Kursverfall von Donnerstag/Freitag: 120 auf 106 EUR
Ist jemand investiert bzw. Vorschläge für Einstieg ?
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Ist jemand investiert bzw. Vorschläge für Einstieg ?
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Sepracor -882759 - SEP
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2
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Zugriffe: 342 / Heute: 1
Ich habe den Bericht mal angehängt, jedoch noch nicht gelesen. Nachbörslich bei 97 $. Könnte Montag also noch weiter runter gehen.
Al grüßt
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August 11, 2000
SEPRACOR INC /DE/ (SEPR)
Quarterly Report (SEC form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains, in addition to historical information, forward-looking statements within the meaning of section 21E of the Securities Exchange Act of 1934, as amended. These forward looking statements involve risk and uncertainties and are not guarantees of future perfomance. Sepracor's actual results could differ significantly from the results discussed in such forward-looking statements. See "Factors Affecting Future Operating Results" below.
OVERVIEW
Sepracor is a specialty pharmaceutical company focused on the cost-effective development of safer, purer and more effective drugs that are improved versions of widely-prescribed pharmaceutical compounds.
The consolidated interim financial statements include the accounts of Sepracor Inc. ("Sepracor" or the "Company") and its majority and wholly-owned subsidiaries, including BioSphere Medical Inc. ("BioSphere") and Sepracor Canada Limited.
On July 31, 2000, Sepracor purchased approximately $5,000,000 of common stock of BioSphere as part of a private equity placement to a small group of investors totaling approximately $13,000,000. As a result of the transaction, Sepracor's ownership in BioSphere decreased from approximately 58% to 56%.
On April 13, 2000, the Company announced that the Federal Trade Commission (the "FTC") closed its investigation, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), of the license agreement that allows Eli Lilly and Company ("Lilly") and Sepracor to exclusively develop and globally commercialize (R)-fluoxetine. (R)-Fluoxetine, a new chemical entity, is a modified form of an active ingredient found in Prozac(R). Upon closing this transaction, the Company received an initial milestone payment and license fee of $20,000,000. The Company has no further work to be performed related to the agreement and has recorded this as revenue in the second quarter of 2000. The Company has also recorded $3,573,000 of collaborative research and development revenue in the second quarter of 2000, related to previous costs incurred in the development of (R)-fluoxetine under the Lilly Agreement. The Company will also receive up to $70,000,000 in additional milestone payments based on the progression of (R)-fluoxetine through development. In addition to the initial milestone payment and license fee and additional milestone payments, Sepracor will receive royalties on (R)-fluoxetine worldwide sales, if any, beginning at product launch. In exchange, Lilly will receive exclusive, worldwide rights to (R)-fluoxetine for all indications and uses. Lilly is responsible for developmental work on (R)-fluoxetine, regulatory submissions, product manufacturing, marketing and sales.
On March 3, 2000, HemaSure Inc. ("HemaSure") announced that it had completed a $28,000,000 private placement of 3,730,000 shares of its common stock, thereby reducing Sepracor's ownership to approximately 22%. The transaction resulted in Sepracor recording a net gain of approximately $1,417,000 through additional paid-in capital.
In the first quarter of 2000, the Company issued $460,000,000 in principal amount of 5% convertible subordinated debentures due 2007 (the "5% Debentures"). The 5% Debentures have an annual interest rate of 5% and are convertible at the option of the holder into Sepracor common stock at $92.38 per share.
In February 2000, the Company converted $96,424,000 of its 6 1/4% convertible subordinated debentures due 2005 (the "6 1/4% Debentures"). Costs related to the conversion of the 6 1/4% Debentures, including inducements and other costs, were approximately $7,497,000. Deferred finance costs of approximately $2,373,000 were written off against additional paid-in capital as a result of the conversion.
On February 4, 2000, BioSphere announced that it had completed a private equity placement of approximately $5,900,000 of common stock and warrants. Investors purchased 653,887 shares of BioSphere common stock and warrants to purchase an additional 163,468 shares of BioSphere common stock. As a result of this transaction, Sepracor's ownership of BioSphere decreased from approximately 64% to 59% as of February 2000. The transaction resulted in Sepracor recording a net gain of approximately $2,771,000 through additional paid-in capital.
On January 20, 2000, the Company announced that its Board of Directors approved a two-for-one stock split which was paid in the form of a 100% stock dividend on February 25, 2000 to stockholders of record on February 1, 2000.
In May 1999, Sepracor commercially introduced Xopenex(R), a single-isomer form of the leading bronchodilator, albuterol. Xopenex is the first pharmaceutical product developed and commercialized by Sepracor.
During 2000, the Company expects that it will incur increasing expenses, primarily in research and development and sales and marketing, as a result of efforts to advance the development of its portfolio of pharmaceuticals and drug candidates, and activities relating to the sales and marketing of Xopenex. The Company also expects to continue to pursue additional corporate partnering and alliance arrangements including out-licensing agreements, co-promotion arrangements, development collaborations and merger or acquisition opportunities.
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
Product revenues were $9,635,000 and $23,501,000 for the three and six months ended June 30, 2000, respectively, compared to $4,947,000 and $5,227,000, respectively, for the same periods in 1999. The increase for the three and six month periods ended June 30, 2000 is due primarily to sales of Xopenex, which the Company commercially introduced in May 1999.
Collaborative research and development revenues were $3,573,000 for the three and six months ended June 30, 2000, compared to $13,000 and $2,390,000, respectively, for the same periods in 1999. The increase for the three months ended June 30, 2000 is attributable to proceeds from the Lilly (R)-fluoxetine agreement, and the increase for the six month period ended June 30, 2000 is also due to proceeds from the Lilly (R)-fluoxetine agreement offset by the termination of the research and development studies conducted by Sepracor under the collaborative license agreement between Sepracor and Janssen Pharmaceutica N.V ("Janssen"), dated January 30, 1998, for the development of norastemizole.
License fee revenues were $20,000,000 for the three and six months ended June 30, 2000, compared to $3,000 and $11,000, respectively, for the same periods in 1999. The increase is attributable to initial milestone payments received under the Lilly (R)-fluoxetine agreement.
Royalty and other revenues were $1,044,000 and $2,311,000 for the three and six months ended June 30, 2000, respectively, compared to $51,000 and $110,000, respectively, for the same periods in 1999. The increase in revenue is due to proceeds from the royalty agreement with Hoechst Marion Roussel, Inc. (now Aventis) under which Sepracor currently receives royalties on non-U.S. sales of fexofenadine in countries where Sepracor holds issued patents on fexofenadine. The increase is also due to other revenues generated by BioSphere.
Cost of product revenues, as a percentage of product revenues, was 8% and 24% for the three and six months ended June 30, 2000, respectively, compared to 23% and 24%, respectively, for the same periods in 1999. The decrease of cost of product revenue for the three months ended June 30, 2000 is due to an increase of sales of pharmaceutical products as a percentage of total product sales which have a lower cost of product revenue, and is also due to favorable manufacturing cost variances during this period. Included in the cost of product revenues for the six months ended June 30, 2000 is a charge of $2,766,000 for costs related to an isolated third party manufacturing issue. When adjusted for this one time charge, the cost of revenue as a percentage of product revenue for the six months ended June 30, 2000 becomes approximately 12%. This decrease in the cost of revenue for the six months ended June 30, 2000 is due principally to an increase of sales of pharmaceutical products as a percentage of the Company's total product sales.
Cost of license fee revenues were $2,000,000 for the three and six months ended June 30, 2000, compared to $0 for the same periods in 1999. The $2,000,000 represents sublicense fees owed under a license agreement with McLean Hospital pertaining to patents related to the Lilly (R)-fluoxetine agreement.
