost
reduction activities under-taken as part of our restructuring in June 2000.
Interest and Other Income, net. Interest and other income, net was $1.5
million in 2000 compared to $0.6 million in 1999. Interest and other income, net
in 2000 consists primarily of earnings on our cash and cash equivalents and
revenue related to a non-compete provision in the March 2000 contract amendment
with Ortho-McNeil Pharmaceutical relating to the discontinuance of our efforts
on behalf of Ortho Tri-Cyclen(R). In 1999, interest and other income, net
consisted primarily of earnings on our cash and cash equivalents netted against
interest expense on short-term borrowings.
21
24
Accretion of beneficial conversion feature related to convertible preferred
stock. A $3.4 million charge for 1999 has been recognized as an increase to the
net loss available to common stockholders equal to the intrinsic value of the
beneficial conversion feature of the Series A Preferred Stock issued in February
1999. The intrinsic value in these shares represents the difference between the
conversion price of the shares and the fair value of the common stock at the
time of issuance.
Income Taxes. We have incurred approximately $57.3 million and $46.0
million, respectively, of net tax operating losses through 2000 for both federal
and California tax purposes that are available to be carried forward, subject to
certain change in control limitations. The federal and California tax loss
carryforwards will begin to expire in 2018 and 2003, respectively, unless
previously utilized. We have recognized a valuation allowance for the deferred
tax asset because we are uncertain of our ability to utilize these losses in the
future.
YEARS ENDED DECEMBER 31, 1999 AND 1998
Net Revenue. For 1999, total net revenue was $22.5 million as compared to
$4.8 million for 1998. Revenue for 1999 was derived primarily from
pharmaceutical product sales of Ortho-Est(R) Tablets, an oral estrogen product,
and the Esclim(TM) estradiol transdermal system of $12.6 million, and sales from
our subsidiary As We Change, LLC, a national mail-order catalog and internet
retailer of $6.8 million. In addition, in September 1999, in accordance with our
co-promotion agreement with Ortho-McNeil Pharmaceutical, Inc., a related party,
pursuant to which we had agreed to co-promote Ortho-Prefest(R), an oral
combination HRT product, Ortho-McNeil agreed to provide us with up to $5.5
million to be used to fund the development of an educational program with an
independent provider of continuing medical education programs regarding HRT and
the application of hormonal management to clinical situations. We recorded
related party revenue of $2.3 million in 1999 for work completed under this
contract. For 1998, revenue was derived primarily from sales of Ortho-Est(R)
Tablets beginning in July 1998 of $3.7 million and sales from As We Change
beginning October 21, 1998 of $0.9 million.
Costs and Expenses. Costs and expenses increased $38.7 million to $53.3
million for 1999 from $14.6 million for 1998. The increase in costs and expenses
was due primarily to the growth in commercial operations in 1999 and the
write-down of assets and other charges recognized in 1999 discussed below.
Cost of sales was $12.3 million, or 54.8% of net revenue, for 1999 as
compared to $2.6 million, or 54.8% of net revenue, for 1998. Cost of sales
consists primarily of the amounts we pay for products under supply agreements.
The increase in costs was primarily due to increases in the fixed and contingent
payments under our distribution agreement with Ortho-McNeil Pharmaceutical and
costs incurred under our distribution and license agreement with Laboratoires
Fournier S.A. regarding our distribution of the Esclim(TM) estradiol transdermal
system.
Marketing and sales expense increased $21.3 million to $26.8 million for
1999 from $5.5 million for 1998. The increase in these expenditures was
primarily due to increases in the number of employees and the corresponding
increased salary expense, deferred compensation and recruiting costs resulting
from the establishment of a direct sales organization, the acquisition of As We
Change, LLC, costs associated with our education programs including the costs of
our programs focused on hormonal replenishment therapy and cardiovascular
health, increased travel and business entertainment expense and increased
expenses for market research, product literature and professional samples.
General and administrative expense increased $4.9 million to $10.8 million
for 1999 from $5.9 million for 1998. The increase in these expenses for 1999
over the prior year was primarily due to increases in the number of employees
and the increased salary expense, employee benefits expense and management
incentive bonus expense, increased recruiting and relocation costs, and
increased amortization expense from the purchase of intangible assets associated
with the acquisition of As We Change, LLC.
Research and development expense was $1.7 million for 1999 compared to $0.6
million in 1998. Research and development expense consists primarily of salaries
and payments for contracted development programs. In 1999 and 1998, we made
payments of $0.5 million and $0.3 million, respectively, for the contracted
development of a patient health questionnaire and software product, the
"Benefit: Risk Assessment Model."
22
25
Also included in research and development expense in 1999 were costs associated
with our development and license agreement with Tufts University regarding
development of the line of Women First(TM) Daily Difference(TM) dietary
supplements.
