Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-K
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
| For the Fiscal Year ended December 31, 2001 | ||
| or | ||
|
o
|
TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
Commission file number 0-20772
Questcor Pharmaceuticals, Inc.
|
California
|
33-0476164 | |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
|
3260 Whipple Road Union City, California |
94587 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (510) 400-0700
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Indicate by mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act 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 þ No o
As of March 15, 2002 the Registrant had 38,228,005 shares of Common Stock, no par value, outstanding, and the aggregate market value of the shares held by non-affiliates on that date was $46,305,102* based upon the last sales price of the Registrant’s Common Stock reported on the American Stock Exchange.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Definitive Proxy Statement filed with the Commission pursuant to Regulation 14A in connection with the 2002 Annual Meeting are incorporated by reference into Part III of this Report.
| * | Excludes 12,359,233 shares of Common Stock held by directors, executive officers and shareholders whose beneficial ownership exceeds ten percent of the shares outstanding on March 15, 2002. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant, or that such person is controlled by or under common control with the Registrant. |
Table of Contents
PART I.
Item 1. Business of Questcor
Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. Questcor’s actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Item 1 “Business of Questcor,” including without limitation “Risk Factors,” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as well as those discussed in any documents incorporated by reference herein or therein. When used in this annual report, the terms “Questcor,” “Company,” “we,” “our,” “ours” and “us” refer to Questcor Pharmaceuticals, Inc. and its consolidated subsidiaries.
Overview
We are an integrated specialty pharmaceutical company focused on the development, acquisition, and marketing of acute care and critical care hospital/ specialty pharmaceutical and related healthcare products. We currently market four products through our internal sales force in the U.S. We expect to launch a fifth product in the U.S. in the first half of 2002, and we market a sixth product in Italy through a strategic partner. Our current products target pediatric neurologists, gastroenterologists, nephrologists, transplant centers and nuclear medicine centers.
On November 17, 1999, Questcor, formerly Cypros Pharmaceutical Corporation, completed a merger with RiboGene, Inc. (“RiboGene”) and subsequently changed its name to Questcor Pharmaceuticals, Inc. Under the terms of the merger agreement, each share of RiboGene common stock was exchanged for 1.509 shares of our common stock and each outstanding share of RiboGene Series A preferred stock was converted into 1.509 shares of our Series A preferred stock. In conjunction with the November 1999 acquisition of RiboGene, we changed our fiscal year end from July 31 to December 31. Since the completion of the merger, we have focused our resources on: i) acquiring new products, ii) increasing the sales of our existing products, and iii) out-licensing and partnering our research and development stage products. During 2001, we completed our transition from operating as essentially two independent companies to emerge as a specialty pharmaceutical company focused on the sales and marketing of our branded products.
We currently market four products in the U.S.: HP Acthar® Gel (“Acthar”), an injectable drug that helps patients with infantile spasm, or West Syndrome; Ethamolin®, an injectable drug used to treat esophageal varices that have recently bled; and GlofilTM-125 and Inulin in Sodium Chloride, which are both injectable agents that assess kidney function by measuring glomerular filtration rate. Additionally, we earn royalties from our strategic partner, Crinos Industria Farmacobiologica S.p.A. (“Crinos”), on sales in Italy of Pramidin®, an intranasal form of metoclopramide for the treatment of various gastrointestinal disorders. We recently acquired the U.S. rights to market VSL#3TM, a patented probiotic. We intend to market VSL#3TM as a dietary supplement, to promote normal gastrointestinal function. We intend to begin sales of VSL#3TM in the first half of 2002.
Consistent with our efforts to focus on sales and marketing, we have reduced spending on research and development. Accordingly, we have entered into several agreements with pharmaceutical and biotechnology companies to further the development of certain technology acquired from RiboGene. In January 2002, we signed a revised Letter of Understanding with Fabre Kramer Pharmaceuticals (“Fabre Kramer”), which anticipates a license agreement whereby Fabre Kramer will manage and provide funding for the clinical development programs for HypnostatTM (an intranasal triazolam for insomnia) and PanistatTM, (an intranasal alprazolam for panic disorders). Our antifungal drug discovery program has been partnered with Tularik, Inc., of South San Francisco, CA; our antiviral drug discovery program has been partnered with Rigel Pharmaceuticals, Inc. of South San Francisco, CA; and our antibacterial program has been partnered with Dainippon Pharmaceuticals Co., Ltd. of Osaka, Japan.
During 2001, we sold an aggregate of 11,666,160 shares of common stock and a warrant to purchase an additional 1,800,000 shares of common stock for $7.8 million to Sigma-Tau Finance Holding S.A. and certain
1
Table of Contents
On March 15, 2002, in two separate transactions, we issued $4.0 million of 8% convertible debentures to an institutional investor and Sigma-Tau. We will pay interest on the debentures at a rate of 8% per annum on a quarterly basis. The debentures are convertible into shares of our common stock at a fixed conversion price of $1.58 per share (subject to adjustment for stock splits and reclassifications). At the end of the term of the debenture, under certain circumstances, we have the option to repay the principal in stock and, under certain circumstances, we can also redeem the debenture for cash prior to maturity. The debentures mature on March 15, 2005. In conjunction with this transaction, we issued warrants to both the institutional investor and Sigma-Tau to acquire an aggregate of 1,518,988 shares of common stock at an exercise price of $1.70 per share. Both warrants expire on March 15, 2006. Assuming the conversion and exercise of the above-mentioned debenture and warrant by Sigma-Tau and assuming the exercise of all other outstanding warrants held by Sigma-Tau, Sigma-Tau would own approximately 38% of our outstanding common stock as of March 15, 2002.
As of December 31, 2001, we had $10.2 million of cash on hand. On January 18, 2002, we paid our outstanding $5 million note and reduced our cash balance accordingly. Based on our internal forecasts and projections, we believe that our cash on hand at December 31, 2001, together with the $4.0 million of cash raised through the issuance of the above-mentioned convertible debentures and the cash to be generated through the expected sale of our products, will be sufficient to fund operations through December 31, 2002.
We have rights to the following registered trademarks: HP Acthar® Gel and Ethamolin®. We also have the following unregistered trademarks: GlofilTM-125, MigrastatTM, EmitasolTM, HypnostatTM, PanistatTM, CeresineTM, CordoxTM, DermafloTM, NeofloTM, and SildafloTM. VSL#3TM is owned by VSL Pharmaceuticals, Inc. Pramidin® is owned by Crinos Industria Farmacobiologica SpA. Each other trademark, trade name or service mark appearing in this document belongs to its respective holder.
Strategy
Our overall objective is to acquire and market acute care and critical care hospital/specialty pharmaceutical and related healthcare products. Our strategy includes acquiring marketed or near-to-market products that complement existing products and, where appropriate, forming corporate alliances to facilitate and fund the clinical development of our drug candidates.
Our operating objectives include: (1) building a strong hospital/ specialty market-oriented sales, marketing and distribution capability to increase and support sales of our products currently being marketed as well as new complementary products which we may acquire in the future; (2) acquiring marketed products to leverage our existing sales, marketing and distribution infrastructure; and (3) building a sustainable cash flow by reducing our overall cash consumption or “burn” rate. Consistent with our strategy, we acquired Acthar from Aventis Pharmaceuticals Inc. (“Aventis”), in July 2001. We began commercial shipment of Questcor-labeled Acthar to drug wholesalers in September 2001. For the year ended December 31, 2001, we had $2.1 million in revenues from Acthar. We also acquired the rights to market VSL#3, a patented probiotic, from VSL Pharmaceuticals, Inc. (“VSL”), in December 2001. VSL is owned in part by the principal shareholders of Sigma-Tau. We expect to launch VSL#3 in the first half of 2002.
2
Table of Contents
| Acquisition of Approved Pharmaceutical Products for Promotion by Sales Force |
We have built a sales, marketing, and distribution capability that is adequate to support and increase our sales of currently marketed products. We are looking to acquire additional hospital/ specialty based products currently on the market, that are available to be licensed or purchased. Products to be considered for acquisition would have to be complementary to our existing products, synergistic with promotional efforts currently being undertaken by our sales force, and contribute to our gross margins. There is no assurance we will be able to acquire such products or that, if acquired, they will be profitable. As of December 31, 2001, we had a group of 20 sales and marketing professionals to sell and promote our products in the hospital/specialty market.
| Strategic Alliances and Corporate Partnering |
An important part of our strategy includes the development of strategic alliances for out-licensing our currently marketed products to other world markets and the corporate partnering of our drug candidates in various stages of clinical development. Through agreements with other companies, we have acquired five marketed products: Acthar, Ethamolin, Glofil-125, Inulin and VSL#3.
To expand the sales of Emitasol (marketed as Pramidin in Italy) worldwide, we have entered into marketing and distribution agreements with the following:
| Company | Headquarters | Territory | ||
|
Crinos Industria Farmacobiologica SpA
|
Como, Italy | Italy | ||
|
CSC Pharmaceuticals Handels GmbH
|
Vienna, Austria | Austria, Poland, the Czech Republic, Bulgaria, Russia, Hungary, the Slovak Republic, Romania, and the remaining Community of Independent States | ||
|
Ahn-Gook Pharmaceuticals
|
Seoul, South Korea | South Korea | ||
|
Laboratorios Silesia S.A.
|
Santiago, Chile | Chile |
We have received some upfront payments and, in certain cases, may receive milestone payments if our partners receive approval to market products in their territories. To date, Pramidin is only marketed in Italy. We receive royalties on sales of Pramidin by Crinos Industria Farmacobiologica SpA (“Crinos”). Royalty revenue has not been significant and we do not believe royalty revenue will increase in the future. CSC Pharmaceuticals Handels GmbH (“CSC”), has received approval to market Pramidin in Poland and the Czech Republic, but it has not begun to market the product. When and if CSC decides to begin selling Pramidin in these territories, we do not believe the royalty revenue will be significant.
Consistent with our objective of de-emphasizing our research and development stage projects, we have entered into various agreements to out-license certain anti-infective drug discovery programs as follows:
| Company | Headquarters | Project | ||
|
Dainippon Pharmaceuticals Co., Ltd.
|
Osaka, Japan | Antibacterial Drug Discovery | ||
|
Tularik, Inc.
|
South San Francisco, CA | Antifungal Drug Discovery | ||
|
Rigel Pharmaceuticals, Inc.
|
South San Francisco, CA | Antiviral Drug Discovery |
We received some upfront payments for these programs and will receive milestone and royalty payments if the compounds covered by these agreements advance through clinical development and eventually into sales. Although we retain some information rights to these programs, we do not control their progress. We have discontinued research and development on all remaining anti-infective programs. We retain certain patents and other intellectual property on these and other drug discovery programs. We are required to pay certain legal fees and patent expenses in order to maintain ownership of this intellectual property. Legal fees and patent expenses may be significant and there can be no assurance that we will ever recognize any value from these expenditures. We may seek to out-license some or all of our intellectual property in this area or a
3
Table of Contents
We intend to out-license to appropriate partners in certain geographic areas the marketing and distribution rights to Emitasol (intranasal metoclopramide) for the treatment of gastrointestinal disorders including delayed onset emesis. In July 2001, the exclusive option to develop and market Emitasol in North America, held by Shire Pharmaceuticals Group plc, had expired. We intend to seek a corporate partner to continue the development of Emitasol in North America. Until such corporate partner is found, we do not expect to incur any significant expense related to the development of Emitasol in North America except legal fees, patent expenses and minimum royalty payments. We currently have four licensing agreements for the marketing of Emitasol in the following territories: Italy, Austria, Poland, Czech Republic, Russia, Hungary, Slovak Republic, South Korea and Chile. It is our goal to enter into more licensing agreements in the future in other countries.
Marketed Pharmaceutical and Related Healthcare Products
Our marketed products as of December 31, 2001 include: Acthar, which was acquired in July 2001, Ethamolin, which was acquired in November 1996, and Glofil-125 and Inulin, which were acquired in August 1995. We intend to begin marketing VSL#3 during the first half of 2002.
Acthar. In July 2001, we signed an agreement with Aventis to acquire the worldwide rights to Acthar. Acthar is a corticotropin product that had previously been made available to patients as part of a special program administered by the National Organization for Rare Disorders (“NORD”), to treat seriously ill children with a seizure complex, referred to as infantile spasm, or West Syndrome, a potentially fatal disorder, and patients with multiple sclerosis who experience severe and painful episodes of flare.
Due to limited production of Acthar and the resulting limited availability of the product over the past few years, distribution had been tightly controlled by Aventis through the NORD limited access program. Under this program approximately 10,000 vials of Acthar were made available to patients in 2001. Following the acquisition of Acthar in July 2001, we began shipping the product to drug wholesalers at the end of the third quarter. We are able to support general market distribution since Acthar is now back in full production. As part of our agreement, Aventis has agreed to manufacture and supply Acthar through July 2002 at a fixed price per vial. A formal manufacturing agreement has not yet been executed. Failure to complete this manufacturing agreement may adversely affect our ability to obtain an adequate supply of Acthar, which in turn would impact future revenues. We are in the process of securing a new manufacturer for the production of the active pharmaceutical ingredient (the “API”) in Acthar and also the production of the finished product. We have identified several potential third party contract manufacturers for the API and finished product. We believe that existing supplies of the API, coupled with our existing relationship with Aventis, should ensure adequate supply of Acthar through 2002 based on our internal sales forecast. However, there can be no assurance that the existing inventory of the API will be sufficient to meet our demand beyond 2002, or that we will be able to enter into agreements with third party manufacturers to supply Acthar, or if these agreements are entered into that the third party manufacturers will be able to supply Acthar. Additionally, under our current arrangement, Aventis has agreed to supply Acthar at a fixed price per vial through July 2002. There can be no assurance, even if we are able to secure an adequate supply of the API and enter into an agreement for the production of the finished product, that the cost of the API and the finished product will not increase substantially.