Research and development expenses were $38,507,000 and $70,512,000 for the three and six months ended June 30, 2000, respectively, compared to $24,122,000 and $42,562,000, respectively, for the same periods in 1999. The increase is primarily due to costs related to clinical studies being initiated and increased personnel costs related to the quality control and clinical and regulatory infrastructure development.
Selling, general and administrative and patent expenses were $22,979,000 and $45,581,000 for the three and six months ended June 30, 2000, respectively, compared to $13,242,000 and $23,650,000, respectively, for the same periods in 1999. The increase is primarily due to the addition of two third-party contracted sales forces and sales and marketing infrastructure development.
The net of interest income, interest (expense) and other income (expense) was $(1,206,000) and $(11,036,000) for the three and six months ended June 30, 2000, respectively, compared to $(2,570,000) and $(4,825,000), respectively, for the same periods in 1999. The decrease in expense for the three month period ended June 30, 2000 is attributable to additional interest income earned on investments purchased with the proceeds of the 5% Debentures, while the increase in expense for the six month period ended June 30, 2000 is primarily the result of the conversion of $96,424,000 principal amount of 6 1/4% Debentures, which resulted in inducements and other costs of $7,497,000 in the first quarter of 2000 partially offset by additional net interest income related to the 5% Debentures.
Equity in loss of investees was $659,000 and $989,000 for the three and six months ended June 30, 2000, respectively, compared to $825,000 and $2,509,000, respectively, for the same periods in 1999. The decrease is due to Sepracor no longer recognizing Versicor losses as of May 1999, and due to Sepracor maintaining a lower ownership percentage in HemaSure in 2000.
Minority interest in subsidiary from continuing operations resulted in a decrease to consolidated net loss of $922,000 and $1,489,000 for the three and six months ended June 30, 2000, respectively, compared to $366,000 and $548,000, respectively, for the same periods in 1999. The fluctuation in minority interest is the result of the minority interest in BioSphere increasing from approximately 36% to 42% and due to BioSphere recording a larger net loss in the three and six month periods ended June 30, 2000 than in the three and six month periods ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents plus marketable securities totaled $729,844,000 at June 30, 2000, compared to $335,823,000 at December 31, 1999.
The net cash used in operating activities for the six months ended June 30, 2000 was $74,704,000. The net cash used in operating activities includes a net loss from continuing operations of $85,345,000 adjusted by non-cash charges of $4,857,000. Inventory increased by $2,137,000 primarily due to increased production of Xopenex inventory. Accounts payable decreased by $11,985,000 due to the timing of cash disbursements. Accrued expenses increased by $17,454,000 due primarily to increased research and development and sales and marketing activities and additional accrued interest related to the 5% Debentures.
The net cash used in investing activities for the six months ended June 30, 2000 was $186,353,000. Cash was invested primarily in net purchases of marketable securities of $181,277,000 and purchases of property and equipment of $3,419,000.
The net cash provided by financing activities for the six months ended June 30, 2000 was $473,687,000. The Company received approximately $445,967,000 in net proceeds from the issuance of the 5% Debentures. The Company also received approximately $21,549,000 in proceeds from the issuance of Sepracor common stock and $6,135,000 from BioSphere's issuance of common stock.
In the first quarter of 2000, the Company issued $460,000,000 in principal amount of 5% convertible subordinated debentures due 2007. The 5% Debentures have an annual interest rate of 5% and are convertible into Sepracor common stock at $92.38 per share.
In February 2000, the Company converted $96,424,000 of its 6 1/4% convertible subordinated debentures due 2005. Costs related to the conversion of the 6 1/4% Debentures, including inducements and other costs, were approximately $7,497,000. Deferred finance costs of approximately $2,373,000 were written off against additional paid-in capital as a result of the conversion.
The Company believes its existing cash and the anticipated cash flow from its current strategic alliances and operations will be sufficient to support existing operations for the near term. Sepracor's actual future cash requirements, however, will depend on many factors, including the progress of its preclinical, clinical, and research programs, the number and breadth of these programs, achievement of milestones under these strategic alliance arrangements, sales of its products, acquisitions, its ability to establish and maintain additional strategic alliance and licensing arrangements, and the progress of the Company's development efforts and the development efforts of its strategic partners.
FACTORS AFFECTING FUTURE OPERATING RESULTS
You should carefully consider the following risks before making an investment decision. You should also refer to the other information set forth in this prospectus, and incorporated by reference in this prospectus. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results could vary significantly from the results discussed in the forward-looking statements. Some risks that could cause our results to vary are disclosed below.
WE HAVE NEVER BEEN PROFITABLE AND WE MAY NOT BE ABLE TO GENERATE REVENUES
SUFFICIENT TO ACHIEVE PROFITABILITY. We have not been profitable since inception, and it is possible that we will not achieve profitability. We incurred net losses applicable to common shares on a consolidated basis of approximately $85.3 million for the six months ended June 30, 2000 and $183.1 million for the year ended December 31, 1999. We expect to continue to incur operating and capital expenditures. As a result, we will need to generate significant revenues to achieve and maintain profitability. We cannot assure you that we will achieve significant revenues or that we will ever achieve profitability. Even if we do achieve profitability, we cannot assure you that we can sustain or increase profitability on a quarterly or annual basis in the future. If revenues grow more slowly than we anticipate or if operating expenses exceed our expectations or cannot be adjusted accordingly, our business, results of operations and financial conditions will be materially and adversely affected. Our ability to generate profitability will depend in large part on successful commercialization of our initial products and successful development and commercialization of principal products under development. Failure to successfully commercialize these products may have a material adverse effect on our business.
WE WILL BE REQUIRED TO EXPEND SIGNIFICANT RESOURCES FOR RESEARCH, DEVELOPMENT,
TESTING AND REGULATORY APPROVAL OF OUR DRUGS UNDER DEVELOPMENT AND THESE DRUGS
MAY NOT BE DEVELOPED SUCCESSFULLY. We are focused on the development of improved versions of widely prescribed pharmaceutical compounds which we refer to as improved chemical entities, or ICEs. Most of our ICEs are still undergoing clinical trials or are in the early stages of development. Our drugs may not provide greater benefits or fewer side effects than the original versions of these drugs and our research
efforts may not lead to the discovery of new drugs with improved characteristics. All of our drugs under development will require significant additional research, development, preclinical and/or clinical testing, regulatory approval and a commitment of significant additional resources prior to their commercialization. Our potential products may not:
- be developed successfully;
- be proven safe and efficacious in clinical trials;
- offer therapeutic or other improvements over comparable drugs;
- meet applicable regulatory standards;
- be capable of being produced in commercial quantities at acceptable costs; or
- be successfully marketed.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR FACE A
CLAIM OF INTELLECTUAL PROPERTY INFRINGEMENT BY A THIRD PARTY, THEN WE COULD LOSE
VALUABLE INTELLECTUAL PROPERTY RIGHTS, BE LIABLE FOR SIGNIFICANT DAMAGES OR BE
PREVENTED FROM COMMERCIALIZING OUR PRODUCTS. Our success depends in part on our ability to obtain and maintain patents, protect trade secrets and operate without infringing upon the proprietary rights of others. In the absence of patent and trade secret protection, competitors may adversely affect our business by independently developing and marketing substantially equivalent products and technology and preventing us from marketing our products. It is also possible that we could incur substantial costs in litigation if we are required to defend ourselves in patent suits brought by third parties, or if we are required to initiate litigation against others to protect our intellectual property rights.