Write-down of Assets and Other Charges. In 1999, we took actions designed
to enhance our ability to focus our resources on our core programs:
pharmaceutical sales and marketing to obstetricians and gynecologists (OB/GYNs)
and nurse practitioners and physician's assistants focused on women's health in
order to leverage the midlife woman's key medical relationships; and
direct-to-consumer marketing through our catalog operation and the internet. As
a result of these actions, we recognized asset write-downs and other charges
amounting to $1.6 million in 1999. These charges consisted primarily of
inventory write-downs and other costs associated with the closure of the
operations of Women First Pharmacy Services, Inc. and our decision to direct our
sales efforts away from certain consumer activities. Included in the inventory
write-downs were charges for the discontinuation of the SafeStart(TM) umbilical
cord clamp/cutter product and our decision not to actively market the ViAmor(TM)
vaginal lubricant product and other self-care products through consumer
channels.
Loss from Operations. For the reasons discussed above, the loss from
operations increased $21.0 million to $30.8 million for 1999 from $9.8 million
for 1998.
Interest Income (Expense), net. Interest income, net increased $0.3 million
to $0.7 million for 1999 from $0.4 million for 1998. Interest income, net
consists primarily of earnings on our cash and cash equivalents and interest
expense on our short-term notes issued in March 1999. The increase in interest
income, net for 1999 compared to the prior year was primarily due to increased
average cash balances as a result of our initial public offering in July 1999.
Accretion of beneficial conversion feature related to convertible preferred
stock. A $3.4 million charge for 1999 has been recognized as an increase of the
net loss available to common stockholders equal to the intrinsic value of the
beneficial conversion feature of the Series A Preferred Stock issued in February
1999. The intrinsic value in these shares of Series A Preferred Stock represents
the difference between the conversion price of the Series A Preferred Stock
issued in February 1999 and the fair value of our common stock at the time of
issuance.
Income Taxes. We have incurred approximately $34.0 million of net tax
operating losses through 1999 for both federal and California tax purposes that
are available to be carried forward, subject to certain change in control
limitations. The federal and California tax loss carryforwards will begin to
expire in 2018 and 2003, respectively, unless previously utilized. We have
recognized a valuation allowance for the deferred tax asset because we are
uncertain of our ability to utilize these losses in the future.
BUSINESS SEGMENTS
The following tables present operating information by business segment,
including corporate support, for the years ended December 31, 2000, 1999 and
1998. All dollar amounts are in thousands.
Pharmaceutical Division
YEARS ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------- -------- -------
Net revenue......................................... $ 5,732 $ 12,509 $ 3,936
Related party revenue............................... 8,488 -- --
-------- -------- -------
Total revenue............................. 14,220 12,509 3,936
Cost of goods....................................... 6,439 9,381 2,283
Operating expenses.................................. 22,421 19,121 5,646
-------- -------- -------
Operating loss...................................... $(14,640) $(15,993) $(3,993)
======== ======== =======
Pharmaceutical revenues are comprised of product sales of Ortho-Est(R)
Tablets (beginning in July 1998), Esclim(TM) transdermal system (launched in
November 1999), and Pravachol(R) (beginning in March 1999),
23
26
and related party revenue from Ortho-McNeil Pharmaceutical for sales calls made
on behalf of Ortho-Prefest(R) and royalties for Ortho-Prefest(R) (launched in
January 2000) and Ortho Tri-Cyclen(R). In 2000, our marketing efforts and sales
focus were directed toward co-promoting Ortho-Prefest(R), which contributed $7.0
million. Revenues from Ortho-Est(R) Tablets and Esclim(TM) were $5.7 million in
2000 and Ortho Tri-Cyclen(R) revenues were $1.5 million. Revenue in 1999 was
primarily from Ortho-Est(R) Tablets and Esclim(TM) sales. In 1998, all revenues
were from Ortho-Est(R) Tablets. Cost of sales for Ortho-Est(R) Tablets were
fixed in all years under terms of a distribution agreement with Ortho-McNeil
Pharmaceutical whereby we made scheduled payments regardless of sales volume.
Our gross margin was earned by generating revenue in excess of these fixed
payments. Cost of sales of Esclim(TM) fluctuate in a narrow range around 25.0%
of revenues. There are no cost of sales associated with Ortho-Prefest(R) and
Ortho Tri-Cyclen(R) revenues.