Based on information received by us from NORD and the previous distributor of Acthar, we estimate that approximately 1,600 patients annually were allowed access to Acthar over the past four years of the Aventis limited access program. We believe, through internal forecasts, that the re-introduction of Acthar into normal distribution channels could open access to more patients suffering from various autoimmune disorders who may be helped by Acthar. Through NORD, we maintain a program to provide vials of Acthar free of
4
Table of Contents
Ethamolin. End stage liver disease, also known as hepatic cirrhosis, results in approximately 26,000 deaths annually. Hepatic cirrhosis promotes the formation of esophageal varices through development of portal hypertension. When portal venous blood pressure rises, the varicosities that develop may cause life threatening upper gastrointestinal hemorrhage and are associated with a high mortality rate. At least 33,000 patients in the U.S. have either actively bleeding esophageal varices or esophageal varices that are at imminent risk of bleeding.
Early and effective treatment of esophageal varices to achieve hemostasis is essential to a favorable outcome in a bleeding patient. The most common pharmaceutical treatment protocol involves the injection of a sclerosing agent into the varix, achieving clot formation and obliteration of the varix. This form of hemostasis is called sclerotherapy and usually requires multiple treatment sessions. Ethamolin is the only sclerotherapy agent approved by the Food and Drug Administration (“FDA”) for the treatment of esophageal varices that have recently bled. There is strong competition from band ligation, a form of surgery, but we believe that Ethamolin is the only sclerosant that is actively promoted at this time. We estimate Ethamolin to have 18% (on a mL basis), of the total sclerosant market share, at this time.
Glofil-125 and Inulin. Kidney disease afflicts more than 8.3 million persons in the U.S. and is increasing primarily due to an increase in diabetes mellitus, hypertension and glomerulonephritis cases. Kidney disease results in over $15 billion annually in healthcare costs in the U.S. The market includes 700,000 persons with severe kidney diseases, 13,500 persons receiving kidney transplants annually, and an additional 50,000 persons awaiting kidney transplants. The measurement of kidney function, glomerular filtration rate or (“GFR”) is critical to the understanding of the disease state and its appropriate therapeutic intervention. GFR has historically been estimated by the measurement of endogenous serum creatinine and by creatinine clearance. These diagnostic assays may overestimate kidney function by as much as 100% in some patients. We believe that the use of renal filtration markers, such as Glofil-125 or Inulin, offer a more accurate and direct means of determining GFR, and thereby result in better clinical decision making.
Glofil-125 and Inulin are FDA-approved products for the measurement of GFR. Nephrology, transplant, oncology and nuclear medicine departments at major medical centers are the primary users of these products. Glofil-125 is an injectable radioactive diagnostic agent, which provides rapid information on GFR with great accuracy. Inulin is a non-radioactive injectable diagnostic agent, which provides a measure of GFR.
We believe that there is an opportunity for increased utilization of Glofil-125. Present diagnostic procedures for measuring kidney function include serum creatinine and creatinine clearance tests. These two tests are the most commonly performed methods of measuring kidney function because of their low cost; however, both methods may significantly overestimate kidney function in the estimated 700,000 patients with severe renal disease. The utility of Glofil-125 has been established in published clinical studies as being a more direct, accurate measure of kidney function, yielding much more reliable results than serum creatinine or creatinine clearance tests. This improved accuracy can be essential in monitoring disease progression, and implementing appropriate interventions and assessing the degree of success of kidney grafts post transplant. We believe that as new interventional therapies emerge, such as the use of ACE inhibitors to slow down disease progression and the Modification of Diet in Renal Disease (“MDRD”), for the treatment of early stage renal disease, the use of Glofil-125 will take on much greater importance; however, at this point, most early stage patients are not felt to require this degree of accuracy in the determination of renal function.
Glofil-125 has also been used in clinical trials administered by the National Institutes of Health (“NIH”). Use of Glofil-125 in clinical trials can provide the trial administrators an accurate measure of kidney function and show the effects of the drug being studied on normal kidney function. Glofil-125 has been included in several recent clinical trials administered by the NIH. One of these trials ended in the third quarter of 2001. We plan to promote the use of Glofil-125 to the NIH and to large pharmaceutical companies for use in clinical trials as a means of detecting kidney toxicity and measuring overall kidney function. Although we believe that Glofil-125 may be used in clinical trials in the future, there can be no assurance that
5
Table of Contents
The biggest impediment to the growth in the sales of Glofil-125 is the lack of availability of the test to practicing clinicians. Routine testing with Glofil-125 requires dedicated laboratory facilities and trained technicians. Our promotional efforts are focused on establishing testing sites in all major market areas in the U.S. We are not aware of any new diagnostic agents that would pose a competitive threat to Glofil-125.
Inulin, which is also sold by us, is an alternative agent for GFR measurement. However, the preparation and use of Inulin is time consuming and it does not provide the practical advantages of Glofil-125. The use of and demand for Inulin is relatively limited. We do not expect revenues from the sale of Inulin to increase in the future.
VSL#3. We have acquired the U.S. marketing rights for VSL#3, a patented probiotic preparation of eight live freeze-dried lactic acid bacterial species. Probiotics are living organisms in foods and dietary supplements, which, upon ingestion in certain numbers, improve the health of the host beyond their inherent basic nutrition. We intend to market VSL#3 in the first half of 2002, as a dietary supplement to promote normal GI function.
VSL#3 is also being studied for use as a biological product to treat a number of Inflammatory Bowel Diseases (“IBDs”). IBD is one of the most common chronic gastrointestinal illnesses and consists mainly of two conditions — ulcerative colitis and Crohn’s disease. It is estimated that almost one million Americans have IBD, with roughly 50% due to ulcerative colitis and 50% due to Crohn’s disease. About 25-40 % of ulcerative colitis patients eventually must have their colon removed because of massive bleeding, severe illness, rupture of the colon, or risk of cancer. A number of surgeries may be performed for ulcerative colitis. One such procedure, which is becoming increasingly common for ulcerative colitis, is ileal pouch anal anastomosis (“IPAA”) surgery. This operation allows the patient to have relatively normal bowel movements because it preserves part of the rectum. The major long-term complication that occurs as a result of this surgery is pouchitis. Pouchitis is the non-specific inflammation of the ileal reservoir that appears to be associated with bacterial overgrowth and dysbiosis. Studies have found that probiotics are effective in preventing flare-ups of chronic pouchitis.
In a specific study regarding chronic pouchitis, conducted by Gionchetti, et al, and discussed in the U.S. peer-reviewed clinical Journal of Gastroenterology and Hepatology, 15:489-493 (2000), VSL#3 has been effective in preventing chronic pouchitis. In this study, the efficacy of VSL#3 was compared with a placebo in 40 patients who had undergone the IPAA surgical procedure and had achieved clinical and endoscopic remission from chronic pouchitis after antibiotic treatment. Of the 20 patients who received the placebo, all had a relapse of pouchitis during the nine-month study period. Of the patients that received VSL#3, 85% were still in remission at nine months post-treatment. No side effects were observed from the treatment with VSL#3.
VSL#3 has received Orphan Drug designation from the Office of Orphan Products Development at FDA for two indications: (1) the treatment of active chronic pouchitis, and (2) the prevention of disease relapse in patients with chronic pouchitis. Orphan Drug designation applies to diseases and disease states with a prevalence of less than 200,000 patients in the U.S. Orphan Drug designation confers certain protection such as market exclusivity for seven years once the product has been approved. For VSL and us to take advantage of this designation, VSL#3 would have to be approved as a new biological product by the FDA. The process to file for approval would require additional clinical trial work as well as a significant amount of manufacturing validation. This could take years and may cost several hundred thousands of dollars to complete. We do not control the clinical development strategy for VSL#3. There can be no assurance that VSL#3 will be studied in additional clinical trials or that it will ever enjoy the benefits of this Orphan Drug designation.
We believe the emerging role for probiotics in the management of patients with IBD offers an attractive market opportunity for VSL#3 while at the same time effectively complements the current promotion of Ethamolin to this same group of gastroenterologists.
6
Table of Contents
Discontinued Product Line
| Neoflo |
In November 1997, we acquired the Dermaflo technology, a patented topical drug delivery system, from Enquay, Inc. for a combination of cash and royalties on net sales. The technology is a polymer matrix system that can store a variety of different drugs and release them at a desired rate over an extended period of time so that optimal clinical response is obtained. Included in the assets acquired were the products Neoflo, a triple antibiotic over-the-counter wound care product, and Sildaflo, a potential prescription burn care product, and required manufacturing equipment.
We had a multi-year agreement with NutraMax Products, Inc. (“NutraMax”), a leading supplier of first aid and wound care products, under which we were supplying Neoflo, a proprietary triple antibiotic product using the Dermaflo technology, to NutraMax for conversion and sale in the form of adhesive strips and patches. NutraMax had the exclusive right to sell the finished products to the retail and industrial first aid markets. Further, the agreement called for us and NutraMax to jointly develop several new products using the Dermaflo technology and to share the development expense and profits from future sales. We began shipping the product to NutraMax in March 1999. In May 2000, NutraMax filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code. The NutraMax bankruptcy filing had a negative impact on our sales and cash flow during calendar year 2000 and first quarter of 2001. Approximately $190,000 of our sales to NutraMax was included in the unsecured creditors class and was subject to a reduced payment. Of this amount, only $19,000 was recovered. In February 2001, NutraMax’s plan of reorganization was approved by the Bankruptcy Court. When NutraMax emerged from Chapter 11, NutraMax further reduced its forecast for adhesive strips to be supplied. On April 2, 2001, NutraMax filed a motion with the U.S. Bankruptcy Court to reject our supply agreement effective on that date. The NutraMax product was manufactured in our facility in Lee’s Summit, Missouri. Since the Dermaflo business is not strategically important to us and since the investment needed to build the business into a profitable venture is substantial, in May 2001 we ceased our manufacturing operations at Lee’s Summit after completion of the remaining orders for NutraMax.
In May 2001, we closed our Lee’s Summit facilities and discontinued any work using the Dermaflo technology. During the remainder of 2001, we had been in discussion with Franklin Pharmaceuticals Inc. (“Franklin”), an entity owned by a former employee who ran the Lee’s Summit facility. We had an agreement in principle with Franklin to acquire the rights to the Dermaflo technology and to sublease the Lee’s Summit facility and the equipment necessary to manufacture products using the Dermaflo technology. In November 2001, in order to avoid the payment of minimum royalties owed to Enquay under the original license agreement, Questcor and Enquay assigned all Dermaflo drug technology to Franklin. Through the end of 2001, we continued to negotiate with Franklin as to the sublease of the facility and the rental of the manufacturing equipment. Since Franklin was unable to secure adequate financing to fund its operations, we did not enter into the sublease and the equipment rental agreement. In December 2001, we determined that the probability of recognizing any future value for the Lee’s Summit facility, the related leasehold improvements, and the manufacturing equipment was minimal. Accordingly, we recorded a charge of $677,000 as a loss on the discontinued product line consisting of a write-off of the remaining net book value of leasehold improvements, a write-down of the manufacturing equipment to its estimated fair market value and the total estimated remaining lease payments remaining on the Lee’s Summit facility.
We continue to discuss the possibility of subleasing the facility and rental of the manufacturing equipment with interested parties. In February 2002, Enquay notified Franklin that it was terminating the Dermaflo license assigned by us in November 2001 unless Franklin was able to obtain adequate funding. To date, we cannot determine if Franklin has obtained adequate funding or if they still have any rights to the Dermaflo technology under the assigned license. It is our intention to try and sublease the Lee’s Summit facility and to sell the manufacturing equipment located in that facility. The market for specialized clean room space in Lee’s Summit is nearly non-existent and it is highly unlikely that we will be successful in entering into a sublease in the near future or ever. Accordingly, it appears we will continue to pay the monthly rent on this facility through December 2004. Although certain equipment contained in the Lee’s Summit facility had recently undergone extensive refurbishment, the equipment is highly specialized and must be recalibrated and
7
Table of Contents
Drug Development
Our development programs include the intranasal drugs Emitasol, Hypnostat, and Panistat and the cytoprotective compound Ceresine (dichloroacetate or “DCA”).
| Intranasal Drugs |
| Emitasol |
Through our merger with RiboGene, Inc., we acquired Emitasol, an intranasal form of metoclopramide. Metoclopramide is an approved antiemetic and is available in both oral and intravenous forms to treat diabetic gastroparesis and to prevent acute chemotherapy-induced emesis. We, through future strategic partners, may choose to investigate Emitasol for the treatment of diabetic gastroparesis and delayed onset emesis (nausea and vomiting) associated with cancer chemotherapy.
Emitasol is currently being developed and marketed in certain countries throughout the world through corporate partners. It is on the market in Italy as Pramidin, and is licensed to and distributed by Crinos in Italy for the treatment of a variety of gastrointestinal disorders and emesis. For the year ended December 31, 2001, Crinos distributed approximately 29,000 units of Pramidin in Italy. We entered into a marketing agreement in December 2000 with Ahn-Gook Pharmaceuticals (“Ahn-Gook”), for intranasal metoclopramide, to be marketed under the trade name Emitasol, in Korea. Ahn-Gook also signed an agreement with Crinos to obtain the intranasal metoclopramide finished product. This product is sold as Pramidin in Italy. Emitasol has been filed for approval in Korea, and if approved, will be distributed by Ahn-Gook in Korea for the treatment of gastrointestinal disorders and emesis. In the U.S., Emitasol is proposed as a method to control diabetic gastroparesis and to prevent delayed onset emesis associated with cancer chemotherapy. Currently, there are no drugs specifically approved to treat delayed onset emesis. We believe that Emitasol, when given intranasally, may be effective in preventing delayed onset emesis. Advantages may include ease of administration, an increased level of efficacy as compared to alternatives, and cost effectiveness.