We have filed various patent applications covering the composition of, and the methods of using, single-isomer or active-metabolite forms of various compounds for specific applications. However, we may not be issued patents in respect of the patent applications already filed or that we file in the future. Moreover, the patent position of companies in the pharmaceutical industry generally involves complex legal and factual questions, and recently has been the subject of much litigation. No consistent policy has emerged from the U.S. Patent and Trademark Office, generally known as the PTO, or the courts regarding the breadth of claims allowed or the degree of protection afforded under patents and other proprietary rights. Any patents we have obtained, or obtain in the future, may be challenged, invalidated or circumvented. Moreover, the PTO may commence interference proceedings involving our patents or patent applications. Any challenge to, or invalidation or circumvention of, our patents or patent applications could have a material adverse effect on our business.
Our ability to commercialize successfully any ICE will largely depend upon our ability to obtain and maintain use patents of sufficient scope to prevent third parties from developing similar or competitive products. Third parties, typically drug companies, hold patents or patent applications covering the composition of matter for most of the ICEs for which we have use patents or patent applications. In each of these cases, unless we have or obtain a license agreement, we generally may not commercialize the ICE until the expiration of these third-party patents. Licenses may not be available to us on acceptable terms, if at all. In addition, it would be costly for us to contest the validity of a third-party patent or defend any claim that we infringe a third-party patent. Moreover, litigation involving third-party patents may not be resolved in our favor.
IF OUR PRODUCTS DO NOT RECEIVE GOVERNMENT APPROVAL, THEN WE WILL NOT BE ABLE TO
COMMERCIALIZE THEM. The U.S. Food and Drug Administration ("FDA") and similar foreign agencies must approve the marketing and sale of pharmaceutical products developed by us or our development partners. These agencies impose substantial requirements on the manufacture and marketing of drugs. Our failure to obtain regulatory approval on a timely basis and any unanticipated significant expenditures on preclinical and clinical studies could adversely affect the funds we will require to advance our products to commercialization and the timing of the commercial introduction of, or our ability to, market and sell our products.
The regulatory process to obtain marketing approval requires clinical trials of a product to establish its safety and efficacy. Problems that may arise during clinical trials include:
- results of clinical trials may not be consistent with preclinical study results;
- results from later phases of clinical trials may not be consistent with the results from earlier phases; and
- products may not be shown to be safe and efficacious.
Even if the FDA or similar foreign agencies grant us regulatory approval of a product, the approval may be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for costly post-marketing follow-up studies. Moreover, if we fail to comply with applicable regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.
THE DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCTS COULD BE DELAYED OR
TERMINATED IF OUR COLLABORATIVE PARTNERS TERMINATE, OR FAIL TO PERFORM THEIR
OBLIGATIONS UNDER, THEIR AGREEMENTS WITH US OR IF ANY OF OUR COLLABORATION
AGREEMENTS IS SUBJECT TO LENGTHY GOVERNMENT REVIEW. We have entered into collaboration arrangements with pharmaceutical companies. Our revenues under these collaboration arrangements will consist primarily of milestone payments and royalties on sales of products. Any such payments and royalties will depend in large part on the efforts of our collaboration partners. If any of our collaboration partners does not devote sufficient time and resources to its collaboration arrangement with us, the potential commercial benefits of the arrangement may not be realized by us, and our results of operations may be adversely affected. In addition, if any of our collaboration partners were to breach or terminate their agreements with us or fail to perform their obligations to us in a timely manner, the development and commercialization of the products could be delayed or terminated. Any delay or termination of this type could have a material, adverse effect on our financial condition and results of operations because we may be required to expend additional funds to bring our products to commercialization, and milestone or royalty payments from collaborative partners or revenue from product sales, if any, could be delayed or terminated. Any failure or inability by us to perform some of our obligations under a collaboration agreement could reduce or extinguish the benefits to which we are otherwise entitled under the agreement.
Development and commercialization of some of our product candidates may depend on our ability to enter into additional collaboration agreements with pharmaceutical companies to fund all or part of the costs of development and commercialization of such product candidates. There can be no assurance that we will be able to enter into collaboration agreements for ICEs in the future or that the terms of the collaboration agreements, if any, will be favorable to us. The inability to enter into collaboration agreements in the future could delay or preclude the development, manufacture and/or marketing of some of our drugs and could have a material adverse effect on our financial condition and results of operations because:
- we may be required to expend additional funds to advance the drugs to commercialization;
- revenue from product sales could be delayed; or
- we may elect not to commercialize the drugs.
We are required to file a notice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, for certain agreements containing exclusive license grants and to delay the effectiveness of any such exclusive license until the expiration or earlier termination of the notice and waiting period under the HSR Act. If the expiration or termination of the notice and waiting period under the HSR Act is delayed because of lengthy government review, or if the Federal Trade Commission or Department of Justice successfully challenges such a license, development and commercialization could be delayed or precluded and our business could be adversely affected.
WE HAVE LIMITED SALES AND MARKETING EXPERIENCE AND EXPECT TO INCUR SIGNIFICANT
EXPENSES IN DEVELOPING A SALES FORCE. IN ADDITION, OUR LIMITED SALES AND
MARKETING EXPERIENCE MAY RESTRICT OUR SUCCESS IN COMMERCIALIZING OUR PRODUCTS.
We currently have very limited sales and marketing experience. If we successfully develop and obtain regulatory approval for the products we are currently developing, we expect to license some of them to large pharmaceutical companies and market and sell others through our direct specialty sales forces or through other arrangements, including co-promotion arrangements. We have established a direct sales force to market Xopenex, our single isomer form of albuterol. As we begin to enter into co-promotion arrangements or market and sell additional products directly, we will need to significantly expand our sales force. We expect to incur significant expense in expanding our direct sales force. Our limited experience in developing, maintaining and expanding a direct specialty sales force may restrict our success in commercializing our products.
Our ability to realize significant revenues from direct marketing and sales activities depends on our ability to attract and retain qualified sales personnel in the pharmaceutical industry and competition for these persons is intense. If we are unable to attract and retain qualified sales personnel, we will not be able to successfully expand our marketing and direct sales force on a timely or cost effective basis. We may also need to enter into additional co-promotion arrangements with third parties where our own direct sales force is neither well situated nor large enough to achieve maximum penetration in the market. We may not be successful in entering into any co-promotion arrangements, and the terms of any co-promotion arrangements may not be favorable to us. We cannot control the level of effort and quality of service provided by co-promoters or any third party sales force. If the level of effort provided by these third parties is not adequate, our revenues may be adversely affected.
IF WE DO NOT MAINTAIN CURRENT GOOD MANUFACTURING PRACTICES, THEN THE FDA
COULD REFUSE TO APPROVE MARKETING APPLICATIONS. WE DO NOT HAVE THE CAPABILITY
TO MANUFACTURE IN SUFFICIENT QUANTITIES ALL OF THE PRODUCTS WHICH MAY BE
APPROVED FOR SALE AND DEVELOPING AND OBTAINING THIS CAPABILITY WILL BE TIME
CONSUMING AND EXPENSIVE. The FDA and other regulatory authorities require that our products be manufactured according to their Good Manufacturing Practices standards. Our failure to maintain current Good Manufacturing Practices compliance and/or scale up our manufacturing processes could lead to refusal by the FDA to approve marketing applications. Failure in either respect could also be the basis for action by the FDA to withdraw approvals previously granted and for other regulatory action.
Failure to increase our manufacturing capabilities may mean that even if we develop promising new products, we may not be able to produce them. We currently operate a manufacturing plant that is compliant with current Good Manufacturing Practices that we believe can produce commercial quantities of Xopenex and support the production of our other possible products in amounts needed for our clinical trials. However, we will not have the capability to manufacture in sufficient quantities all of the products which may be approved for sale. Accordingly, we will be required to spend money to expand our current manufacturing facility, build an additional manufacturing facility or contract the production of these drugs to third-party manufacturers.