Operating expenses, which include marketing and sales and research and
development expenses, increased $3.3 million in 2000 from 1999 primarily as a
result of the build-up in sales force begun in late 1999 through mid-year 2000
required by the Ortho-Prefest(R) co-promotion agreement. That agreement, which
was revised in September 2000, required us to maintain a sales force of 150 to
support the launch of Orth-Prefest(R). In June 2000 we reduced the sales force
by approximately 50%. The increase in this category from 1998 to 1999 is the
result of comparing only a half year of sales activity and one product
(Ortho-Est(R) Tablets) in 1998 to a full year's activity in 1999 and four
products (Ortho-Est(R) Tablets , Pravachol(R), Ortho Tri-Cyclen(R) and
Esclim(TM)). We currently maintain a sales force of 60 specialists. Research and
development expenses consist primarily of employee related expenses and
consulting services in the area of regulatory compliance. In 1999, we charged
$0.7 million for the Benefit:Risk Assessment Model and $0.3 million for the
development of Daily Difference(TM). In 1998, we charged $0.3 million for the
Benefit:Risk Assessment Model. We did not record any expenses with respect to
either of these products in 2000.
Consumer Business
YEARS ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------- ------- ----
Net revenue.............................................. $ 8,539 $ 6,843 $898
Related party revenue.................................... -- -- --
------- ------- ----
Total revenue.................................. 8,539 6,843 898
Cost of goods............................................ 4,089 2,946 365
Operating expenses....................................... 6,377 5,167 579
------- ------- ----
Operating loss........................................... $(1,927) $(1,270) $(46)
======= ======= ====
Consumer business revenues grew 24.8% in 2000 as we continued to expand the
distribution of our catalog. We mailed 7.5 million catalogs in 2000 up from 4.9
million mailed in 1999. Catalog revenues in 1998 cover the period from October
21, 1998, the date of acquisition of As We Change LLC. The gross margin in 2000
was down 24.9% from 1999 as a result of a write-down of obsolete inventory of
$65,000, which increased cost of sales, and the establishment of a $0.3 million
reserve for a new frequent buyer program, which reduced revenues.
Operating expenses, which include marketing and sales and general and
administrative expenses, consist of catalog production and mailing costs, call
center and fulfillment expenses, as well as purchasing and marketing expenses.
The 2000 strategy to increase sales through higher circulation caused the
increase in marketing and sales expenses. Although orders and sales increased,
these increases did not cover the increased marketing and sales costs and
expenses. General and administrative expenses increased in 2000 due to increased
payroll related expenses, increased rent, and increased depreciation expense.
24
27
Trialogue(TM)
YEARS ENDED DECEMBER 31,
-------------------------
2000 1999 1998
------ ------- ----
Net revenue............................................... $ 477 $ 800 $--
Related party revenue..................................... 3,849 2,350 --
------ ------- ---
Total revenue................................... 4,326 3,150 --
Cost of goods............................................. -- -- --
Operating expenses........................................ 4,789 6,828 --
------ ------- ---
Operating loss............................................ $ (463) $(3,678) $--
====== ======= ===
Revenues in the Trialogue(TM) segment are derived from educational grants
from pharmaceutical companies to fund the development of educational programs
with an independent provider of continuing education programs. Related party
revenues in 2000 and 1999 are from Ortho McNeil Pharmaceutical for development
of hormone replenishment education programs. There are no cost of sales
associated with educational revenues in this segment.
Operating expenses consist primarily of marketing and sales expenses and
are comprised of program costs and employee related expenses. Programs are
priced at cost plus a modest management fee. Employee related expenses are for
those employees charged with generating new business opportunities and
maintaining the content of our internet site, www.womenfirst.com.
Corporate
YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
------- -------- -------
Net revenue.......................................... $ -- $ -- $ --
Related party revenue................................ -- -- --
------- -------- -------
Total revenue.............................. -- -- --
Cost of goods........................................ -- -- --
Operating expenses................................... 6,994 9,839 5,737
------- -------- -------
Operating loss....................................... (6,994) (9,839) (5,737)
Other income (expense), net.......................... 1,458 645 394
Accretion of preferred stock......................... -- (3,362) --
------- -------- -------
Net loss............................................. $(5,536) $(12,556) $(5,343)
======= ======== =======
Operating expenses were reduced in 2000 as a result of the restructuring in
July 2000. In addition, incentive compensation comprised $1.5 million of the
1999 amount. There was no incentive compensation charged in 2000.
Other income is primarily comprised of interest on corporate funds, which
became available in July 1999 with the completion of our initial public
offering. In 2000, we earned $0.3 million in conjunction with a limited
non-compete agreement for Ortho Tri-Cyclen(R).
