UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2004
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number: 000-23265
SALIX PHARMACEUTICALS, LTD.
(Exact name of Registrant as specified in its charter)
| Delaware | 94-3267443 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
8540 Colonnade Center Drive, Suite 501
Raleigh, North Carolina 27615
(Address of principal executive offices, including zip code)
(919) 862-1000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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 whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES x NO ¨
The number of shares of the Registrant’s Common Stock outstanding as of August 4, 2004 was 36,167,588.
TABLE OF CONTENTS
| Page No. | ||||||
| PART I. | FINANCIAL INFORMATION | |||||
| Item 1. |
||||||
| Condensed Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003 |
1 | |||||
| 2 | ||||||
| 3 | ||||||
| 4 | ||||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
7 | ||||
| Item 3. |
11 | |||||
| Item 4. |
11 | |||||
| PART II. |
OTHER INFORMATION | |||||
| Item 4. |
12 | |||||
| Item 6. |
12 | |||||
| 15 | ||||||
PART I. FINANCIAL INFORMATION.
SALIX PHARMACEUTICALS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. dollars, in thousands, except share amounts)
| June 30, 2004 |
December 31, 2003 |
|||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 42,291 | $ | 62,795 | ||||
| Short-term investments |
— | 2,012 | ||||||
| Accounts receivable, net |
7,324 | 3,598 | ||||||
| Inventory, net |
21,792 | 16,094 | ||||||
| Prepaid and other current assets |
1,063 | 1,732 | ||||||
| Total current assets |
72,470 | 86,231 | ||||||
| Property and equipment, net |
2,442 | 2,621 | ||||||
| Other assets |
15,150 | 2,000 | ||||||
| Total assets |
$ | 90,062 | $ | 90,852 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 3,835 | $ | 1,611 | ||||
| Accrued liabilities |
13,337 | 11,749 | ||||||
| Deferred revenue |
— | 3,557 | ||||||
| Total current liabilities |
17,172 | 16,917 | ||||||
| Commitments |
— | — | ||||||
| Stockholders’ equity: |
||||||||
| Preferred stock, $0.001 par value; 5,000,000 shares authorized, issuable in series, none outstanding |
— | — | ||||||
| Common stock, $0.001 par value; 80,000,000 shares authorized, 36,143,009 shares issued and outstanding at June 30, 2004 and 35,579,732 shares issued and outstanding at December 31, 2003 |
36 | 36 | ||||||
| Additional paid-in capital |
168,569 | 165,281 | ||||||
| Accumulated other comprehensive loss |
(676 | ) | (655 | ) | ||||
| Accumulated deficit |
(95,039 | ) | (90,727 | ) | ||||
| Total stockholders’ equity |
72,890 | 73,935 | ||||||
| Total liabilities and stockholders’ equity |
$ | 90,062 | $ | 90,852 | ||||
The accompanying notes are an integral part of these financial statements.