We currently have a supply contract with ChiRex Inc. that commits us to purchase through December 31, 2001 all of our annual requirements of those drugs that we will market directly through our specialty sales force, provided ChiRex meets certain pricing, supply and quality control conditions. If ChiRex experiences delays or difficulties in producing, packaging or delivering the drugs, market introduction and subsequent sales of the drugs that we market through our specialty sales force could be adversely affected. Under this supply agreement, however, we retain the right to manufacture commercial quantities of our drugs in our Nova Scotia manufacturing plant.
IF WE OR OUR COLLABORATION PARTNERS FAIL TO OBTAIN AN ADEQUATE LEVEL OF
REIMBURSEMENT FOR OUR FUTURE PRODUCTS OR SERVICES BY THIRD PARTY PAYORS, THERE
MAY BE NO COMMERCIALLY VIABLE MARKETS FOR OUR PRODUCTS OR SERVICES. The availability and levels of reimbursement by governmental and other third party payors affects the market for any pharmaceutical product or service. These third party payors continually attempt to contain or reduce the costs of healthcare by challenging the prices charged for medical products and services. In certain foreign countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. We may not be able to sell our products profitably if reimbursement is unavailable or limited in scope or amount.
In both the United States and certain foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the healthcare system. Further proposals are likely. The potential for adoption of these proposals affects or will affect our ability to raise capital, obtain additional collaboration partners and market our products.
We expect to experience pricing pressure for our existing products and any future products for which marketing approval is obtained due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative proposals.
WE COULD BE EXPOSED TO SIGNIFICANT LIABILITY CLAIMS THAT COULD PREVENT OR
INTERFERE WITH OUR PRODUCT COMMERCIALIZATION EFFORTS. We may be subjected to product liability claims that arise through the testing, manufacturing, marketing and sale of human health care products. These claims could expose us to significant liabilities that could prevent or interfere with our product commercialization efforts. Product liability claims could require us to spend significant time and money in litigation or to pay significant damages. Although we maintain product liability insurance coverage for both the clinical trials and commercialization of our products, it is possible that we will not be able to obtain further product liability insurance on acceptable terms, if at all, and that our insurance coverage may not provide adequate coverage against all potential claims.
WE HAVE SIGNIFICANT LONG-TERM DEBT AND WE MAY NOT BE ABLE TO MAKE INTEREST OR
PRINCIPAL PAYMENTS WHEN DUE. As of June 30, 2000, our total long-term debt was approximately $854.1 million and our stockholders' equity (deficit) was ($121.1) million. None of the 6 1/4% Debentures issued by us in February 1998, the 7% convertible subordinated debentures due 2005 issued by us in December 1998 (the "7% Debentures") nor the 5% Debentures issued by us in February 2000 restricts our ability or our subsidiaries ability to incur additional indebtedness, including debt that ranks senior to the 6 1/4% Debentures, the 7% Debentures and the 5% Debentures. Additional indebtedness that we incur may rank senior to or on parity with these debentures in certain circumstances. Our ability to satisfy our obligations will depend upon our future performance, which is subject to many factors, including factors beyond our control. It is possible that we will be unable to meet our debt service requirements on any of our outstanding Debentures. Moreover, we may be unable to repay any of our outstanding Debentures at maturity or otherwise in accordance with the debt instruments.
IF SUFFICIENT FUNDS TO FINANCE OUR BUSINESS ARE NOT AVAILABLE TO US WHEN
NEEDED OR ON ACCEPTABLE TERMS, THEN WE MAY BE REQUIRED TO DELAY, SCALE BACK,
ELIMINATE OR ALTER OUR STRATEGY FOR OUR PROGRAMS.We may require additional funds for our research and product development programs, operating expenses, the pursuit of regulatory approvals, license or acquisition opportunities and the expansion of our production, sales and marketing capabilities. Historically we have satisfied our funding needs through collaboration arrangements with corporate partners, equity or debt financing. We cannot assure you that these funding sources will be available to us when needed in the future, or, if available, will be on terms acceptable to us. Insufficient funds could require us to delay, scale back or eliminate certain of our research and product development programs or to license third parties to commercialize products or technologies that we would otherwise develop or commercialize ourselves. Our cash requirements may vary materially from those now planned because of factors including:
- increased research and development expenses; - patent developments; - licensing or acquisition opportunities; - relationships with collaboration partners; - the FDA regulatory process; - our capital requirements; and - selling and marketing expenses in connection with commercialization of products.
WE EXPECT TO FACE INTENSE COMPETITION AND OUR COMPETITORS HAVE GREATER RESOURCES
AND CAPABILITIES THAN WE HAVE. DEVELOPMENTS BY OTHERS MAY RENDER OUR PRODUCTS OR
TECHNOLOGIES OBSOLETE OR NONCOMPETITIVE. We expect to encounter intense competition in the sale of our future products. If we are unable to compete effectively, our financial condition and results of operations could be materially adversely affected because we may use our financial resources to seek to differentiate ourselves from our competition and because we may not achieve our product revenue objectives. Many of our competitors and potential competitors, which include pharmaceutical companies, biotechnology firms, universities and other research institutions, have substantially greater resources, manufacturing and marketing capabilities, research and development staff and production facilities than we have. The fields in which we compete are subject to rapid and substantial technological change. Our competitors may be able to respond more quickly to new or emerging technologies or to devote greater resources to the development, manufacture and marketing of new products and/or technologies than we can. As a result, any products and/or technologies that we develop may become obsolete or noncompetitive before we can recover expenses incurred in connection with their development.
FLUCTUATIONS IN THE DEMAND FOR PRODUCTS, THE TIMING OF COLLABORATIVE
ARRANGEMENTS, EXPENSES AND THE RESULTS OF OPERATIONS OF OUR SUBSIDIARIES WILL
CAUSE FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS, WHICH COULD CAUSE
VOLATILITY IN OUR STOCK PRICE. Our quarterly operating results are likely to fluctuate significantly, which could cause our stock price to be volatile. These fluctuations will depend on factors which include:
- the timing of collaboration agreements for development of our pharmaceutical candidates and development costs for those pharmaceuticals; - the timing of receipt of upfront, milestone or royalty payments under collaboration agreements; - the timing of product sales and market penetration; - the timing of operating expenses, including selling and marketing expenses and the costs of expanding and maintaining a direct sales force; - the timing of expenses we may incur with respect to any license or acquisitions of products or technologies; and - the losses of BioSphere, a 58% owned consolidated subsidiary of Sepracor, and of HemaSure, a 22% owned affiliate of Sepracor.
FAILURE BY US TO IDENTIFY AND REMEDIATE ALL YEAR 2000 RISKS COULD CAUSE A
DISRUPTION IN OUR BUSINESS. In prior periods and years, we discussed the progress of our plans to prepare for any system or processing failures which could result from computer programs recognizing dates represented as "00" as the year 1900 rather than the year 2000. There have been no significant disruptions in critical information technology and non-information technology systems and we believe those systems successfully responded to the Year 2000 date change. Costs relating to this Year 2000 issue have not been material. We are not aware of any material problems resulting from Year 2000 issues, either with our internal systems, or with the products and services of third parties. We will continue to monitor our mission critical computer applications and those of vendors and suppliers throughout the year 2000 to ensure that we promptly address any issues that may arise. In the event that we experience disruptions as a result of the Year 2000 problem, our business could be seriously harmed.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market Risk
The Company is exposed to market risk from changes in interest rates and equity prices, which could affect its future results of operations and financial condition. These risks are described in the Company's Annual Report on Form 10-K/A for the year ended December 31, 1999. As of June 30, 2000, there have been no material changes to the market risks described in the Company's Annual Report on Form 10-K/A for the year ended December 31, 1999. Additionally, the Company does not anticipate any near-term changes in the nature of its market risk exposures or in management's objectives and strategies with respect to managing such exposures.