Diabetic gastroparesis. Questcor, together with its former North American collaborative partner Shire Pharmaceuticals Group plc (“Shire”), (see “Strategic Alliances and Collaborations”), concluded a U.S. Phase II clinical trial in diabetic gastroparesis in the fourth quarter of 2000. For some diabetics, proper digestion may be difficult. Variable blood glucose levels may lead to a condition known as gastroparesis or stomach paralysis. Gastroparesis can result in general loss of appetite, nausea and vomiting, and in some cases severe dehydration. Many prescription medications are used to treat gastroparesis, including bethanchol and erythromycin. Each of these prescription drugs has limited effectiveness and contain side effects. Metoclopramide is approved for treating gastroparesis. We believe that the intranasal form of metoclopramide may provide diabetics who have gastroparesis with an easier route of administration, resulting in better patient compliance. In October 2000, we announced the results of the Phase II study of Emitasol (metoclopramide nasal spray) in the treatment of diabetic gastroparesis. The study showed that both Emitasol (metoclopramide nasal spray) and oral metoclopramide were bioavailable when administered to diabetic gastroparesis patients. The trial also suggested that Emitasol (metoclopramide nasal spray) treatment may enhance the clinical response versus oral metoclopramide. In July 2001, Shire’s exclusive option to develop and market Emitasol in North America expired and all rights were returned to us. We currently intend to seek a corporate partner for the development of Emitasol in the U.S. and in other countries around the world.
Delayed onset emesis. According to the American Cancer Society, about 1.3 million new patients are diagnosed with cancer in the U.S. each year, many of whom are treated with chemotherapy. Nausea and vomiting (emesis) are common side effects of cancer chemotherapy. Chemotherapy-induced emesis is considered to occur in two phases: acute (within 24 hours of the initiation of chemotherapy) and delayed (on the second and subsequent days). Several drugs have been approved by the FDA for preventing nausea and
8
Table of Contents
Prior clinical trials for Emitasol have demonstrated that metoclopramide is absorbed and effective when given intranasally. Phase I trials indicated that the overall amount of metoclopramide which reaches the plasma is very similar whether the drug is given intranasally, intravenously or orally. Given the similarity in uptake of the three dosage forms, similarity might also be expected in their clinical performance. For acute emesis, the expected similarity in performance has been demonstrated for the intranasal and intravenous dosage forms. In a prior Phase III study, Emitasol provided protection against acute emesis comparable to that previously reported for intravenous metoclopramide. We therefore anticipate that intranasal metoclopramide may be effective for controlling delayed onset emesis, an activity suggested for oral metoclopramide in the clinical literature.
Regardless of which indication is selected for Emitasol, substantial additional development, clinical testing (potentially including one or more Phase III trials) and investment will be required prior to seeking regulatory approval for commercialization of this product in the U.S. There can be no assurance that a Phase III clinical trial of Emitasol will demonstrate the safety and efficacy of the product to the extent necessary to obtain regulatory approvals for the indications being studied, or at all. The failure to demonstrate adequately the safety and efficacy of Emitasol could delay or prevent regulatory approval of the product.
| Hypnostat |
Through our merger with RiboGene, we acquired Hypnostat, an intranasal form of triazolam. Oral triazolam is approved for short-term treatment of insomnia. In June 2001, we signed a Letter of Understanding with Fabre Kramer of Houston, TX, to jointly pursue the worldwide development and commercialization of Hypnostat (intranasal triazolam) for insomnia and Panistat (intranasal alprazolam) for panic disorders, two of our product candidates. Under this agreement, we were reimbursed $32,000 in 2001 for consultants, employees, materials and supplies expenses related to this project. This original agreement was replaced with a new Letter of Understanding, dated January 2002, which anticipates entering into a License Agreement with the development to be funded by Fabre Kramer. We, together with our partner, are developing Hypnostat for the short-term treatment of insomnia. We believe that Hypnostat, when given intranasally, may be effective in treating insomnia. Advantages may include ease of administration, an increased level of efficacy as compared to alternatives, cost effectiveness, and possibly reduced side effects.
The potential advantages of Hypnostat are significant in light of the fact that thirty to forty million Americans suffer from serious sleep disorders which are often untreated or inadequately treated. Continued sleep impairment may cause severe health effects. Oral triazolam (Halcion®) has been one of the most successful and most prescribed sleep-inducing agents in the world, with over 11 billion prescriptions filled. Oral triazolam is considered safer in terms of overdose, drug interactions, and addictive potential compared to barbiturates. In addition, oral triazolam produces less morning grogginess, as compared to other benzodiazepines, due to a short plasma half-life. Oral triazolam and other benzodiazepines are recommended for short-term use in conservative doses. Zolpidem (Ambien®) and zaleplon (Sonata®) are newer hypnosedative agents that are chemically unrelated to benzodiazepines. However, both zolpidem and zaleplon have similar pharmacokinetic and pharmacodynamic effects and do not differ with respect to efficacy, tolerability, residual effects, memory impairment, rebound insomnia, or abuse potential compared to oral triazolam. Over the counter medications containing diphenhydramine (such as Benadryl® and Sominex®) have been shown to
9
Table of Contents
Prior clinical trials for Hypnostat support that triazolam is absorbed and effective when given intranasally. Phase I trials indicated that the overall amount of triazolam which reaches the plasma is very similar whether the drug is given intranasally or orally. Given the similarity in uptake of the two dosage forms, similarity might also be expected in their clinical performance. The expected similarity in performance is supported for the intranasal dosage form. In a prior Phase II pilot study, Hypnostat at 0.125 mg was superior to oral triazolam at 0.250 mg for time to sleep onset (p=0.008), effective sleep time (p=0.008), and stage two sleep time (p<0.05) and was equivalent to oral triazolam at 0.250 mg for quality of sleep. We therefore anticipate that intranasal triazolam may be effective for treating insomnia. The drug is in Phase II stage of development.
| Panistat |
Through our merger with RiboGene, we acquired Panistat, an intranasal form of alprazolam. Oral alprazolam is approved for the management of panic disorder or the short-term relief of anxiety symptoms. Questcor and Fabre Kramer intend to develop Panistat for the management of panic disorder or the short-term relief of anxiety symptoms. We believe that Panistat, when given intranasally, may be effective in treating panic disorders. Advantages may include ease of administration, an increased level of efficacy as compared to alternatives, and cost effectiveness.
The potential advantages of Panistat are significant in light of the fact that anxiety disorders are the most common mental disorder in the U.S., affecting approximately 19 million people. According to the National Institute of Mental Health, approximately 25% of those affected seek treatment. Generalized anxiety disorder is characterized by constant uncontrollable worry. Panic disorder is characterized by acute, spontaneous, and repeated anxiety attacks which involve an intense, terrifying, and unfocused fear in the absence of any external threat. Panic attacks typically last for approximately 20 to 30 minutes and may cause racing heartbeat, chest pains, difficulty breathing, choking sensations, dizziness, and numbness. Panic attacks can occur as often as several times per week or several times per day. Approximately 2.4 million people in the U.S. suffer from panic disorder, which often progresses into chronic anxiety and agoraphobia.
Early treatment can help keep a panic disorder from progressing. Benzodiazepines, including oral alprazolam (Xanax®), have proven to be safe and effective for treating panic disorder for over 20 years. Benzodiazepines block panic attacks during the first or second day of treatment. Surprisingly low rates of abuse of this and other medicines are reported in persons with panic disorder. Many antidepressants, including doxepin (Sinequan®), sertraline (Zoloft®), fluoxetine (Prozac®), imipramine (Tofranil®), and paroxetine hydrochloride (Paxil®), are useful in treating panic attacks without causing physical dependence. However, successful treatment requires full strength dosage and usually takes four to eight weeks for therapeutic effects to be observed. In addition, antidepressants cause panic attacks to initially increase in approximately half of panic disorder sufferers. As a rule, the less expensive antidepressants have more side effects than the newer, more expensive, ones. Phenelzine sulfate (Nardil®) is effective for panic disorder, but is complicated to use. Although phenelzine sulfate is safe when used by an experienced physician, it is typically reserved for cases where simpler medications have failed or cannot be used. Unsafe elevations of blood pressure for several hours can occur if one does not adhere to diet and medication restrictions. Cognitive-behavioral therapy (“CBT”) teaches the patient to anticipate and prepare for situations and bodily sensations that may trigger panic attacks. CBT generally requires at least eight to twelve weeks for the patient to learn the skills and put them into practice. CBT requires a motivated patient and a specially trained therapist. Clinical experience suggests that for many patients with panic disorder, a combination of CBT and medication may be the best treatment. Other treatment options include relaxation, breathing techniques, hypnotherapy, and psychotherapy.
10
Table of Contents
| Cytoprotective Drugs |
Cytoprotective drugs for acute care settings that treat ischemic injury are not currently available and the market opportunities for us may be significant, potentially totaling several million cases annually in the U.S. We believe that our drugs, if approved, may reduce the number of fatalities associated with ischemia-related and inherited metabolic disorders and also reduce the high cost of rehabilitation and ongoing care in the U.S. of these patients.
Our cytoprotective drugs are administered intravenously, which allows for rapid delivery to the ischemic tissue, or orally, which facilitates chronic administration. In order to ensure early interventions, our cytoprotective drugs are intended to be standard components in hospital emergency rooms, operating theater suites, endoscopy suites and radiology suites. Chemically demonstrated lack of toxicity should suit them for this purpose, but such a demonstration is dependent on ongoing and future clinical trials, which may not be successful.
| Ceresine |
Ceresine is a small non-peptide molecule, which acts on glycolysis at the level of the mitochondria. Ceresine is a form of sodium dichloroacetate, or (“DCA.”) We have licensed or obtained two issued U.S. patents covering the use of Ceresine in cerebral ischemia and received orphan drug designation for Ceresine for this indication. We believe that Ceresine stimulates a specific enzyme which is present in the membrane of the mitochondria that removes a precursor of lactic acid, known as pyruvic acid, from the cytoplasm of the cell by transporting it into the mitochondria and converting it to acetyl coA. This results in a reduction of lactic acid in the cell. Increased post-ischemia accumulation of lactic acid is a major causal factor in the cessation of glycolysis, the resultant decrease in cellular ATP levels and eventual cell death. Numerous studies have shown that Ceresine reduces post-ischemia lactic acid levels in humans subjected to various traumatic events, which would otherwise have resulted in increased lactic acid or lactic acidosis.
Ceresine has been employed by clinical investigators in patients on an experimental basis for the intravenous and oral treatment of lactic acidosis. Published clinical studies and our own Phase I data have established that Ceresine reduces serum lactic acid and exhibited no serious side effects at the dose levels studied. Ceresine has also been shown in human studies to cross the blood-brain barrier and to reduce cerebrospinal fluid lactic acid levels in congenital lactic acidosis patients.
Approximately 100 patients participated in the Phase I and two Phase II trials of Ceresine under our Investigational New Drug application or (“IND”) and the drug was well tolerated. Our Phase II clinical trial data on Ceresine in closed head injury patients showed that the drug crosses the blood-brain barrier at high levels and very quickly after crossing reduces lactate levels substantially. This effect lasted for at least 12 hours. Serum lactate levels were also reduced substantially in the drug-treated group. In July 1998, the FDA granted expedited development status to Ceresine in head injury under Subpart E of the FDA regulations. We are not currently pursuing clinical development of Ceresine in head injury and have no plans to pursue this indication in the future.
Congenital Lactic Acidosis (“CLA”) is a heterogeneous group of disorders characterized by mitochondrial dysfunction. Mitochondria are sub cellular organelles responsible for production of energy necessary for cellular function and survival. When mitochondria do not function normally there are inadequate stores of energy (ATP) produced and the accumulation of poisonous metabolic intermediates such as lactate. Clinically, disorders of mitochondrial dysfunction may affect cells of the nervous system (retardation, seizures, strokes, migraines, psychiatric disturbances, weakness, poor gastrointestinal function), muscles (weakness, cramping, pain), kidneys (electrolyte abnormalities), heart (cardiomyopathy, heart block), liver (hypoglycemia, hepatic failure), eyes (blindness), ears (deafness) and other organs (failure to grow normally). When the mitochondrial problem is severe, the condition is lethal. In other less extreme instances, there may not be any clinical symptoms. There are over 20,000 patients in the U.S. suffering from some type of mitochondrial disease. Diagnosis of the disorder may be made on physical examination, medical history review, and in some cases special laboratory tests. These laboratory tests may include identification of the gene responsible for the mitochondrial dysfunction. Muscle biopsy is often performed to identify the mitochondrial disorder; however,
11
Table of Contents
DCA has been administered orally to individuals with CLA with anecdotal reports of benefit. Some side effects have been observed with chronic dosing, including peripheral neuropathies that required drug interruptions or dose reductions although individuals nearly always were able to continue on treatment. The treatment of CLA with Ceresine has also been granted orphan drug status by the FDA. This confers seven years of marketing exclusivity to the first licensed agent as well as certain tax advantages. An additional six months of exclusivity may be granted upon licensure or at some time prior to the expiration of all existing marketing exclusivity or patent protection if adequate studies have been conducted in pediatric subjects.