1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(U.S. Dollars, in thousands, except per share data)
| Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| Revenues: |
||||||||||||||||
| Product revenue |
$ | 19,440 | $ | 12,933 | $ | 39,299 | $ | 24,454 | ||||||||
| Revenue from collaborative agreements |
3,799 | — | 3,799 | — | ||||||||||||
| Total revenues |
23,239 | 12,933 | 43,098 | 24,454 | ||||||||||||
| Costs and expenses: |
||||||||||||||||
| Cost of products sold |
4,682 | 3,070 | 9,378 | 5,834 | ||||||||||||
| License fees and costs related to collaborative agreements |
1,806 | 31 | 1,837 | 63 | ||||||||||||
| Research and development |
4,569 | 6,459 | 9,524 | 11,609 | ||||||||||||
| Selling, general and administrative |
14,232 | 9,357 | 27,000 | 18,976 | ||||||||||||
| Total cost and expenses |
25,289 | 18,917 | 47,739 | 36,482 | ||||||||||||
| Loss from operations |
(2,050 | ) | (5,984 | ) | (4,641 | ) | (12,028 | ) | ||||||||
| Interest, and other income (expense), net |
163 | (1,019 | ) | 329 | (447 | ) | ||||||||||
| Net loss before tax |
(1,887 | ) | (7,003 | ) | (4,312 | ) | (12,475 | ) | ||||||||
| Income tax |
— | — | — | — | ||||||||||||
| Net loss |
$ | (1,887 | ) | $ | (7,003 | ) | $ | (4,312 | ) | $ | (12,475 | ) | ||||
| Net loss per share, basic and diluted |
$ | (0.05 | ) | $ | (0.22 | ) | $ | (0.12 | ) | $ | (0.39 | ) | ||||
| Shares used in computing net loss per share, basic and diluted |
36,031 | 32,214 | 35,903 | 32,139 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(U.S. dollars, in thousands)
| Six months ended June 30, |
||||||||
| 2004 |
2003 |
|||||||
| Cash flows from operating activities |
||||||||
| Net loss |
$ | (4,312 | ) | $ | (12,475 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Depreciation and amortization |
404 | 232 | ||||||
| Changes in assets and liabilities: |
||||||||
| Accounts receivable, inventory and other assets |
(9,005 | ) | (2,143 | ) | ||||
| Accounts payable and other current liabilities |
3,812 | 770 | ||||||
| Deferred revenue |
(3,557 | ) | 93 | |||||
| Net cash used in operating activities |
(12,658 | ) | (13,523 | ) | ||||
| Cash flows from investing activities |
||||||||
| Purchases of property and equipment |
(125 | ) | (556 | ) | ||||
| Purchase of intangible asset |
(13,000 | ) | — | |||||
| Proceeds from maturity of investments |
2,012 | 16,181 | ||||||
| Net cash (used in) provided by investing activities |
(11,113 | ) | 15,625 | |||||
| Cash flows from financing activities |
||||||||
| Proceeds from issuance of common stock |
3,288 | 1,136 | ||||||
| Net cash provided by financing activities |
3,288 | 1,136 | ||||||
| Effect of exchange rate changes on cash |
(21 | ) | (93 | ) | ||||
| Net increase in cash and cash equivalents |
(20,504 | ) | 3,145 | |||||
| Cash and cash equivalents at beginning of period |
62,795 | 34,531 | ||||||
| Cash and cash equivalents at end of period |
$ | 42,291 | $ | 37,676 | ||||
The accompanying notes are an integral part of these financial statements.
3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
| 1. | Organization and Basis of Presentation |
Salix Pharmaceuticals, Ltd., a Delaware corporation (“Salix” or the “Company), is a specialty pharmaceutical company dedicated to acquiring, developing and commercializing prescription drugs used in the treatment of a variety of gastrointestinal diseases, which are those affecting the digestive tract.
These financial statements are stated in United States dollars and are prepared under accounting principles generally accepted in the United States. The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
The accompanying condensed consolidated financial statements include all adjustments (consisting only of normal recurring items), that, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and cash flows. These financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Quarterly Report and with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 filed with the Securities and Exchange Commission. The results of operations for interim periods are not necessarily indicative of results to be expected for a full year or any future period.
| 2. | Commitments |
At June 30, 2004, the Company had binding purchase order commitments for inventory purchases aggregating approximately $18.6 million over nine months.
| 3. | Investments |
The Company considers all investments that have a maturity of greater than three months and less than one year to be short-term investments. All securities with maturities beyond one year are considered long-term investments. The Company’s short-term and long-term investments consist of government agency and high-grade corporate bonds. The Company has the intent and ability to hold these investments until maturity; therefore, the investments are classified as held-to-maturity and are reported at amortized cost.
| 4. | Inventory |
Inventory at June 30, 2004 consisted of $17.5 million of raw materials and $4.3 million of finished goods. Inventory at December 31, 2003 consisted of $12.2 million of raw materials and $3.9 million of finished goods.
| 5. | Intangible Assets |
When the Company makes product acquisitions that include license agreements, product rights and other identifiable intangible assets, it records the aggregate purchase price, along with the value of the product related liabilities that it assumes, as intangible assets. The Company allocates the purchase price to the fair value of the various intangible assets in order to amortize their cost as an expense in our statement of operations over the estimated economic useful life of the related assets. The Company assesses the impairment of identifiable intangible assets whenever events or changes in circumstances indicate that the carrying value might not be recoverable. Factors the Company considers important that could trigger an impairment review include significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of the Company’s use of the acquired assets or the strategy for the Company’s overall business, and significant negative industry or economic trends.