Al grüßt
August 11, 2000
SEPRACOR INC /DE/ (SEPR)
Quarterly Report (SEC form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains, in addition to historical information, forward-looking statements within the meaning of section 21E of the Securities Exchange Act of 1934, as amended. These forward looking statements involve risk and uncertainties and are not guarantees of future perfomance. Sepracor's actual results could differ significantly from the results discussed in such forward-looking statements. See "Factors Affecting Future Operating Results" below.
OVERVIEW
Sepracor is a specialty pharmaceutical company focused on the cost-effective development of safer, purer and more effective drugs that are improved versions of widely-prescribed pharmaceutical compounds.
The consolidated interim financial statements include the accounts of Sepracor Inc. ("Sepracor" or the "Company") and its majority and wholly-owned subsidiaries, including BioSphere Medical Inc. ("BioSphere") and Sepracor Canada Limited.
On July 31, 2000, Sepracor purchased approximately $5,000,000 of common stock of BioSphere as part of a private equity placement to a small group of investors totaling approximately $13,000,000. As a result of the transaction, Sepracor's ownership in BioSphere decreased from approximately 58% to 56%.
On April 13, 2000, the Company announced that the Federal Trade Commission (the "FTC") closed its investigation, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), of the license agreement that allows Eli Lilly and Company ("Lilly") and Sepracor to exclusively develop and globally commercialize (R)-fluoxetine. (R)-Fluoxetine, a new chemical entity, is a modified form of an active ingredient found in Prozac(R). Upon closing this transaction, the Company received an initial milestone payment and license fee of $20,000,000. The Company has no further work to be performed related to the agreement and has recorded this as revenue in the second quarter of 2000. The Company has also recorded $3,573,000 of collaborative research and development revenue in the second quarter of 2000, related to previous costs incurred in the development of (R)-fluoxetine under the Lilly Agreement. The Company will also receive up to $70,000,000 in additional milestone payments based on the progression of (R)-fluoxetine through development. In addition to the initial milestone payment and license fee and additional milestone payments, Sepracor will receive royalties on (R)-fluoxetine worldwide sales, if any, beginning at product launch. In exchange, Lilly will receive exclusive, worldwide rights to (R)-fluoxetine for all indications and uses. Lilly is responsible for developmental work on (R)-fluoxetine, regulatory submissions, product manufacturing, marketing and sales.
On March 3, 2000, HemaSure Inc. ("HemaSure") announced that it had completed a $28,000,000 private placement of 3,730,000 shares of its common stock, thereby reducing Sepracor's ownership to approximately 22%. The transaction resulted in Sepracor recording a net gain of approximately $1,417,000 through additional paid-in capital.
In the first quarter of 2000, the Company issued $460,000,000 in principal amount of 5% convertible subordinated debentures due 2007 (the "5% Debentures"). The 5% Debentures have an annual interest rate of 5% and are convertible at the option of the holder into Sepracor common stock at $92.38 per share.
In February 2000, the Company converted $96,424,000 of its 6 1/4% convertible subordinated debentures due 2005 (the "6 1/4% Debentures"). Costs related to the conversion of the 6 1/4% Debentures, including inducements and other costs, were approximately $7,497,000. Deferred finance costs of approximately $2,373,000 were written off against additional paid-in capital as a result of the conversion.
On February 4, 2000, BioSphere announced that it had completed a private equity placement of approximately $5,900,000 of common stock and warrants. Investors purchased 653,887 shares of BioSphere common stock and warrants to purchase an additional 163,468 shares of BioSphere common stock. As a result of this transaction, Sepracor's ownership of BioSphere decreased from approximately 64% to 59% as of February 2000. The transaction resulted in Sepracor recording a net gain of approximately $2,771,000 through additional paid-in capital.
On January 20, 2000, the Company announced that its Board of Directors approved a two-for-one stock split which was paid in the form of a 100% stock dividend on February 25, 2000 to stockholders of record on February 1, 2000.
In May 1999, Sepracor commercially introduced Xopenex(R), a single-isomer form of the leading bronchodilator, albuterol. Xopenex is the first pharmaceutical product developed and commercialized by Sepracor.
During 2000, the Company expects that it will incur increasing expenses, primarily in research and development and sales and marketing, as a result of efforts to advance the development of its portfolio of pharmaceuticals and drug candidates, and activities relating to the sales and marketing of Xopenex. The Company also expects to continue to pursue additional corporate partnering and alliance arrangements including out-licensing agreements, co-promotion arrangements, development collaborations and merger or acquisition opportunities.
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
Product revenues were $9,635,000 and $23,501,000 for the three and six months ended June 30, 2000, respectively, compared to $4,947,000 and $5,227,000, respectively, for the same periods in 1999. The increase for the three and six month periods ended June 30, 2000 is due primarily to sales of Xopenex, which the Company commercially introduced in May 1999.
Collaborative research and development revenues were $3,573,000 for the three and six months ended June 30, 2000, compared to $13,000 and $2,390,000, respectively, for the same periods in 1999. The increase for the three months ended June 30, 2000 is attributable to proceeds from the Lilly (R)-fluoxetine agreement, and the increase for the six month period ended June 30, 2000 is also due to proceeds from the Lilly (R)-fluoxetine agreement offset by the termination of the research and development studies conducted by Sepracor under the collaborative license agreement between Sepracor and Janssen Pharmaceutica N.V ("Janssen"), dated January 30, 1998, for the development of norastemizole.
License fee revenues were $20,000,000 for the three and six months ended June 30, 2000, compared to $3,000 and $11,000, respectively, for the same periods in 1999. The increase is attributable to initial milestone payments received under the Lilly (R)-fluoxetine agreement.
Royalty and other revenues were $1,044,000 and $2,311,000 for the three and six months ended June 30, 2000, respectively, compared to $51,000 and $110,000, respectively, for the same periods in 1999. The increase in revenue is due to proceeds from the royalty agreement with Hoechst Marion Roussel, Inc. (now Aventis) under which Sepracor currently receives royalties on non-U.S. sales of fexofenadine in countries where Sepracor holds issued patents on fexofenadine. The increase is also due to other revenues generated by BioSphere.
Cost of product revenues, as a percentage of product revenues, was 8% and 24% for the three and six months ended June 30, 2000, respectively, compared to 23% and 24%, respectively, for the same periods in 1999. The decrease of cost of product revenue for the three months ended June 30, 2000 is due to an increase of sales of pharmaceutical products as a percentage of total product sales which have a lower cost of product revenue, and is also due to favorable manufacturing cost variances during this period. Included in the cost of product revenues for the six months ended June 30, 2000 is a charge of $2,766,000 for costs related to an isolated third party manufacturing issue. When adjusted for this one time charge, the cost of revenue as a percentage of product revenue for the six months ended June 30, 2000 becomes approximately 12%. This decrease in the cost of revenue for the six months ended June 30, 2000 is due principally to an increase of sales of pharmaceutical products as a percentage of the Company's total product sales.
Cost of license fee revenues were $2,000,000 for the three and six months ended June 30, 2000, compared to $0 for the same periods in 1999. The $2,000,000 represents sublicense fees owed under a license agreement with McLean Hospital pertaining to patents related to the Lilly (R)-fluoxetine agreement.
Research and development expenses were $38,507,000 and $70,512,000 for the three and six months ended June 30, 2000, respectively, compared to $24,122,000 and $42,562,000, respectively, for the same periods in 1999. The increase is primarily due to costs related to clinical studies being initiated and increased personnel costs related to the quality control and clinical and regulatory infrastructure development.