To accelerate any potential NDA filing, collaborations have been discussed with two academic sites actively investigating DCA in individuals with CLA. Upon finalization of these two relationships, databases would become available to us. These databases could be used as part of the clinical information necessary for NDA filing with regulatory authorities. If a clinical benefit is demonstrated, regulatory authorities could act favorably on the application. We currently have no rights to the data generated by the academic institutions that studied various formulations of DCA in patients with CLA. We have been in discussion with these groups about a potential agreement to gain access to the data. The trials are complete and the data are being analyzed. The final data analysis will take several months to complete. After data analysis is complete, if the results are extremely positive and if the combined results are sufficient to allow us to file for an accelerated review with the FDA for approval, we may seek to finalize these agreements to gain access to the data. There can be no assurance, however, that the clinical results would be positive, that we could successfully complete agreements to gain access to the data or that the FDA would approve the product for use. In addition, the studies have been conducted with different formulations of DCA. There is no assurance the FDA would not require substantial additional testing of Ceresine, or the re-formulation of DCA used to complete the trials in order to grant approval.
| Glial Excitotoxin Release Inhibitors (“GERIs”) |
The GERIs series of neuroprotective compounds may prevent ischemic brain damage originating from astrocytes (astroglial cells). Astrocytes serve important metabolic functions and are thought to be responsible for the bulk of brain swelling following stroke or injury. The swelling constricts blood vessels and worsens the injury — resulting in ischemia and subsequent cell death. In addition, upon onset of ischemia, astrocytes release excitotoxins such as glutamate and aspartate over an extended period of time — not rapidly, as in the case of neurons — that result in significant and persistent damage to neurons. Because astrocyte swelling and excitotoxin releases are late-stage events in the development of ischemia following brain injury or stroke, they may be more appropriate targets for drug intervention than neuron-related events.
In animal models and cell culture experiments, the GERI compounds exert a powerful neuroprotective effect by blocking chloride-ion channels, to reduce swelling, and by inhibiting excitotoxin release, to limit or prevent damage to neurons. In vitro, excitotoxin release from cultured astrocytoma cells is fully inhibited at very low concentrations by many compounds of the GERI series. A greater than 30-fold decrease in drug concentration required to inhibit excitotoxin release has been achieved by designing novel derivatives in the GERI compound family. In animal models of global and focal brain ischemia, a number of the GERI compounds demonstrated reduction of the infarct volume by as much as 50% in comparison to untreated controls. In addition, the toxicity profile of existing development candidates appears excellent.
The GERI compounds are currently being funded by a Small Business Innovation Research (“SBIR”) grant from the NIH. It is anticipated that reimbursement under this grant will be completed in April 2002. Although we have had some preliminary discussions with potential corporate partners regarding the GERI compounds, there can be no assurance that we will enter into a collaboration to fund future research on these compounds. Pending completion of the reimbursement under the existing SBIR grant, we do not intend to expend any additional resources on these compounds.
12
Table of Contents
At this time, we continue to define the chemical, toxicological and pharmacological effect of a number of GERI compounds in animal models having utilized $443,000 through December 31, 2001 of the $749,000 in funding from an NIH SBIR grant. Funding for this project expires in April 30, 2002. There can be no assurance that we will be successful in licensing the GERI program or that we will realize license fees or revenues from such programs.
Discontinued Drug Development
Cordox has been studied in the past for a variety of indications including its use in several acute ischemic indications and as a blood preservative. To date, the results of the clinical studies have not been compelling enough to warrant further development of Cordox for any indication.
In September 2001, we completed our final review of the final report from Hoxworth Blood Center in Cincinnati on the ability of Cordox to improve the biochemical and physical characteristics of stored human red blood cells. During storage at 4 degrees centigrade, red cell concentrate incubated with Cordox did not demonstrate improved levels of ATP or 2,3 DPG compared to red blood cells stored in currently licensed blood additive solutions. In addition, experiments with 13C labeled Cordox failed to show metabolism to lactate in stored red blood cells. The results indicate that Cordox does not enter red blood cells and does not reach its intended target. This is a prerequisite for Cordox to have a beneficial effect on cellular metabolism. Based on these results, all further work on Cordox has been discontinued.
We intend to terminate all the agreements relating to Cordox and Dr. Markov, the individual that we obtained the Cordox license from. We have also abandoned all our patents relating to Cordox.
Drug Discovery/ Strategic Alliances and Collaborations
Subsequent to our merger with RiboGene, we implemented a strategy to focus on the sales and marketing of approved pharmaceutical products and late stage drug development candidates. As a result, we planned to out-license our early stage drug targets and technology. Thus, we discontinued our drug discovery programs in the first quarter of 2000 and anticipate that future in-house drug discovery research expenses associated with drug discovery will be limited to legal fees, patent costs and other costs to license such programs.
| The Dainippon Agreement |
We have an exclusive, worldwide license agreement with Dainippon to use our antibacterial ppGpp degradase and peptide deformylase technology for the research, development and commercialization of pharmaceutical products. We have retained the right to co-promote, in Europe and the U.S., certain products resulting from the arrangement. We will be entitled to receive potential milestone payments upon the achievement of clinical and regulatory milestones in the amount of $5.0 million in Japan and $5.0 million in one other major market. We will receive a potential royalty on net sales that will range from 5% to 10%, depending on sales volume and territory.
Dainippon has been conducting research on two specific bacterial targets, deformylase and ppGpp degradase. To date, Dainippon has focused most of their efforts on the deformylase project. Several compounds have been synthesized and tested in vivo against drug resistant bacteria. Although the compounds have shown good in vivo activity, Dainippon has not selected any compounds for pre-clinical studies. There can be no assurance that Dainippon will ever select any compounds for preclinical studies or if selected that these compounds will eventually be approved as drugs. There can also be no assurance that we will ever receive any milestone payments or royalties under our agreement with Dainippon.
| The Rigel Pharmaceuticals Agreement |
We have an exclusive agreement with Rigel Pharmaceuticals, Inc. (“Rigel”), to use our antiviral technology. Under the agreement, we have assigned to Rigel certain antiviral technology, including our Hepatitis C virus internal ribosome entry site and NS5A drug discovery technology, for the research, development and commercialization of pharmaceutical products. We will be entitled to potential future
13
Table of Contents
| The Tularik Agreement |
In February 2001, we announced that we had exclusively licensed certain antifungal drug research technology to Tularik, Inc. In addition, we have transferred to Tularik certain biological and chemical reagents to be used in the discovery and development of novel antifungal agents. In exchange, we received a cash payment, payment for reimbursement of patent expenses, and will be entitled to future potential milestone payments upon the achievement of certain clinical and regulatory milestones as well as royalty payments on sales. Tularik has screened numerous compounds through the antifungal capping assay that it acquired as part of this agreement. Several of these compounds have been identified as having activity against C. albicans capping enzymes. Tularik is continuing to review these compounds.
| The Shire Pharmaceuticals Group plc Agreement |
In July 2001, the option held by Shire Pharmaceuticals Group to acquire exclusive rights to Emitasol in North America expired and all rights reverted to us. In December 2001, Shire notified the FDA that it will no longer be our agent and, as such, will transfer to us all responsibilities previously conducted by them. This transfer is currently in progress.
| The Fabre Kramer Pharmaceuticals Letter of Understanding |
In June 2001, we signed a Letter of Understanding with Fabre Kramer of Houston, TX, to jointly pursue the worldwide development and commercialization of two of our product candidates, Hypnostat (intranasal triazolam) for insomnia and Panistat (intranasal alprazolam) for panic disorders. This was replaced with a new Letter of Understanding, dated January 2002. This Letter of Understanding anticipates entering into a License Agreement with the development to be funded by Fabre Kramer.
Licenses
Crinos Industria Farmacobiologica SpA (“Crinos”). In January 1994, as part of our acquisition of Emitasol and certain other intranasal products from Hyline Laboratories, Inc., we entered into a license agreement with Crinos. The agreement grants Crinos an exclusive license to manufacture and market Emitasol in Italy. The agreement expires 10 years after the first commercial sale in Italy subject to automatic renewal for three-year periods. In October 1996, the agreement was amended to grant Crinos a non-exclusive worldwide license to manufacture Emitasol. The amendment provides that we will receive additional royalties on all supply arrangements between Crinos and any of our licensees to Emitasol. We may terminate the license agreement in the event Crinos fails to pay certain minimum royalties. We also retain the right to all data generated by Crinos on Emitasol, including clinical and manufacturing information.
Crinos has received governmental approval to market Emitasol in Italy and launched this product under the trade name Pramidin in 1999 for the treatment of gastrointestinal disorders. Pramidin is marketed in two dosage forms under the names Pramidin 10 (200 milligrams/mL of active ingredient) and Pramidin 20 (400 milligrams/mL of active ingredient). To date, we have received minimal royalties from the sale of Pramidin in Italy. For the year ended December 31, 2001 unit sales of Pramidin were approximately 29,000.
CSC Pharmaceuticals Handels GmbH (“CSC”). In April 1997, RiboGene entered into an agreement with CSC. The agreement grants CSC an exclusive license to market and sell Emitasol in Austria, Poland, the Czech Republic, Bulgaria, Russia, Hungary, the Slovak Republic, Romania, and the remaining Community of Independent States and eight other eastern European countries. CSC has agreed to pay us a royalty based on net sales within the countries listed above. The agreement will expire on a country-by-country basis 10 years after the first commercial sale in that country. Although we can terminate the license if CSC did not obtain approval in any country contained in the agreement by April 16, 1999, we have not done so, since CSC has filed for regulatory approval in Austria, Russia, Hungary and the Slovak Republic. In 2001,
14
Table of Contents
Laboratorios Silesia SA. In December 1999, we signed a license agreement with Laboratorios Silesia SA for marketing intranasal metoclopramide, to be marketed under the trade name Emitasol, in Chile. Laboratories Silesia SA also signed an agreement with Crinos to obtain the intranasal metoclopramide, finished product under the trade name Pramidin. This product is sold as Pramidin in Italy. We received a small up-front payment and will receive royalties on the net sales of Emitasol in the territory.
Ahn-Gook Pharmaceutical Co., Ltd. We entered into a license agreement in December 2000 with Ahn-Gook for marketing intranasal metoclopramide, to be marketed under the trade name Emitasol, in Korea. Ahn-Gook also signed an agreement with Crinos to obtain the intranasal metoclopramide finished product, under the trade name Pramidin. This product is sold as Pramidin in Italy. Under the terms of the agreement, Ahn-Gook will obtain government approval to market Emitasol. We received an up-front cash payment of $50,000, and are entitled to a milestone payment of $150,000 upon approval of the drug for distribution in Korea and royalties based on actual sales in Korea.
Manufacturing
We do not currently manufacture any of our acquired products or our products in development. Our commercial products, Acthar, Ethamolin, Glofil-125, and Inulin are manufactured for us by approved contract manufacturers.
As part of our agreement with Aventis to acquire Acthar, Aventis agreed to manufacture the finished goods from existing inventory of the active pharmaceutical ingredient (the “API”) through July 2002. Subsequent to this, Aventis has agreed in principle as to the terms of the manufacturing agreement but the agreement has not yet been executed. Aventis has provided finished product to us under the proposed agreement. The production of Acthar requires the production of the API and the production of the finished product. The API is an extraction from porcine pituitary glands. Although the extraction process is well known by individuals within Aventis, the extraction may be difficult to reproduce at a new vendor. As part of the agreement to acquire Acthar, we obtained a sufficient supply of the API in order to meet our forecasted demand through 2002. We are required to find a new third party manufacturer to produce the API and for the production of the finished goods. We have identified potential third party manufacturers that could produce the API and the finished product but we have not yet entered into an agreement with any of these manufacturers. In addition, the production of the API and the finished product are subject to inspection and ultimate approval by the FDA. The Acthar site transfer process has numerous risks that could have a materially adverse impact on our financial results for us this year and in future years. Such risks include the ability to successfully identify and to enter into agreements with new independent third party contractors for the production of the API and the production of finished goods, or, if we are successful in identifying and entering into such agreements that the API and finished goods could be produced in sufficient quantities on a timely basis and at an acceptable cost, that the production facilities and the processes will be approved by the FDA and that the API and finished product will be similar in potency and efficacy as the API currently held by Aventis. Although we believe we have adequate time and resources to ensure that the site transfer of Acthar will occur timely and correctly with minimal impact on future revenues, there can be no assurance that the site transfer will occur timely and correctly and that the transfer will not have a materially adverse impact on the company in the future.
We presently obtain Ethamolin from Schering-Plough. Currently Schering-Plough manufactures Ethamolin for us on a purchase order basis. We have had great difficulty obtaining Ethamolin from Schering-Plough. During the fourth quarter of 2001, our inability to acquire Ethamolin caused a backorder situation which resulted in us being unable to fulfill orders for the product, resulting in lost revenues for us for the year ended December 31, 2001. We received a batch of approximately 2,500 10-packs of Ethamolin in January 2002 and were able to ship $408,000 of product that had been backordered as of December 31, 2001. We have requested that Schering-Plough manufacture one additional batch of Ethamolin (2,500 10-packs) which we hope to receive by April 30, 2002. At this time, we are in a backorder situation for Ethamolin. We have
15
Table of Contents
Our manufacturer of Glofil-125 was recently subject to an inspection by the FDA. As a result of this inspection, our manufacturer received notification that numerous items required attention in order to comply with FDA regulations. We were made aware of this situation and have undergone a review of the potential impact of this inspection on the manufacture of Glofil-125. Based on the information available, we believe that the manufacture of Glofil-125 will not be affected.
In the case of Inulin, we are responsible for obtaining the bulk drug from a third party and delivering it to the finished goods manufacturer.