4
In assessing the recoverability of the Company’s intangible assets, it must make assumptions regarding estimated future cash flows and other factors. If the estimated undiscounted future cash flows do not exceed the carrying value of the intangible assets, the Company must determine the fair value of the intangible assets. If the fair value of the intangible assets is less than the carrying value, an impairment loss will be recognized in an amount equal to the difference. The Company reviews intangible assets for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable.
In June 2004, the Company acquired the exclusive U.S. rights to Anusol-HC® 2.5% (hydrocortisone Cream USP), Anusol-HC® 25 mg Suppository (Hydrocortisone Acetate), Proctocort® Cream (Hydrocortisone Cream USP) 1% and Proctocort® Suppositories (Hydrocortisone Acetate Rectal Suppositores, 30 mg) from King Pharmaceuticals, Inc. for $13.0 million. At June 30, 2004, other assets consisted primarily of intangible assets related to the Anusol, Proctocort and Azasan product acquisitions.
| 6. | Stock Dividend |
On June 21, 2004, the Board of Directors approved a three-for-two stock split of the Company’s common stock, in the form of a stock dividend. As a result, stockholders received one additional common share for every two shares held on the record date of June 30, 2004. Statements or certificates were issued on or about July 12, 2004. All share and per share amounts have been retroactively adjusted to reflect the split for all periods presented.
| 7. | Revenue Recognition |
Product sales are recorded upon shipment of order and transfer of title.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements”, as amended by SAB 104, “Revenue Recognition”, which clarifies conditions to be met in order to recognize revenue. SAB 101 requires companies to recognize up-front non-refundable fees over the term of the related agreement unless the fee is in exchange for products delivered or services performed that represent the culmination of a separate earnings process.
Due to the uniqueness of each of the Company’s licensing arrangements, the Company analyzes each element of each contract, including milestone payments, to determine the appropriate revenue recognition. In accordance with SAB 101, the Company recognizes revenue upon achievement of contractual milestones only when and to the extent that it concludes that a separate earnings process has been culminated or the milestone is representative of the level of effort and progress toward completion of a long-term contract.
Revenues from collaborative agreements for the three-month and six-month periods ended June 30, 2004 were $3.8 million. These revenues were primarily related to the Company’s agreement with Shire Pharmaceuticals Group plc under which Shire purchased from us the intellectual property related to balsalazide for Austria, Belgium, Denmark, Finland, France, Germany, Iceland, Republic of Ireland, Luxembourg, Norway, the Netherlands, Switzerland and the United Kingdom.
| 8. | Research and Development |
Research and development costs, both internal and externally contracted, are expensed as incurred. These costs include direct expenditures for goods and services, as well as indirect expenditures such as salaries, administrative expenses and various allocated costs.
5
| 9. | Comprehensive Loss |
Comprehensive loss is comprised of net loss and other comprehensive loss. Other comprehensive loss includes certain changes in the stockholders’ equity of the Company that are excluded from net loss. Specifically, other comprehensive loss includes foreign currency translation adjustments.
Comprehensive loss for the three and six months ended June 30, 2004 and 2003 was as follows:
| Three months ended June 30, |
||||||||
| 2004 |
2003 |
|||||||
| Net loss |
$ | (1,887 | ) | $ | (7,003 | ) | ||
| Cumulative foreign currency translation adjustments |
74 | (151 | ) | |||||
| Comprehensive loss |
$ | (1,813 | ) | $ | (7,154 | ) | ||
| Six months ended June 30, |
||||||||
| 2004 |
2003 |
|||||||
| Net loss |
$ | (4,312 | ) | $ | (12,475 | ) | ||
| Cumulative foreign currency translation adjustments |
(21 | ) | ||||||