Selling, general and administrative and patent expenses were $22,979,000 and $45,581,000 for the three and six months ended June 30, 2000, respectively, compared to $13,242,000 and $23,650,000, respectively, for the same periods in 1999. The increase is primarily due to the addition of two third-party contracted sales forces and sales and marketing infrastructure development.
The net of interest income, interest (expense) and other income (expense) was $(1,206,000) and $(11,036,000) for the three and six months ended June 30, 2000, respectively, compared to $(2,570,000) and $(4,825,000), respectively, for the same periods in 1999. The decrease in expense for the three month period ended June 30, 2000 is attributable to additional interest income earned on investments purchased with the proceeds of the 5% Debentures, while the increase in expense for the six month period ended June 30, 2000 is primarily the result of the conversion of $96,424,000 principal amount of 6 1/4% Debentures, which resulted in inducements and other costs of $7,497,000 in the first quarter of 2000 partially offset by additional net interest income related to the 5% Debentures.
Equity in loss of investees was $659,000 and $989,000 for the three and six months ended June 30, 2000, respectively, compared to $825,000 and $2,509,000, respectively, for the same periods in 1999. The decrease is due to Sepracor no longer recognizing Versicor losses as of May 1999, and due to Sepracor maintaining a lower ownership percentage in HemaSure in 2000.
Minority interest in subsidiary from continuing operations resulted in a decrease to consolidated net loss of $922,000 and $1,489,000 for the three and six months ended June 30, 2000, respectively, compared to $366,000 and $548,000, respectively, for the same periods in 1999. The fluctuation in minority interest is the result of the minority interest in BioSphere increasing from approximately 36% to 42% and due to BioSphere recording a larger net loss in the three and six month periods ended June 30, 2000 than in the three and six month periods ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents plus marketable securities totaled $729,844,000 at June 30, 2000, compared to $335,823,000 at December 31, 1999.
The net cash used in operating activities for the six months ended June 30, 2000 was $74,704,000. The net cash used in operating activities includes a net loss from continuing operations of $85,345,000 adjusted by non-cash charges of $4,857,000. Inventory increased by $2,137,000 primarily due to increased production of Xopenex inventory. Accounts payable decreased by $11,985,000 due to the timing of cash disbursements. Accrued expenses increased by $17,454,000 due primarily to increased research and development and sales and marketing activities and additional accrued interest related to the 5% Debentures.
The net cash used in investing activities for the six months ended June 30, 2000 was $186,353,000. Cash was invested primarily in net purchases of marketable securities of $181,277,000 and purchases of property and equipment of $3,419,000.
The net cash provided by financing activities for the six months ended June 30, 2000 was $473,687,000. The Company received approximately $445,967,000 in net proceeds from the issuance of the 5% Debentures. The Company also received approximately $21,549,000 in proceeds from the issuance of Sepracor common stock and $6,135,000 from BioSphere's issuance of common stock.
In the first quarter of 2000, the Company issued $460,000,000 in principal amount of 5% convertible subordinated debentures due 2007. The 5% Debentures have an annual interest rate of 5% and are convertible into Sepracor common stock at $92.38 per share.
In February 2000, the Company converted $96,424,000 of its 6 1/4% convertible subordinated debentures due 2005. Costs related to the conversion of the 6 1/4% Debentures, including inducements and other costs, were approximately $7,497,000. Deferred finance costs of approximately $2,373,000 were written off against additional paid-in capital as a result of the conversion.
The Company believes its existing cash and the anticipated cash flow from its current strategic alliances and operations will be sufficient to support existing operations for the near term. Sepracor's actual future cash requirements, however, will depend on many factors, including the progress of its preclinical, clinical, and research programs, the number and breadth of these programs, achievement of milestones under these strategic alliance arrangements, sales of its products, acquisitions, its ability to establish and maintain additional strategic alliance and licensing arrangements, and the progress of the Company's development efforts and the development efforts of its strategic partners.
FACTORS AFFECTING FUTURE OPERATING RESULTS
You should carefully consider the following risks before making an investment decision. You should also refer to the other information set forth in this prospectus, and incorporated by reference in this prospectus. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results could vary significantly from the results discussed in the forward-looking statements. Some risks that could cause our results to vary are disclosed below.
WE HAVE NEVER BEEN PROFITABLE AND WE MAY NOT BE ABLE TO GENERATE REVENUES
SUFFICIENT TO ACHIEVE PROFITABILITY. We have not been profitable since inception, and it is possible that we will not achieve profitability. We incurred net losses applicable to common shares on a consolidated basis of approximately $85.3 million for the six months ended June 30, 2000 and $183.1 million for the year ended December 31, 1999. We expect to continue to incur operating and capital expenditures. As a result, we will need to generate significant revenues to achieve and maintain profitability. We cannot assure you that we will achieve significant revenues or that we will ever achieve profitability. Even if we do achieve profitability, we cannot assure you that we can sustain or increase profitability on a quarterly or annual basis in the future. If revenues grow more slowly than we anticipate or if operating expenses exceed our expectations or cannot be adjusted accordingly, our business, results of operations and financial conditions will be materially and adversely affected. Our ability to generate profitability will depend in large part on successful commercialization of our initial products and successful development and commercialization of principal products under development. Failure to successfully commercialize these products may have a material adverse effect on our business.
WE WILL BE REQUIRED TO EXPEND SIGNIFICANT RESOURCES FOR RESEARCH, DEVELOPMENT,
TESTING AND REGULATORY APPROVAL OF OUR DRUGS UNDER DEVELOPMENT AND THESE DRUGS
MAY NOT BE DEVELOPED SUCCESSFULLY. We are focused on the development of improved versions of widely prescribed pharmaceutical compounds which we refer to as improved chemical entities, or ICEs. Most of our ICEs are still undergoing clinical trials or are in the early stages of development. Our drugs may not provide greater benefits or fewer side effects than the original versions of these drugs and our research
efforts may not lead to the discovery of new drugs with improved characteristics. All of our drugs under development will require significant additional research, development, preclinical and/or clinical testing, regulatory approval and a commitment of significant additional resources prior to their commercialization. Our potential products may not:
- be developed successfully;
- be proven safe and efficacious in clinical trials;
- offer therapeutic or other improvements over comparable drugs;
- meet applicable regulatory standards;
- be capable of being produced in commercial quantities at acceptable costs; or
- be successfully marketed.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR FACE A
CLAIM OF INTELLECTUAL PROPERTY INFRINGEMENT BY A THIRD PARTY, THEN WE COULD LOSE
VALUABLE INTELLECTUAL PROPERTY RIGHTS, BE LIABLE FOR SIGNIFICANT DAMAGES OR BE
PREVENTED FROM COMMERCIALIZING OUR PRODUCTS. Our success depends in part on our ability to obtain and maintain patents, protect trade secrets and operate without infringing upon the proprietary rights of others. In the absence of patent and trade secret protection, competitors may adversely affect our business by independently developing and marketing substantially equivalent products and technology and preventing us from marketing our products. It is also possible that we could incur substantial costs in litigation if we are required to defend ourselves in patent suits brought by third parties, or if we are required to initiate litigation against others to protect our intellectual property rights.
We have filed various patent applications covering the composition of, and the methods of using, single-isomer or active-metabolite forms of various compounds for specific applications. However, we may not be issued patents in respect of the patent applications already filed or that we file in the future. Moreover, the patent position of companies in the pharmaceutical industry generally involves complex legal and factual questions, and recently has been the subject of much litigation. No consistent policy has emerged from the U.S. Patent and Trademark Office, generally known as the PTO, or the courts regarding the breadth of claims allowed or the degree of protection afforded under patents and other proprietary rights. Any patents we have obtained, or obtain in the future, may be challenged, invalidated or circumvented. Moreover, the PTO may commence interference proceedings involving our patents or patent applications. Any challenge to, or invalidation or circumvention of, our patents or patent applications could have a material adverse effect on our business.