There can be no assurance that any of our bulk or finished goods contract manufacturers will continue to meet our requirements for quality, quantity and timeliness or the FDA’s current good manufacturing practice (“GMP”) requirements. Also, there can be no assurance that we will be able to find a substitute bulk manufacturer for Inulin or Acthar or a substitute finished goods manufacturer for Acthar, Ethamolin, Glofil-125, Inulin, or for any of our other products, nor that all GMP requirements will be met, nor that lots will not have to be recalled with the attendant financial consequences to us.
In the case of VSL#3, we will obtain the product from VSL under our agreement. However, we have no experience with manufacturing VSL#3, and we are relying completely on VSL to supply us with the product. Due to our lack of experience with VSL#3 and our reliance on VSL, we can provide no assurances as to the timely manufacture of this product.
Our limited manufacturing experience and our dependence upon others for the manufacture of bulk or finished forms of our products may adversely affect the future profit margin on the sale of those products and our ability to develop and deliver products on a timely and competitive basis. We do not have substitute suppliers for any of our products. In the event we are unable to manufacture our products, either directly or indirectly through others, or on commercially acceptable terms at all, we may not be able to commercialize our products as planned.
Sales and Marketing
As of December 31, 2001, we have hired, trained and deployed a total of twenty product specialists and marketing personnel to support the commercial sales of Acthar, Ethamolin, Glofil-125 and Inulin. The Product Specialists are promoting Ethamolin to hospital-based gastroenterologists, who treat patients with liver disease who develop bleeding esophageal varices, a potentially life threatening disorder. Ethamolin is an FDA approved product for the specific indication of esophageal varices that have recently bled. The promotion of Glofil-125 targets organ transplant centers and those patients who are at greatest risk of kidney failure. The promotion of Acthar to pediatric neurologists began during the third quarter of 2001 and focused on adequate stocking of wholesalers and hospitals. We currently distribute all of our products from our distribution location in Carlsbad, CA.
In the case of VSL#3, we plan to promote the product to gastroenterologists and directly to consumers. Since we have no experience with direct consumer marketing, sales and customer support there can be no assurance we will be successful in marketing VSL#3.
16
Table of Contents
Competition
Acthar competes with newer agents, such as synthetic corticosteroids, immunosupressants, and anti-seizure medications (in the case of infantile spasms) and other types of anti-inflammatory products for various autoimmune conditions that have inflammation as a clinical aspect of the disease. Acthar is currently used in patients suffering from arthritis, multiple sclerosis, and infantile spasm.
Several companies offer sclerotherapy agents products that compete with Ethamolin. Ethamolin is an injectable drug used to treat patients with bleeding esophageal varices that have recently bled, to prevent bleeding. Other competitive agents include ScleromateTM, Rubber Band Ligation methods such as the Multi-band Superview manufactured by Boston-Scientific, the Multi-band Six Shooter manufactured by Wilson-Cook, and the Multi-band Ligator by Bard and Octreotide® by Novartis. The competition to market FDA-approved active bleeding esophageal varices therapies is intense and no assurance can be given that our product will continue to be commercially successful.
A number of companies offer both clinical competition as well as research competition to Glofil-125. The clinical competition includes serum creatinine and creatinine clearance methods such as Tc-DTPA, which is manufactured by Mallinckrodt, Inc. as well as Omnipaque®, which is manufactured by Sanofi, a division of Sanofi-Synthelabo. Research competition includes Conray®-iothalamate (nonradiolabeled) meglumine, which is also manufactured by Mallinckrodt, Inc. and employed through the Mayo Clinic. The competition to market FDA-approved drugs to measure kidney function by evaluating GFR, is intense and no assurance can be given that our product will continue to be commercially successful.
We have identified CulturelleTM by ConAgra, Probiotica by Johnson and Johnson, and LiveBac® by Nutraceutix as competitors to VSL#3.
Several large companies’ products will compete with Emitasol in the delayed onset emesis market, including Zofran® (ondansetron hydrochlordide) by Glaxo-Wellcome, Kytril® (granisetron hydrochloride) by SmithKline Beecham and Reglan® (metoclopramide) by A.H. Robins. These competitive products, however, are available in oral and intravenous delivery forms only. The competition to develop FDA-approved drugs for delayed onset emesis and diabetic gastroparesis is intense and no assurance can be given that our product candidate will be developed into commercially successful product.
We are unaware of any competitors at this time to Ceresine. The competition to market FDA-approved drugs to treat ischemic disorders is intense and no assurance can be given that our product candidates will be commercially successful products.
Most of our competitors are larger than us and have substantially greater financial, marketing and technical resources. In addition, many of these competitors have substantially greater experience than we do in developing, testing and obtaining FDA and other approvals of pharmaceuticals. Furthermore, if we commence commercial sales of the pharmaceuticals in our pipeline, we will also be competing with respect to manufacturing efficiency and marketing capabilities, areas in which we have limited experience. If any of the competitors develop new technologies that are superior to our technologies, our ability for us to expand into the pharmaceutical markets may be materially and adversely affected.
Competition among products will be based, among other things, on product efficacy, safety, reliability, availability, price and patent position. An important factor will be the timing of market introduction of our or our competitors’ products. Accordingly, the relative speed with which we can develop products, complete the clinical trials and approval processes and supply commercial quantities of the products to the market is expected to be an important competitive factor. Our competitive position will also depend upon our ability to attract and retain qualified personnel, to obtain patent protection or otherwise develop proprietary products or processes and to secure sufficient capital resources for the often substantial period between technological conception and commercial sales.
17
Table of Contents
Government Regulation
| Marketed Pharmaceutical Products |
All pharmaceutical firms, including manufacturers from whom we purchase products, are subject to regulation by the FDA. Any restrictions or prohibitions applicable to sales of products we market could materially and adversely affect our business.
We market prescription drug products that have been approved by the FDA. The FDA has the authority to revoke existing approvals, or to review the status of currently exempt pharmaceuticals and to require application and approval of prescription drugs if new information reveals that they are not safe or effective. The FDA also regulates the promotion, including advertisement, of prescription drugs.
Drug products must be manufactured, packaged, and labeled in accordance with their approvals and in conformity with GMP standards and other requirements. Drug manufacturing facilities must be registered with and approved by the FDA and must list with the FDA the drug products they intend to distribute. The manufacturer is subject to inspections by the FDA and periodic inspections by other regulatory agencies. The FDA has extensive enforcement powers over the activities of pharmaceutical manufacturers, including authority to seize and prohibit the sale of unapproved or non-complying products, and to halt manufacturing operations that are not in compliance with current GMPs. Also, the FDA regulates the distribution of drug samples. Both the FDA and the Drug Enforcement Agency (“DEA”) may impose criminal penalties arising from non-compliance with applicable regulations.
| Drugs in Development |
Our products in development are subject to extensive regulation by the U.S. principally under the Federal Food, Drug and Cosmetic Act (“FDCA”) and the Public Health Service Act, and foreign governmental authorities prior to commercialization. In particular, drugs and biological products are subject to rigorous preclinical and clinical testing and other approval requirements by the FDA, state and local authorities and comparable foreign regulatory authorities. The process for obtaining the required regulatory approvals from the FDA and other regulatory authorities takes many years and is very expensive. There can be no assurance that any product developed by us will prove to meet all of the applicable standards to receive marketing approval in the U.S. or abroad. There can be no assurance that these approvals will be granted on a timely basis, if at all. Delays and costs in obtaining these approvals and the subsequent compliance with applicable federal, state and local statutes and regulations could materially adversely affect our ability to commercialize our products and our ability to earn sales revenues.
The research activities required by the FDA before a drug can be approved for marketing begin with extensive preclinical animal and laboratory testing. The tests include laboratory evaluation of product chemistry and animal studies for the safety and efficacy of the drug. The results of these studies are submitted to the FDA as part of an IND which is reviewed by the FDA prior to beginning clinical trials, first in normal volunteers and then in patients with the disease.
Clinical trials involve the administration of the investigational new drug to healthy volunteers or to patients, under the supervision of a qualified physician/ principal investigator. Clinical trials are conducted in accordance with governmental statutes, regulations and guidelines and under protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. Further, each clinical study must be evaluated by an independent Institutional Review Board, referred to as the “IRB”, at the institution at which the study will be conducted. The IRB considers, among other things, ethical factors, the safety of human subjects and the possible liability of the institution, and approves the informed consent to be obtained from all subjects and patients in the clinical trials. We will have to monitor the conduct of clinical investigators in performing clinical trials and their compliance with FDA requirements.
Clinical trials are typically conducted in three sequential phases (Phase I, Phase II and Phase III), but these phases may overlap. There can be no assurance that Phase I, Phase II or Phase III testing will be completed successfully within any specified time period, if at all, with respect to any of our drugs.
18
Table of Contents
The results of the pharmaceutical development, preclinical studies and clinical studies are submitted to the FDA in the form of a new drug application (“NDA”) or, in the case of a biological product, a Biologics License Application (“BLA”) for approval of the marketing and commercial shipment of the product. The testing and approval process is likely to require substantial time (frequently five to eight years or more) and expense, and there can be no assurance that any approval will be granted on a timely basis, if at all. The FDA may deny an NDA or BLA if applicable regulatory criteria are not satisfied, require additional testing or information, or require post-marketing testing and surveillance to monitor the safety of our drugs. Notwithstanding the submission of the NDA or BLA and any additional testing data or information, the FDA may ultimately decide that the application does not satisfy its regulatory criteria for approval. Finally, drug and biological product approvals may be withdrawn if compliance with labeling and current good manufacturing practices regulatory standards is not maintained or if unexpected safety or efficacy problems occur following initial marketing.
Among the conditions for clinical studies and NDA or BLA approval is the requirement that the prospective manufacturer’s quality control and manufacturing procedures conform to cGMP, which must be followed at all times. In complying with standards set forth in these regulations, manufacturers must continue to expend time, monies and effort in the area of production and quality control to ensure full technical compliance.
Also, companies that engage in pharmaceutical development, such as Questcor, are required to pay user fees of more than $300,000 upon submission of an NDA or BLA. No fee is required for the submission of an NDA or BLA for an orphan product and waivers of the user fee are also available under other circumstances. In addition to regulations enforced by the FDA, we are subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and potential future federal, state or local regulations. For marketing outside the U.S., we are subject to foreign regulatory requirements governing human clinical trials and marketing approval for drugs. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country.
| VSL#3 |
We intend to market VSL#3 as a dietary supplement. If we pursue FDA approval of VSL#3 as a biological product, we will be subject to the regulatory hurdles discussed above.
The manufacturing, distribution, and sale of dietary supplements and medical foods are subject to regulation by one or more federal agencies, principally the FDA and the Federal Trade Commission (the “FTC”). Our activities are also regulated by various governmental agencies for the states and localities in which VSL#3 is manufactured, distributed, and sold. Among other matters, the FDA and FTC are concerned with product safety and claims that refer to a product’s ability to provide dietary support for health-related conditions.
The regulation of dietary supplements is principally governed by the Dietary Supplement Health and Education Act (“DSHEA”), which were enacted in 1994, amending the FDCA. We believe DSHEA is generally favorable to the dietary supplement industry. DSHEA establishes a statutory class of “dietary supplements,” which includes vitamins, minerals, herbs, amino acids and other dietary ingredients for human use to supplement the diet. Dietary ingredients that were not on the market as of October 15, 1994 require the submission by the manufacturer or distributor to the FDA of evidence of a history of use or other evidence of safety establishing that the ingredient will reasonably be expected to be safe. Among other things, DSHEA prevents the further regulation of dietary ingredients as “food additives” and allows the use of statements of nutritional support on product labels. The FDA has issued proposed and final regulations in this area and indicates that further guidance and regulations are forthcoming.
19
Table of Contents
The FDA has announced its intent to issue GMP regulations for the dietary supplement industry. The FDA has published an advance notice of proposed rulemaking, and publication of proposed regulations is expected soon.
In November 1998, the FTC Bureau of Consumer Protection announced its new advertising guidelines for the dietary supplement industry, which it labeled “Dietary Supplements: An Advertising Guide for Industry.” These guidelines reiterate many of the policies the FTC has announced over the years, including requirements for substantiation of claims made in advertising about dietary supplements.
The regulation of medical foods is principally governed by the FDCA and FDA regulations. A product qualifies as a medical food if it is specially formulated for the feeding of a patient, is intended for the dietary management of a patient who has special dietary needs, provides nutritional support for the management of the unique nutritional needs of the patient, and is intended to be used under active medical supervision. Moreover, an ingredient added to a food, including a medical food, must be approved by an FDA food additive petition unless it is generally recognized as safe (“GRAS”) for its particular intended use.
Patents and Proprietary Rights
Our success may depend in large measure upon our ability to obtain patent protection for our products, maintain confidentiality and operate without infringing upon the proprietary rights of third parties. We have obtained patent coverage, either directly or through licenses from third parties, for some of our products. We currently own or have licensed a total of nineteen issued U.S. and foreign patents covering Hypnostat, four issued U.S. and foreign patents covering Emitasol, one issued U.S. patent covering GERI, and twelve issued U.S. and foreign patents covering our other technology.
We acquired intellectual property associated with our intranasal program, including: Emitasol for diabetic gastroparesis and delayed onset emesis associated with chemotherapy, Migrastat (intranasal propranolol) for migraine treatment, and intranasal benzodiazepines such as Hypnostat and Panistat for various conditions such as anxiety, seizures, panic attacks and sleep disorders. We have licensed rights to intranasal metoclopramide in, Italy, Chile, South Korea, Austria, the Russian Federation, and certain former Eastern European countries. The Italian licensee, Crinos, received approval to market intranasal metoclopramide (Pramidin) in Italy. We are currently earning small royalties on our sales of Pramidin. There can be no assurance that the foreign licensees will obtain the necessary regulatory approvals to market Emitasol, or that, in the event such approvals are obtained, Emitasol will achieve market acceptance in such countries, or that we will ever realize royalties on sales of Emitasol in such countries.