FACTORS AFFECTING RESULTS OF OPERATIONS
We incurred losses of $22.6 million, $33.5 million and $9.4 million in the
years ended December 31, 2000, 1999 and 1998 respectively. Due to our short
operating history, our revenues have varied and have been difficult to forecast
on a quarterly or annual basis. However, many of our expenses are fixed,
especially in the short term. In addition, we are an early stage company that
has incurred significant operating expenses associated with obtaining rights to
market and distribute products, the expansion of our sales and marketing efforts
and general and administrative activities. In June 2000 we took steps to reduce
expenses by eliminating certain corporate overhead and, in recognition of lower
than expected revenues, reduced our sales force by almost 50%. We expect
continued variability in revenues as we realign our product mix as a result of
ending
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our co-promotion of Ortho-Prefest(R). Because of these factors, our results of
operations have varied during our short operating history, and we expect that
they will continue to fluctuate, perhaps significantly, in the future. In
addition, other factors may cause fluctuations in our revenues and results of
operations in the future, including the following:
- the success or failure of our sales force in distributing our current
product line and changes in market acceptance of those products,
- our success or failure in executing under our asset transfer and supply
agreement,
- our ability to acquire new products,
- legislative changes that affect our products and the way we market them
and our ability to comply with new or existing regulations,
- the amount and timing of expenditures for the expansion of our
operations,
- the timing and growth of our consumer division,
- changes in the competitive environment that could cause us to change our
pricing or marketing strategy,
- the effects our limited capital and needs for additional capital may have
on our ability to meet the objectives we have set for our business, and
- changes in the economic and market environment generally or in the health
care industry.
To the extent our revenues do not cover our expenses, we may be unable to
reduce spending commitments in a timely manner to compensate for any unexpected
revenue shortfall and may experience significant unanticipated losses. As a
result of these factors, our operating results in one or more future periods may
fail to meet the expectations of investors.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, our working capital was $9.5 million compared to
$30.5 million at December 31, 1999. Cash and cash equivalents were $9.5 million
at December 31, 2000 compared to $32.7 million at year end 1999.
In our short history we have had two primary sources of
liquidity -- revenues from product sales and educational grants and proceeds
from private placements of our equity securities and the initial public offering
of common stock.
We have generated $54.4 million in revenues since our inception.
Between January 1998 and February 1999 we issued 2,200,000 shares of Series
A Preferred Stock (equivalent to 4,026,000 shares of common stock) and warrants
for net proceeds of $21.0 million.
In addition, in March 1999, we issued $7.5 million of short-term notes and
warrants to purchase 60,756 shares of common stock in a private placement for
net proceeds of $7.5 million. In August 1999, the Company repaid $7.2 million
representing all principal outstanding plus accrued interest on the short-term
notes issued in March 1999, with the exception of $0.25 million in principal,
which was repaid in October 1999.
On July 1, 1999, we completed our initial public offering of 4,500,000
shares of our common stock, providing us with proceeds, net of underwriting fees
and offering expenses, of approximately $44.5 million. All shares of convertible
preferred stock outstanding on June 28, 1999 automatically converted into
4,388,329 shares of common stock upon the sale of common stock in the offering.
In July 1999, the underwriters exercised in full their over-allotment option,
and we issued an additional 675,000 shares of common stock providing us with net
proceeds of approximately $6.9 million.
In addition to operating expenses, our primary use of funds has been and
will continue to be to fund capital expenditures and to obtain the rights to
market and distribute products.
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Net cash used in operating activities was $23.0 million, $25.1 million and
$9.0 million for the years ended December 31, 2000, 1999 and 1998 respectively.
Net cash used in investing activities was $0.4 million, $3.3 million and $2.8
million for the same periods. In 2000, investing activities consisted of
equipment and other asset purchases. In 1999 and 1998, investment activity was
comprised of net capital expenditures, payments for the acquisition of As We
Change, LLC and license acquisitions. Net cash provided by financing activities
was $0.2 million, $56.7 million, $15.7 million respectively for the same
periods. In 2000, financing activities consisted of proceeds from the exercise
of stock options. In 1999 and 1998, financing activities consisted primarily of
the net proceeds from the issuance of equity securities, short-term notes and
warrants.
For the year ended December 31, 2000, we made net capital expenditures of
$0.3 million primarily for computer equipment and web site development. We made
net capital expenditures of $2.3 million during 1999 primarily for computer
equipment, development of our Internet site and acquisition of licenses and
other assets and $0.7 million in 1998 for furniture and fixtures, lease
improvements, equipment and licenses.
In October 1998, we acquired all of the outstanding membership interests in
As We Change, LLC. Total acquisition costs were $4.4 million, consisting of $1.8
million cash paid at acquisition date, $1.1 million deferred payment made March
31, 1999, 594,000 shares of Series B Preferred Stock (equivalent to 362,329
shares of common stock) and $107,000 of acquisition related expenses. We issued
a total of 44,000 shares of Series B Preferred Stock (equivalent to 26,835
shares of common stock) in April 1999 pursuant to an earn-out based on 1998
operating results of As We Change, LLC. We issued an additional 54,900 shares of
common stock in April 2000 based on the 1999 operating results of As We Change,
LLC.
While we intend