Our ability to commercialize successfully any ICE will largely depend upon our ability to obtain and maintain use patents of sufficient scope to prevent third parties from developing similar or competitive products. Third parties, typically drug companies, hold patents or patent applications covering the composition of matter for most of the ICEs for which we have use patents or patent applications. In each of these cases, unless we have or obtain a license agreement, we generally may not commercialize the ICE until the expiration of these third-party patents. Licenses may not be available to us on acceptable terms, if at all. In addition, it would be costly for us to contest the validity of a third-party patent or defend any claim that we infringe a third-party patent. Moreover, litigation involving third-party patents may not be resolved in our favor.
IF OUR PRODUCTS DO NOT RECEIVE GOVERNMENT APPROVAL, THEN WE WILL NOT BE ABLE TO
COMMERCIALIZE THEM. The U.S. Food and Drug Administration ("FDA") and similar foreign agencies must approve the marketing and sale of pharmaceutical products developed by us or our development partners. These agencies impose substantial requirements on the manufacture and marketing of drugs. Our failure to obtain regulatory approval on a timely basis and any unanticipated significant expenditures on preclinical and clinical studies could adversely affect the funds we will require to advance our products to commercialization and the timing of the commercial introduction of, or our ability to, market and sell our products.
The regulatory process to obtain marketing approval requires clinical trials of a product to establish its safety and efficacy. Problems that may arise during clinical trials include:
- results of clinical trials may not be consistent with preclinical study results;
- results from later phases of clinical trials may not be consistent with the results from earlier phases; and
- products may not be shown to be safe and efficacious.
Even if the FDA or similar foreign agencies grant us regulatory approval of a product, the approval may be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for costly post-marketing follow-up studies. Moreover, if we fail to comply with applicable regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.
THE DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCTS COULD BE DELAYED OR
TERMINATED IF OUR COLLABORATIVE PARTNERS TERMINATE, OR FAIL TO PERFORM THEIR
OBLIGATIONS UNDER, THEIR AGREEMENTS WITH US OR IF ANY OF OUR COLLABORATION
AGREEMENTS IS SUBJECT TO LENGTHY GOVERNMENT REVIEW. We have entered into collaboration arrangements with pharmaceutical companies. Our revenues under these collaboration arrangements will consist primarily of milestone payments and royalties on sales of products. Any such payments and royalties will depend in large part on the efforts of our collaboration partners. If any of our collaboration partners does not devote sufficient time and resources to its collaboration arrangement with us, the potential commercial benefits of the arrangement may not be realized by us, and our results of operations may be adversely affected. In addition, if any of our collaboration partners were to breach or terminate their agreements with us or fail to perform their obligations to us in a timely manner, the development and commercialization of the products could be delayed or terminated. Any delay or termination of this type could have a material, adverse effect on our financial condition and results of operations because we may be required to expend additional funds to bring our products to commercialization, and milestone or royalty payments from collaborative partners or revenue from product sales, if any, could be delayed or terminated. Any failure or inability by us to perform some of our obligations under a collaboration agreement could reduce or extinguish the benefits to which we are otherwise entitled under the agreement.
Development and commercialization of some of our product candidates may depend on our ability to enter into additional collaboration agreements with pharmaceutical companies to fund all or part of the costs of development and commercialization of such product candidates. There can be no assurance that we will be able to enter into collaboration agreements for ICEs in the future or that the terms of the collaboration agreements, if any, will be favorable to us. The inability to enter into collaboration agreements in the future could delay or preclude the development, manufacture and/or marketing of some of our drugs and could have a material adverse effect on our financial condition and results of operations because:
- we may be required to expend additional funds to advance the drugs to commercialization;
- revenue from product sales could be delayed; or
- we may elect not to commercialize the drugs.
We are required to file a notice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, for certain agreements containing exclusive license grants and to delay the effectiveness of any such exclusive license until the expiration or earlier termination of the notice and waiting period under the HSR Act. If the expiration or termination of the notice and waiting period under the HSR Act is delayed because of lengthy government review, or if the Federal Trade Commission or Department of Justice successfully challenges such a license, development and commercialization could be delayed or precluded and our business could be adversely affected.
WE HAVE LIMITED SALES AND MARKETING EXPERIENCE AND EXPECT TO INCUR SIGNIFICANT
EXPENSES IN DEVELOPING A SALES FORCE. IN ADDITION, OUR LIMITED SALES AND
MARKETING EXPERIENCE MAY RESTRICT OUR SUCCESS IN COMMERCIALIZING OUR PRODUCTS.
We currently have very limited sales and marketing experience. If we successfully develop and obtain regulatory approval for the products we are currently developing, we expect to license some of them to large pharmaceutical companies and market and sell others through our direct specialty sales forces or through other arrangements, including co-promotion arrangements. We have established a direct sales force to market Xopenex, our single isomer form of albuterol. As we begin to enter into co-promotion arrangements or market and sell additional products directly, we will need to significantly expand our sales force. We expect to incur significant expense in expanding our direct sales force. Our limited experience in developing, maintaining and expanding a direct specialty sales force may restrict our success in commercializing our products.
Our ability to realize significant revenues from direct marketing and sales activities depends on our ability to attract and retain qualified sales personnel in the pharmaceutical industry and competition for these persons is intense. If we are unable to attract and retain qualified sales personnel, we will not be able to successfully expand our marketing and direct sales force on a timely or cost effective basis. We may also need to enter into additional co-promotion arrangements with third parties where our own direct sales force is neither well situated nor large enough to achieve maximum penetration in the market. We may not be successful in entering into any co-promotion arrangements, and the terms of any co-promotion arrangements may not be favorable to us. We cannot control the level of effort and quality of service provided by co-promoters or any third party sales force. If the level of effort provided by these third parties is not adequate, our revenues may be adversely affected.
IF WE DO NOT MAINTAIN CURRENT GOOD MANUFACTURING PRACTICES, THEN THE FDA
COULD REFUSE TO APPROVE MARKETING APPLICATIONS. WE DO NOT HAVE THE CAPABILITY
TO MANUFACTURE IN SUFFICIENT QUANTITIES ALL OF THE PRODUCTS WHICH MAY BE
APPROVED FOR SALE AND DEVELOPING AND OBTAINING THIS CAPABILITY WILL BE TIME
CONSUMING AND EXPENSIVE. The FDA and other regulatory authorities require that our products be manufactured according to their Good Manufacturing Practices standards. Our failure to maintain current Good Manufacturing Practices compliance and/or scale up our manufacturing processes could lead to refusal by the FDA to approve marketing applications. Failure in either respect could also be the basis for action by the FDA to withdraw approvals previously granted and for other regulatory action.
Failure to increase our manufacturing capabilities may mean that even if we develop promising new products, we may not be able to produce them. We currently operate a manufacturing plant that is compliant with current Good Manufacturing Practices that we believe can produce commercial quantities of Xopenex and support the production of our other possible products in amounts needed for our clinical trials. However, we will not have the capability to manufacture in sufficient quantities all of the products which may be approved for sale. Accordingly, we will be required to spend money to expand our current manufacturing facility, build an additional manufacturing facility or contract the production of these drugs to third-party manufacturers.