In addition to the patents issued and allowed as mentioned above, we have also filed several other patent applications in the U.S. and abroad on our various products and expect to file additional applications in the future. There can be no assurance that any of these patent applications will be approved, except where claims have already been examined and allowed, or that we will develop additional proprietary products that are patentable. Nor can there be any assurance that any patents issued to us or our licensors will provide us with any competitive advantages or will not be challenged by third parties or that patents issued to others will not have an adverse effect on the ability of us to conduct our business. Furthermore, because patent applications in the U.S. are maintained in secrecy until issue, and because publication of discoveries in the scientific and patent literature often lag behind actual discoveries, we cannot be certain that we were the first chronologically to make the inventions covered by each of our pending U.S. patent applications, or we were the first to file patent applications for such inventions. In the event that a third party has also filed a U.S. patent application for any of its inventions, we may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine priority of the invention, which could result in substantial costs to us, even if the eventual outcome is favorable to us. In addition, there can be no assurance that our U.S. patents, including those of our licensors, would be held valid by a court of law of competent jurisdiction. If patents are issued to other companies that contain competitive or conflicting claims, which ultimately may be determined to be valid, there can be no assurance that we would be able to obtain a license to any of these patents.
Under Title 35 of the United States Code, as amended by the General Agreement on Tariffs and Trade implementing the Uruguay Round Agreement Act of 1994, commonly referred to as GATT, patents that issue
20
Table of Contents
Under the Drug Price Competition and Patent Term Restoration Act of 1984, including amendments implemented under GATT, the period of enforceability of a first or basic product patent or use patent covering a drug may be extended for up to five years to compensate the patent holder for the time required for FDA regulatory review of the product. This law also establishes a period of time following FDA approval of certain drug applications during which the FDA may not accept or approve applications for similar or identical drugs from other sponsors. Any extension under the Patent Term Restoration Act and any extension under GATT are cumulative. There can be no assurance that we will be able to take advantage of the patent term extensions or marketing exclusivity provisions of these laws. While we cannot predict the effect that such changes will have on our business, the adoption of such changes could have a material adverse effect on our ability to protect our proprietary information and sustain the commercial viability of our products. Furthermore, the possibility of shorter terms of patent protection, combined with the lengthy FDA review process and possibility of extensive delays in such process, could effectively further reduce the term during which a marketed product could be protected by patents.
We also rely on trade secrets and proprietary know-how. We have been and will continue to be required to disclose our trade secrets and proprietary know-how to employees and consultants, potential corporate partners, collaborators and contract manufacturers. Although we seek to protect our trade secrets and proprietary know-how, in part by entering into confidentiality agreements with such persons, there can be no assurance that these agreements will not be breached, that we would have adequate remedies for any breach or that our trade secrets will not otherwise become known or be independently discovered by competitors.
Employees
At December 31, 2001, we had 38 full-time employees (as compared to 46 full-time employees at December 31, 2000); seven of whom are engaged in, or directly support, our research and development activities. Of the employees engaged in research and development activities, two hold Ph.D. degrees. In the first quarter of 2000, we discontinued our drug discovery programs and terminated eleven employees associated with early stage drug discovery.
Our success will depend in large part on our ability to attract and retain key employees. At December 31, 2001, we had 20 employees engaged directly in the marketing and selling of our on-market products. Our potential growth and expansion into areas and activities requiring additional expertise, such as business development, direct to consumer marketing and customer support, contract manufacturing, medical affairs, clinical development, regulatory affairs and sales and marketing, are expected to place increased demands on our management skills and resources. These demands are expected to require an increase in management, manufacturing, customer support, regulatory, and sales personnel and the development of additional expertise by existing management personnel. Accordingly, recruiting and retaining management, sales and marketing, customer service and support, business development, medical affairs and regulatory affairs personnel in the future will also be critical to the our success. There can be no assurance that we will be able to attract and retain skilled and experienced management, and operational personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies, universities and other research institutions for such personnel. The failure to attract and retain such personnel or to develop such expertise could have a material adverse effect on our business, financial condition and results of operations. See “Risk Factors — Dependence on Key Personnel”.
21
Table of Contents
RISK FACTORS
We have a history of operating losses and may never generate sufficient revenue to achieve profitability
We have a history of consistent operating losses. Further substantial operating losses will continue over the next year and if we are unable to achieve our sales forecast and maintain expenses in a way that allows us to reach “breakeven” by the end of 2002 substantial operating losses will continue to occur. To date, our revenues have been generated principally from sales of Acthar, Ethamolin, Glofil-125, and Inulin, the licensing of rights to commercialize certain research technology and the manufacturing of our proprietary topical triple antibiotic wound care product for our over-the-counter marketing partner, NutraMax Products, Inc. During 2001, we discontinued the Neoflo product line and we discontinued all work on Cordox. We do not expect Hypnostat, Panistat, Migrastat, Ceresine, or any of the compounds currently in pre-clinical testing to be commercially available for a number of years, if at all. Further, our revenues from the sale of Emitasol will also be dependent on the FDA approval and the development of Emitasol in conjunction with a new strategic partner which has not yet been obtained. In December 2001, we acquired the U.S. rights to market VSL#3, a patented probiotic. We intend to begin generating sales of VSL#3 in the first half of 2002. Our ability to achieve a consistent, profitable level of operations will be dependent in large part upon our ability to:
| • | finance the operations with external capital until positive cash flows are achieved, | |
| • | finance and acquire additional marketed products, | |
| • | increase sales of current products, | |
| • | finance the future growth of the sales/marketing and customer service organization, | |
| • | enter into agreement with corporate partners for the development of Emitasol, | |
| • | properly and timely perform the transfer of the manufacturing of our products to new contract manufacturers including receiving the appropriate approvals from the FDA and other regulatory authorities, and | |
| • | continue to receive products from our sole-source contract manufacturers on a timely basis and at acceptable costs |
With the exception of VSL#3, no new product launches are planned. There can be no assurance that sufficient revenues from the sale of our products will be generated, nor can there be assurance that we will ever generate sufficient revenues and be able to contain costs and expenses to become profitable.
Our inability to secure additional funding could lead to a loss of your investment
Although we recently completed a $4.0 million financing in the form of convertible debentures due in 2005 with an institutional investor and Sigma-Tau, there can be no assurance that this investment combined with our cash on hand will be adequate to fund operations to reach cash flow breakeven. There can also be no assurance that further capital investments will materialize nor that these investments can be completed at attractive terms to us, or that we will receive any additional capital investments at all. In order to conduct our operating activities, we will require substantial additional capital resources in order to acquire new products, increase sales of existing products, and maintain our operations. Our future capital requirements will depend on many factors, including the following:
| • | existing product sales performance, | |
| • | sales performance of VSL#3, | |
| • | cost maintenance and potential future expansion of the sales force, | |
| • | achieving lower cost of goods sold and better operating efficiencies, | |
| • | obtaining product from our sole-source contract manufacturers and completing the site transfer to new contract manufacturers, |
22
Table of Contents
| • | the acquisition of additional product candidates, and | |
| • | the status of the equity markets, in general, and investor’s tolerance for risk. |
Based on our internal forecast and projections, we believe that our cash on hand at December 2001, together with the $4.0 million of cash raised through the issuance of the convertible debentures and the cash to be generated through the expected sales of our products, will be sufficient to fund operations through December 31, 2002. We anticipate obtaining additional financing through corporate partnerships and public or private debt or equity financing. However, additional financing may not be available to us on acceptable terms, if at all. Further, additional equity financings will be dilutive to our shareholders. If sufficient capital is not available, then we may be required to delay, reduce the scope of, eliminate or divest one or more of our product acquisition, or manufacturing efforts. There can be no assurance we can achieve cash flow breakeven by the end of 2002 or that our existing cash resources will be adequate to fund operations beyond the end of 2002.
Our reliance on contract manufacturers could adversely affect our business
We will rely on third party contract manufacturers to produce the clinical supplies for Emitasol, and Ceresine and for the marketed products, Acthar, Ethamolin, Glofil-125, Inulin and VSL#3, and other products that may be developed or commercialized in the future. Third party manufacturers may not be able to meet our needs with respect to timing, quantity or quality. All of our manufacturers are sole-source manufacturers and no alternative suppliers exist. In addition, we do not have contracts in place with the contract manufacturer for Ethamolin and the bulk product for Inulin. We are negotiating a supply agreement with Aventis for the finished product but we do not have a contract in place for the supply of Acthar API. We are also attempting to transfer the finished product manufacturing for Acthar and Ethamolin. If we are unable to contract for a sufficient supply of required products and substances on acceptable terms, or if we should encounter delays or difficulties in our relationships with our manufacturers, or if the site transfers and the corresponding approval by the FDA and other regulatory authorities does not occur on a timely basis at the appropriate costs to us, we will lose sales and our clinical testing could be delayed, leading to a delay in the submission of products for regulatory approval or the market introduction and subsequent sales of these products. Moreover, contract manufacturers that we may use must continually adhere to current good manufacturing practices regulations enforced by the FDA. If the facilities of these manufacturers cannot pass an inspection, the FDA approval of our products will not be granted. During December of 2001, we were on backorder for Ethamolin and Acthar due to manufacturing constraints at two of our third party contract manufacturers. At this time, we are currently on backorder for Ethamolin. There is no guarantee that we will not have backorders in the future for Ethamolin and Acthar or any of our current or future products nor that we will not be on backorder again. Failure to obtain product for sale for any reason will have a material adverse impact on the financial condition of Questcor.
We rely heavily on sales of Acthar
For the quarter and the year ended December 31, 2001, Acthar revenues comprised 75% and 41% of total product revenues respectively. We also expect that Acthar could contribute to a significant portion of the revenues for 2002. Although our goal is to actively promote Acthar, and we have no reason to believe Acthar will not be successful, there can be no assurance that the strong demand for Acthar will continue and that we will continue to generate significant revenues from the sale of Acthar. If the demand for Acthar declines, or if we are forced to reduce the price, or if the cost to produce Acthar increases, our revenue and results from operations would be adversely affected.
We will be dependent on key personnel
We are highly dependent on the services of Charles J. Casamento, Chairman, President, and Chief Executive Officer and Kenneth Greathouse, Vice President of Commercial Operations. While Mr. Casamento has executed an employment agreement there can be no assurance that Mr. Casamento or Mr. Greathouse will continue to be employed by us in the future. The loss of Mr. Casamento, Mr. Greathouse or both could
23
Table of Contents
Our products may not be accepted by the market
Our current development program focuses on Emitasol. Emitasol, (intranasal metoclopramide) could be developed for two indications: diabetic gastroparesis and delayed onset emesis associated with cancer chemotherapy patients. The diabetic gastroparesis drug candidate was being developed in collaboration with a subsidiary of Shire, in the U.S. and had completed a Phase II clinical trial in the treatment of diabetic gastroparesis. With the expiration in July 2001 of the exclusive option held by Shire, development under this collaboration stopped. Further development of Emitasol is on hold pending our entering into an agreement with a future partner to fund the development of Emitasol. We also have two intranasal drug candidates, on which pilot trials have been conducted: Migrastat for migraine headache and Hypnostat for insomnia. There is no guarantee that any of these drugs will successfully complete Phase III testing. We expect that the failure of one or more of these drugs to successfully pass Phase III testing would likely have a materially adverse effect on our future results of operations.
We cannot guarantee, however, that the products will ever successfully pass such testing phases, and if so, result in commercially successful products. Clinical trial results are frequently susceptible to varying interpretations by scientists, medical personnel, regulatory personnel, statisticians and others, which may delay, limit or prevent further clinical development or regulatory approvals of a product candidate. Also, the length of time that it takes for us to complete clinical trials and obtain regulatory approval for product marketing can vary by product and by the indicated use of a product. We expect that this will likely be the case with future product candidates and we cannot predict the length of time to complete necessary clinical trials and obtain regulatory approval.
Any products that we successfully develop, if approved for marketing, may never achieve market acceptance. These products, if successfully developed, will compete with drugs and therapies manufactured and marketed by major pharmaceutical and other biotechnology companies. Physicians, patients or the medical community in general may not accept and utilize any products that we may develop or that our corporate partners may develop.
The degree of market acceptance of any products that we develop will depend on a number of factors, including:
| • | the establishment and demonstration of the clinical efficacy and safety of the product candidates, | |
| • | their potential advantage over alternative treatment methods and competing products, | |
| • | reimbursement policies of government and third-party payors, and | |
| • | our ability to market and promote the products effectively. |
The failure of our products to achieve market acceptance could materially harm our business.
We have no experience marketing VSL#3
We intend to market VSL#3 as a dietary supplement. Dietary supplements are typically not reimbursable by healthcare providers. This may limit our sales of VSL#3. We also do not know what the demand for
24
Table of Contents
Control by existing shareholders
Sigma-Tau and their affiliates own, directly or indirectly, approximately 31% of the common stock outstanding as of March 15, 2002. Accordingly, these shareholders can control the outcome of certain shareholder votes, including votes concerning the election of directors, the adoption or amendment of provisions in our Articles of Incorporation, and the approval of mergers and other significant corporate transactions. This level of concentrated ownership may have the effect of delaying or preventing a change in the management or voting control of us. In addition, these shareholders own warrants to purchase another 2,559,494 shares of common stock as well as a $2.0 million 8% convertible debenture. If this warrant exercise were to occur, Sigma-Tau and their affiliates would own a significantly greater percentage of our outstanding common stock, thus resulting in substantial dilution to existing shareholders.
Our business could be harmed by intense competition
The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. A number of companies are pursuing the development of pharmaceuticals and products which target the same diseases and conditions that we will target. For example, there are products on the market that compete with Acthar, Ethamolin, Glofil-125, Inulin, and VSL#3. Moreover, technology controlled by third parties that may be advantageous to our business, may be acquired or licensed by competitors of Questcor, preventing us from obtaining this technology on favorable terms, or at all.
Our ability to compete will depend on our abilities to create and maintain scientifically advanced technology and to develop and commercialize pharmaceutical products based on this technology, as well as our ability to attract and retain qualified personnel, obtain patent protection or otherwise develop proprietary technology or processes and secure sufficient capital resources for the expected substantial time period between technological conception and commercial sales of products based upon our technology.
Many of the companies developing competing technologies and products have significantly greater financial resources and expertise in development, manufacturing, obtaining regulatory approvals and marketing than we do. Other smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. Academic institutions, government agencies and other public and private research organizations may also seek patent protection and establish collaborative arrangements for clinical development, manufacturing and marketing of products similar to ours. These companies and institutions will compete with us in recruiting and retaining qualified sales and marketing and management personnel as well as in acquiring technologies complementary to our programs. We will face competition with respect to:
| • | product efficacy and safety, | |
| • | the timing and scope of regulatory approvals, | |
| • | availability of resources, | |
| • | reimbursement coverage, | |
| • | price, and | |
| • | patent position, including potentially dominant patent positions of others. |
There can be no assurance that our competitors will not succeed in developing technologies and drugs that are more effective or less costly than any which we are developing or which would render our technology and future drugs obsolete and noncompetitive. In addition, our competitors may succeed in obtaining the approval of the FDA or other regulatory approvals for drug candidates more rapidly than we will. Companies that complete clinical trials, obtain required regulatory agency approvals and commence commercial sale of their drugs before their competitors may achieve a significant competitive advantage, including patent and
25
Table of Contents
Successful late stage Phase III clinical trials for such potentially important treatments as diabetic gastroparesis and delayed onset emesis will require the enrollment of many patients. Together, the cost of these trials, if funded solely by us, will exceed our current financial resources.
If we fail to maintain or enter into new contracts related to collaborations and in-licensed or acquired technology and products, our business could adversely be affected
Our business model has been dependent on our ability to enter into licensing and acquisition arrangements with commercial or academic entities to obtain technology or marketed products for development and commercialization. There is no assurance we can enter into any new agreements in the future. Disputes may arise regarding the inventorship and corresponding rights in inventions and know-how resulting from the joint creation or use of intellectual property by us and our licensors or scientific collaborators. We may not be able to negotiate additional license and acquisition agreements in the future on acceptable terms, if at all. In addition, current license and acquisition agreements may be terminated, and we may not be able to maintain the exclusivity of our exclusive licenses.
There can be no assurance that any collaborators will commit sufficient development resources, technology, regulatory expertise, manufacturing, marketing and other resources towards developing, promoting and commercializing products incorporating our discoveries. Further, competitive conflicts may arise among these third parties that could prevent them from working cooperatively with us. The amount and timing of resources devoted to these activities by the parties could depend on the achievement of milestones by us and otherwise generally may be controlled by other parties. In addition, we expect that our agreements with future collaborators will likely permit the collaborators to terminate their agreements upon written notice to us. This type of termination would substantially reduce the likelihood that the applicable research program or any lead candidate or candidates would be developed into a drug candidate, would obtain regulatory approvals and would be manufactured and successfully commercialized. Therefore, any such termination could materially harm our business.
There can be no assurance that any of our collaborations will be successful in developing and commercializing products or that we will receive milestone payments or generate revenues from royalties sufficient to offset our significant investment in product development and other costs. Disagreements with our collaborators could lead to delays or interruptions in, or termination of, development and commercialization of certain potential products or could require or result in litigation or arbitration, which could be time-consuming and expensive and could have a material adverse effect on our business.
Our collaboration agreement with Shire Pharmaceuticals Group plc presents a great amount of uncertainty
Under a collaboration agreement between Shire (after its acquisition of Roberts Pharmaceuticals) and us, Shire had the option to acquire exclusive North American rights to Emitasol. This option expired in July 2001. Under that collaboration agreement, we were obligated to fund one-half of the clinical development expenses for Emitasol up to an aggregate of $7 million. Through December 31, 2001 we have made development payments for Emitasol, under the terms of the agreement with Shire, totaling $4.6 million, consisting of $4.1 million paid to Shire and approximately $500,000 paid to other parties for allowable expenses including patent and trademark costs.
Shire asserts we owe $348,000 in development expenses incurred by it under the collaboration agreement prior to the expiration of the option. We have requested that Shire return certain items to us, including the manufacturing and clinical data it obtained over the course of the agreement, the transfer of the INDs relating to Emitasol (which is substantially complete) and the assignment of the intellectual property relating to Emitasol generated in the course of the development program. While Shire has returned some of these items,
26
Table of Contents
Our business could be harmed if we are unable to protect our proprietary rights
Our success will depend in part on our ability to:
| • | obtain patents for our products and technologies, | |
| • | protect trade secrets, | |
| • | operate without infringing upon the proprietary rights of others, and | |
| • | prevent others from infringing on our proprietary rights. |
We will only be able to protect our proprietary rights from unauthorized use by third parties to the extent that these rights are covered by valid and enforceable patents or are effectively maintained as trade secrets and are otherwise protectable under applicable law. We will attempt to protect our proprietary position by filing U.S. and foreign patent applications related to our proprietary products, technology, inventions and improvements that are important to the development of our business.
The patent positions of biotechnology and biopharmaceutical companies involve complex legal and factual questions and, therefore, enforceability cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. Thus, any patents that we own or license from third parties may not provide any protection against competitors. Pending patent applications we may file in the future, or those we may license from third parties, may not result in patents being issued. Also, patent rights may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed or we will develop. The laws of some foreign countries may not protect the company’s intellectual property rights to the same extent as do the laws of the U.S.
In addition to patents, we rely on trade secrets and proprietary know-how. We currently seek protection, in part, through confidentiality and proprietary information agreements. These agreements may not provide meaningful protection or adequate remedies for proprietary technology in the event of unauthorized use or disclosure of confidential and proprietary information. The parties may not comply or may breach these agreements. Furthermore, our trade secrets may otherwise become known to, or be independently developed by competitors.
Our success will further depend, in part, on our ability to operate without infringing the proprietary rights of others. There can be no assurance that our activities will not infringe on patents owned by others. We could incur substantial costs in defending ourselves in suits brought against any licensor or us. Should our products or technologies be found to infringe on patents issued to third parties, the manufacture, use and sale of our products could be enjoined, and we could be required to pay substantial damages. In addition, we, in connection with the development and use of our products and technologies, may be required to obtain licenses to patents or other proprietary rights of third parties. No assurance can be given that any licenses required under any such patents or proprietary rights would be made available on terms acceptable to us, if at all.
Our business and product approvals must comply with strict government regulation
Any products that we develop are subject to regulation by federal, state and local governmental authorities in the U.S., including the FDA, and by similar agencies in other countries. Any product that we develop must receive all relevant regulatory approvals or clearances before it may be marketed in a particular country. The regulatory process, which includes extensive preclinical studies and clinical trials of each product to establish its safety and efficacy, is uncertain, can take many years and requires the expenditure of
27
Table of Contents
| • | would adversely affect the marketing, selling and distribution of any products that our corporate partners or we develop, | |
| • | could impose significant additional costs on our corporate partners, and us | |
| • | could diminish any competitive advantages that we or our corporate partners may attain, and | |
| • | could adversely affect our ability to receive royalties and generate revenues and profits. |
Regulatory approval, if granted, may entail limitations on the indicated uses for which the new product may be marketed that could limit the potential market for the product. Product approvals, once granted, may be withdrawn if problems occur after initial marketing. Furthermore, manufacturers of approved products are subject to pervasive review, including compliance with detailed regulations governing FDA good manufacturing practices. The FDA has recently revised the good manufacturing practices regulations. Failure to comply with applicable regulatory requirements can result in warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to grant marketing applications and criminal prosecution.
In addition, we cannot predict the extent of government regulations or the impact of new governmental regulations that might have an adverse effect on the development, production and marketing of our products. We may be required to incur significant costs to comply with current or future laws or regulations.
We may not be reimbursed by third party payers
In both domestic and foreign markets, sales of our products will depend in part on the availability of reimbursement from third-party payors such as state and federal governments (for example, under Medicare and Medicaid programs in the U.S.) and private insurance plans. VSL#3 currently does not qualify for any reimbursements by third party payors. In certain foreign markets, the pricing and profitability of our products generally are subject to government controls. In the U.S., there have been, and we expect there will continue to be, a number of state and federal proposals that limit the amount that state or federal governments will pay to reimburse the cost of drugs. In addition, we believe the increasing emphasis on managed care in the U.S. has and will continue to put pressure on the price and usage of our products, which may impact product sales. Further, when a new therapeutic is approved, the reimbursement status and rate of such a product is uncertain. In addition, current reimbursement policies for existing products may change at any time. Changes in reimbursement or our failure to obtain reimbursement for our products may reduce the demand for, or the price of, our products, which could result in lower product sales or revenues which could have a material adverse effect on us and our results of operations.
In the U.S. proposals have called for substantial changes in the Medicare and Medicaid programs. If such changes are enacted, they may require significant reductions from currently projected government expenditures for these programs. Driven by budget concerns, Medicaid managed care systems have been under consideration in several states. If the Medicare and Medicaid programs implement changes that restrict the access of a significant population of patients to its innovative medicines, our business could be materially affected. On the other hand, relatively little pharmaceutical use is currently covered by Medicare.
Legislation in the U.S. requires us to give rebates to state Medicaid agencies based on each state’s reimbursement of pharmaceutical products under the Medicaid program. We also must give discounts or rebates on purchases or reimbursements of pharmaceutical products by certain other federal and state agencies and programs. There can be no assurance that these discounts and rebates may become burdensome to us, which may adversely affect our current business and future product development.
28
Table of Contents
We will incur costs associated with expanding the business
Management expects to grow the business in areas in which we can be most competitive, either through in-licensing, collaborations or acquisitions of products or companies. In connection with these efforts, we may incur significant charges, costs and expenses which could impact our profitability, including impairment losses, restructuring charges, the write-off of purchased in-process technologies, transaction-related expenses, costs associated with integrating new businesses and the cost of amortizing goodwill and other intangibles.
Our stock price is subject to volatility
The price of our stock, like that of other specialty pharmaceutical companies, is subject to significant volatility. Any number of events, both internal and external to us, may affect the stock price. These include, without limitation, the quarterly and yearly revenues and earnings, results of clinical trials conducted by us, our partners or by our competitors; announcement by us or our competitors regarding product development efforts, including the status of regulatory approval applications; the outcome of legal proceedings, including claims filed by us against third parties to enforce our patents and claims filed by third parties against us relating to patents held by the third parties, the launch of competing products; the resolution of (or failure to resolve) disputes with collaboration partners; corporate restructuring by us; licensing activities by us; and the acquisition or sale by us of products, products in development or businesses.
In connection with our research and development collaborations, from time to time we invest in equity securities of our corporate partners. The price of these securities also is subject to significant volatility and may be affected by, among other things, the types of events that affect our stock. Changes in the market price of these securities may impact our profitability.
Our sales are affected by the availability of reimbursement on non-prescription products
In the U.S. and other significant markets, sales of our products may be affected by the availability of reimbursement from the government or other third parties, such as insurance companies. It is difficult to predict the reimbursement status of newly approved, novel biotechnology and pharmaceutical products, and current reimbursement policies for existing products may change. In certain foreign markets, governments have issued regulations relating to the pricing and profitability of pharmaceutical companies. There have been proposals in the U.S. (at both the federal and state level) to implement such controls. The growth of managed care in the U.S. also has placed pressure on the pricing of healthcare products. These pressures can be expected to continue.
Our business may be affected by product liability and availability of insurance
Our business will expose us to potential liability risks that are inherent in the testing, manufacturing and marketing of pharmaceutical products. The use of any drug candidates ultimately developed by us or our collaborators in clinical trials may expose us to product liability claims and possible adverse publicity. These risks will expand for any of our drug candidates that receive regulatory approval for commercial sale. Product liability insurance for the pharmaceutical industry is generally expensive, if available at all. We currently have product liability insurance, however, there can be no assurance that we will be able to maintain insurance coverage at acceptable costs or in a sufficient amount, if at all, or that a product liability claim would not harm our reputation, stock price or our business.
We could be adversely affected by litigation
Although there are currently no lawsuits pending against us, we could be adversely affected by litigation. Potential litigation could arise from a number of factors including disputes with past, current and future employees and partners, class action litigation relating to shareholder lawsuits or product liability claims, frivolous lawsuits filed on behalf of manufactured plaintiffs or any other items not foreseen at this time. We believe we have adequate insurance to protect ourselves against certain claims but there can be no assurance that this insurance coverage will be of any use against any future claims. If we were to become subject to any
29
Table of Contents
Item 2. Properties
At December 31, 2001, we leased four buildings. Our headquarters, which includes the Executive, Finance and Administration, Sales and Marketing, Medical and Regulatory Affairs departments, are located in Union City, California. The building has 23,000 square feet of office space, under a 10-year lease agreement. We are subleasing 100% of our previous headquarter premises in Hayward, California. The Hayward premises has 30,000 square feet of laboratory and office space, under a lease that expires in November 2012. While we anticipate that the sublessee will fulfill the term of the sublease agreement, if they were to default, it would have a negative impact on us as we would still be obligated to make rent payments on the Hayward facility. We classify both the rental income and costs related to this facility to rental income, net.