We currently have a supply contract with ChiRex Inc. that commits us to purchase through December 31, 2001 all of our annual requirements of those drugs that we will market directly through our specialty sales force, provided ChiRex meets certain pricing, supply and quality control conditions. If ChiRex experiences delays or difficulties in producing, packaging or delivering the drugs, market introduction and subsequent sales of the drugs that we market through our specialty sales force could be adversely affected. Under this supply agreement, however, we retain the right to manufacture commercial quantities of our drugs in our Nova Scotia manufacturing plant.
IF WE OR OUR COLLABORATION PARTNERS FAIL TO OBTAIN AN ADEQUATE LEVEL OF
REIMBURSEMENT FOR OUR FUTURE PRODUCTS OR SERVICES BY THIRD PARTY PAYORS, THERE
MAY BE NO COMMERCIALLY VIABLE MARKETS FOR OUR PRODUCTS OR SERVICES. The availability and levels of reimbursement by governmental and other third party payors affects the market for any pharmaceutical product or service. These third party payors continually attempt to contain or reduce the costs of healthcare by challenging the prices charged for medical products and services. In certain foreign countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. We may not be able to sell our products profitably if reimbursement is unavailable or limited in scope or amount.
In both the United States and certain foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the healthcare system. Further proposals are likely. The potential for adoption of these proposals affects or will affect our ability to raise capital, obtain additional collaboration partners and market our products.
We expect to experience pricing pressure for our existing products and any future products for which marketing approval is obtained due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative proposals.
WE COULD BE EXPOSED TO SIGNIFICANT LIABILITY CLAIMS THAT COULD PREVENT OR
INTERFERE WITH OUR PRODUCT COMMERCIALIZATION EFFORTS. We may be subjected to product liability claims that arise through the testing, manufacturing, marketing and sale of human health care products. These claims could expose us to significant liabilities that could prevent or interfere with our product commercialization efforts. Product liability claims could require us to spend significant time and money in litigation or to pay significant damages. Although we maintain product liability insurance coverage for both the clinical trials and commercialization of our products, it is possible that we will not be able to obtain further product liability insurance on acceptable terms, if at all, and that our insurance coverage may not provide adequate coverage against all potential claims.
WE HAVE SIGNIFICANT LONG-TERM DEBT AND WE MAY NOT BE ABLE TO MAKE INTEREST OR
PRINCIPAL PAYMENTS WHEN DUE. As of June 30, 2000, our total long-term debt was approximately $854.1 million and our stockholders' equity (deficit) was ($121.1) million. None of the 6 1/4% Debentures issued by us in February 1998, the 7% convertible subordinated debentures due 2005 issued by us in December 1998 (the "7% Debentures") nor the 5% Debentures issued by us in February 2000 restricts our ability or our subsidiaries ability to incur additional indebtedness, including debt that ranks senior to the 6 1/4% Debentures, the 7% Debentures and the 5% Debentures. Additional indebtedness that we incur may rank senior to or on parity with these debentures in certain circumstances. Our ability to satisfy our obligations will depend upon our future performance, which is subject to many factors, including factors beyond our control. It is possible that we will be unable to meet our debt service requirements on any of our outstanding Debentures. Moreover, we may be unable to repay any of our outstanding Debentures at maturity or otherwise in accordance with the debt instruments.
IF SUFFICIENT FUNDS TO FINANCE OUR BUSINESS ARE NOT AVAILABLE TO US WHEN
NEEDED OR ON ACCEPTABLE TERMS, THEN WE MAY BE REQUIRED TO DELAY, SCALE BACK,
ELIMINATE OR ALTER OUR STRATEGY FOR OUR PROGRAMS.We may require additional funds for our research and product development programs, operating expenses, the pursuit of regulatory approvals, license or acquisition opportunities and the expansion of our production, sales and marketing capabilities. Historically we have satisfied our funding needs through collaboration arrangements with corporate partners, equity or debt financing. We cannot assure you that these funding sources will be available to us when needed in the future, or, if available, will be on terms acceptable to us. Insufficient funds could require us to delay, scale back or eliminate certain of our research and product development programs or to license third parties to commercialize products or technologies that we would otherwise develop or commercialize ourselves. Our cash requirements may vary materially from those now planned because of factors including:
- increased research and development expenses; - patent developments; - licensing or acquisition opportunities; - relationships with collaboration partners; - the FDA regulatory process; - our capital requirements; and - selling and marketing expenses in connection with commercialization of products.
WE EXPECT TO FACE INTENSE COMPETITION AND OUR COMPETITORS HAVE GREATER RESOURCES
AND CAPABILITIES THAN WE HAVE. DEVELOPMENTS BY OTHERS MAY RENDER OUR PRODUCTS OR
TECHNOLOGIES OBSOLETE OR NONCOMPETITIVE. We expect to encounter intense competition in the sale of our future products. If we are unable to compete effectively, our financial condition and results of operations could be materially adversely affected because we may use our financial resources to seek to differentiate ourselves from our competition and because we may not achieve our product revenue objectives. Many of our competitors and potential competitors, which include pharmaceutical companies, biotechnology firms, universities and other research institutions, have substantially greater resources, manufacturing and marketing capabilities, research and development staff and production facilities than we have. The fields in which we compete are subject to rapid and substantial technological change. Our competitors may be able to respond more quickly to new or emerging technologies or to devote greater resources to the development, manufacture and marketing of new products and/or technologies than we can. As a result, any products and/or technologies that we develop may become obsolete or noncompetitive before we can recover expenses incurred in connection with their development.
FLUCTUATIONS IN THE DEMAND FOR PRODUCTS, THE TIMING OF COLLABORATIVE
ARRANGEMENTS, EXPENSES AND THE RESULTS OF OPERATIONS OF OUR SUBSIDIARIES WILL
CAUSE FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS, WHICH COULD CAUSE
VOLATILITY IN OUR STOCK PRICE. Our quarterly operating results are likely to fluctuate significantly, which could cause our stock price to be volatile. These fluctuations will depend on factors which include:
- the timing of collaboration agreements for development of our pharmaceutical candidates and development costs for those pharmaceuticals; - the timing of receipt of upfront, milestone or royalty payments under collaboration agreements; - the timing of product sales and market penetration; - the timing of operating expenses, including selling and marketing expenses and the costs of expanding and maintaining a direct sales force; - the timing of expenses we may incur with respect to any license or acquisitions of products or technologies; and - the losses of BioSphere, a 58% owned consolidated subsidiary of Sepracor, and of HemaSure, a 22% owned affiliate of Sepracor.
FAILURE BY US TO IDENTIFY AND REMEDIATE ALL YEAR 2000 RISKS COULD CAUSE A
DISRUPTION IN OUR BUSINESS. In prior periods and years, we discussed the progress of our plans to prepare for any system or processing failures which could result from computer programs recognizing dates represented as "00" as the year 1900 rather than the year 2000. There have been no significant disruptions in critical information technology and non-information technology systems and we believe those systems successfully responded to the Year 2000 date change. Costs relating to this Year 2000 issue have not been material. We are not aware of any material problems resulting from Year 2000 issues, either with our internal systems, or with the products and services of third parties. We will continue to monitor our mission critical computer applications and those of vendors and suppliers throughout the year 2000 to ensure that we promptly address any issues that may arise. In the event that we experience disruptions as a result of the Year 2000 problem, our business could be seriously harmed.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market Risk
The Company is exposed to market risk from changes in interest rates and equity prices, which could affect its future results of operations and financial condition. These risks are described in the Company's Annual Report on Form 10-K/A for the year ended December 31, 1999. As of June 30, 2000, there have been no material changes to the market risks described in the Company's Annual Report on Form 10-K/A for the year ended December 31, 1999. Additionally, the Company does not anticipate any near-term changes in the nature of its market risk exposures or in management's objectives and strategies with respect to managing such exposures.
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