We lease a building in Carlsbad, California. Our distribution, contract manufacturing, quality control and quality assurance functions are located in this facility of 8,203 square feet of space located at 2714 Loker Avenue West. This lease commenced in November 2000 and has a term of 63 months. In April 1997, we subleased our other building in Carlsbad located at 2732 Loker Avenue West to another pharmaceutical company. The lease on the 2732 Loker Avenue West property commenced in December 1993 and had a term of 81 months. Both leases have clauses providing for rent increases at various points in time during the terms of the leases. The subtenant’s lease covered the remainder of our original lease term plus a 36-month option, and the subtenant’s rental payments to us exceeded our rental payments to the landlord. In addition, the sublease provide for annual rent increases. Effective February 1, 2001, the sub-lease at 2732 Loker Avenue was assigned to the landlord and the master lease was terminated.
In May 2001, we closed our Neoflo manufacturing facility for the Neoflo product line located in Lee’s Summit, Missouri. The lease period ends in December 2004. We closed this facility in May 2001 and are currently seeking a sublessee for this facility. See further discussion under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Item 3. Legal Proceedings
We are subject to litigation from time to time which could adversely affect our business.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
30
Table of Contents
PART II.
Item 5. Market for Registrant’s Common Equity and Related Shareholder Matters
Our common stock was quoted on the Nasdaq National Market System under the symbol “CYPR” until January 1998. In January 1998, we were listed on the American Stock Exchange, Inc. under the symbol “CYP”. On November 17, 1999, we changed our name to Questcor Pharmaceuticals, Inc. and began trading under the symbol “QSC”.
The following table sets forth, for the periods presented, the high and low closing price of a share of our common stock.
| Common Stock | ||||||||
| Closing Price | ||||||||
| Quarter Ended | High | Low | ||||||
|
December 31, 2001
|
$ | 2.16 | $ | 0.85 | ||||
|
September 30, 2001
|
1.53 | 0.55 | ||||||
|
June 30, 2001
|
1.00 | 0.43 | ||||||
|
March 31, 2001
|
1.00 | 0.58 | ||||||
|
December 31, 2000
|
$ | 1.50 | $ | 0.56 | ||||
|
September 30, 2000
|
2.19 | 1.38 | ||||||
|
June 30, 2000
|
3.06 | 1.25 | ||||||
|
March 31, 2000
|
5.25 | 1.31 | ||||||
The last sales price of our common stock on March 15, 2002 was $1.79. As of March 15, 2002 there were approximately 271 holders of record of Questcor’s common stock.
We have never paid a cash dividend on our common stock. Our dividend policy is to retain our earnings, if we achieve positive earnings and to support the expansion of our operations. The Board of Directors of Questcor does not intend to pay cash dividends on the common stock in the foreseeable future. Any future cash dividends will depend on future earnings, capital requirements, our financial condition and other factors deemed relevant by the Board of Directors.
31
Table of Contents
Item 6. Selected Consolidated Financial Data
The following table sets forth certain financial data with respect to our business. The selected consolidated financial data should be read in conjunction with our Consolidated Financial Statements (including the Notes thereto) and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Form 10-K.
| Years Ended | Five Months | ||||||||||||||||||||||||
| December 31, | Ended | Years Ended July 31, | |||||||||||||||||||||||
| December 31, | |||||||||||||||||||||||||
| 2001 | 2000 | 1999(1) | 1999 | 1998 | 1997 | ||||||||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||||||||||
|
Consolidated Statement of
Operations Data: |
|||||||||||||||||||||||||
|
Net product sales
|
$ | 5,196 | $ | 2,134 | $ | 624 | $ | 2,518 | $ | 3,446 | $ | 2,428 | |||||||||||||
|
Total revenues
|
5,667 | 3,594 | 956 | 2,569 | 3,616 | 2,527 | |||||||||||||||||||
|
Total operating cost and expenses
|
15,050 | 17,752 | 23,257 | 10,026 | 9,910 | 8,004 | |||||||||||||||||||
|
Loss from operations
|
(9,383 | ) | (14,158 | ) | (22,301 | ) | (7,457 | ) | (6,294 | ) | (5,477 | ) | |||||||||||||
|
Other income (expense), net
|
686 | 396 | 91 | 673 | 721 | (1,198 | ) | ||||||||||||||||||
|
Net loss
|
(8,697 | ) | (13,762 | ) | (22,210 | ) | (6,784 | ) | (5,573 | ) | (6,675 | ) | |||||||||||||
|
Net loss per share — basic and diluted
|
(0.28 | ) | (0.56 | ) | (1.22 | ) | (0.43 | ) | (0.37 | ) | (0.54 | ) | |||||||||||||
|
Shares used in computing net loss per
share — basic and diluted
|
31,425 | 24,722 | 18,240 | 15,712 | 15,187 | 12,303 | |||||||||||||||||||
| December 31, | July 31, | ||||||||||||||||||||||||
| 2001 | 2000 | 1999 | 1999 | 1998 | 1997 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||
|
Consolidated Balance Sheet Data:
|
|||||||||||||||||||||||||
|
Cash, cash equivalents and investments (includes
$5 million compensating balance at December 31, 2001,
2000 and 1999)
|
$ | 10,571 | $ | 8,151 | $ | 21,699 | $ | 7,263 | $ | 13,445 | $ | 14,567 | |||||||||||||
|
Working capital
|
2,591 | 1,201 | 16,943 | 5,261 | 13,379 | 13,076 | |||||||||||||||||||
|
Total assets
|
15,072 | 14,969 | 32,221 | 13,140 | 19,736 | 21,345 | |||||||||||||||||||
|
Long-term obligations
|
122 | 548 | 6,078 | 147 | 217 | 4,176 | |||||||||||||||||||
|
Preferred stock
|
5,081 | 5,081 | 5,081 | — | — | — | |||||||||||||||||||
|
Common stock
|
74,018 | 66,152 | 65,423 | 41,497 | 41,328 | 32,345 | |||||||||||||||||||
|
Accumulated deficit
|
(74,183 | ) | (65,486 | ) | (51,724 | ) | (29,514 | ) | (22,730 | ) | (17,157 | ) | |||||||||||||
|
Total stockholders’ equity (deficit)
|
(300 | ) | 927 | 13,626 | 11,914 | 18,511 | 15,026 | ||||||||||||||||||
| (1) | Includes the results of operations of RiboGene, Inc. from November 17, 1999 through December 31, 1999, including a one-time charge for restructuring costs and a non-cash charge for acquired in process research and development costs. |
Quarterly Financial Information (Unaudited)
| Quarter Ended | ||||||||||||||||
| 12/31/01 | 09/30/01 | 06/30/01 | 03/31/01 | |||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
|
Total Revenues
|
$ | 2,297 | $ | 1,321 | $ | 1,033 | $ | 1,016 | ||||||||
|
Cost of product sales
|
476 | 370 | 276 | 361 | ||||||||||||
|
Net loss
|
(2,566 | ) | (2,262 | ) | (1,997 | ) | (1,872 | ) | ||||||||
|
Net loss per share
|
(0.07 | ) | (0.07 | ) | (0.07 | ) | (0.07 | ) | ||||||||
32
Table of Contents
| Quarter Ended | ||||||||||||||||
| 12/31/00 | 9/30/00 | 6/30/00 | 3/31/00 | |||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
|
Total Revenues
|
$ | 544 | $ | 1,809 | $ | 543 | $ | 698 | ||||||||
|
Cost of product sales
|
346 | 546 | 460 | 586 | ||||||||||||
|
Net loss
|
(2,798 | ) | (1,966 | ) | (3,747 | ) | (5,251 | ) | ||||||||
|
Net loss per share
|
(0.11 | ) | (0.08 | ) | (0.15 | ) | (0.21 | ) | ||||||||
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties, including statements regarding the period of time during which our existing capital resources and income from various sources will be adequate to satisfy its capital requirements. Our actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section, as well as Item 1 “Business of Questcor,” including without limitation “Risk Factors,” as well as those discussed in any documents incorporated by reference herein or therein.
We are an integrated specialty pharmaceutical company focused on the development, acquisition, and marketing of acute care and critical care hospital/specialty pharmaceutical and related healthcare products. We currently market four products through our internal sales force in the U.S. We expect to launch a fifth product in the U.S. in the first half of 2002, and we market a sixth product in Italy through a strategic partner. Our current products target gastroenterologists, pediatric neurologists, nephrologists, transplant centers and nuclear medicine centers.
On November 17, 1999, Questcor, formerly Cypros Pharmaceutical Corporation, completed a merger with RiboGene, Inc. (“RiboGene”) and subsequently changed its name to Questcor Pharmaceuticals, Inc. Under the terms of the merger agreement, each share of RiboGene common stock was exchanged for 1.509 shares of our common stock and each outstanding share of RiboGene Series A preferred stock was converted into 1.509 shares of our Series A preferred stock. In conjunction with the November 1999 acquisition of RiboGene, we changed our fiscal year end from July 31 to December 31. We accounted for the merger transaction as a purchase. A write-off of $15,168,000 for in-process research and development acquired from RiboGene is included in our statement of operations for the five months ended December 31, 1999. The intangible assets acquired are amortized over the estimated useful lives of 3 years. Since the completion of the merger, we have focused our resources on: i) acquiring new products, ii) increasing the sales of our existing products, and iii) out-licensing and partnering our research and development stage products. During 2001, we completed our transition from operating as essentially two independent companies to emerge as a specialty pharmaceutical company focused on the sales and marketing of our branded products.
We currently market four products in the U.S.: Acthar, an injectable drug that helps patients with infantile spasm or West Syndrome; Ethamolin, an injectable drug used to treat esophageal varices that have recently bled; and Glofil-125 and Inulin in sodium chloride, which are both injectable agents that assess kidney function by measuring glomerular filtration rate. Additionally, we earn royalties from our strategic partner, Crinos Industria Farmacobiologica SpA (“Crinos”) on sales in Italy, of Pramidin, an intranasal form of metoclopramide for the treatment of various gastrointestinal disorders. We recently acquired the U.S. rights to market VSL#3 a patented probiotic. We intend to begin sales of VSL#3 in the first half of 2002.
Consistent with our efforts to focus on sales and marketing, we have reduced our spending on research and development. Accordingly, we have entered into several agreements with pharmaceutical and biotechnology companies to further the development of certain technology acquired from RiboGene. We have signed a Letter of Understanding with Fabre Kramer of Houston, TX which anticipates a License Agreement whereby Fabre Kramer will manage and provide funding for the clinical development programs for Hypnostat (intranasal triazolam for insomnia) and Panistat (intranasal alprazolam for panic disorders). The antifungal drug discovery program has been partnered with Tularik, Inc., of South San Francisco, CA., the antiviral drug discovery program has been partnered with Rigel Pharmaceuticals, Inc. of South San Francisco, CA. and the antibacterial program has been partnered with Dainippon Pharmaceuticals Co., Ltd. Of Osaka, Japan.
33
Table of Contents
In 2001, our research and development programs included the following products: Cordox as a blood preservative, Sildaflo for wound care, Ceresine for CLA, Emitasol for diabetic gastroparesis, Hypnostat for sleep disorders, Panistat for panic disorders and the GERI compounds as cytoprotective agents. The development of Hypnostat and Panistat will be controlled by Fabre Kramer. The future development of Emitasol, Ceresine and the GERI compounds, will be dependent in part on our ability to enter into partnership arrangements or secure additional sources of capital to fund the development efforts. The development of Sildaflo and Cordox has been discontinued. As we rely on current and future strategic partners to develop and fund the remaining projects, we are unable to project estimated completion dates. We have limited control, if any, over these programs due to our reliance on partners for their development. Accordingly our ability to disclose historical and future costs associated with these projects is limited.
In April 2001, we entered into a Stock and Warrant Purchase Agreement with Sigma-Tau Finance Holding S.A. (“Sigma-Tau”) pursuant to which Sigma-Tau purchased (i) an aggregate of 2,873,563 shares of common stock at a purchase price of $0.52 per share, for an aggregate purchase price of $1,500,000, and (ii) a warrant to purchase an additional 2,873,563 shares of common stock at a purchase price of $0.52 per share. In May 2001, as required under the rules of AMEX, we sought and received shareholder approval to allow for full exercise of the warrant. In July 2001, Sigma-Tau assigned the warrant to Paolo Cavazza and Claudio Cavazza, the principal shareholders of Sigma-Tau, who exercised the warrant in full, purchasing 2,873,563 shares of common stock at a purchase price of $0.52 per share, resulting in aggregate proceeds to us of $1,500,000 (including the $100,000 originally paid by Sigma-Tau to acquire the warrant).
In July 2001, concurrent with our agreement to acquire Acthar from Aventis, we entered into a Stock Purchase Agreement with Sigma-Tau pursuant to which Sigma-Tau purchased 5,279,034 shares of common stock at a purchase price of $0.66 per share, for an aggregate purchase price of $3,500,000.
In December 2001, we entered into a Promotion Agreement with VSL Pharmaceuticals, Inc., a private company owned in part by the principal shareholders of Sigma-Tau, to promote, sell and distribute the product VSL#3 in the U.S. In connection with this Promotion Agreement, we entered into two Stock and Warrant Purchase Agreements, one with Paolo Cavazza and one with Claudio Cavazza, to purchase (i) an aggregate of 640,000 shares of common stock for a purchase price of $1.50 per share (representing a twenty percent premium to our market price for the five days prior to execution of the Purchase Agreements), for an aggregate purchase price of $960,000, and (ii) warrants, at an aggregate purchase price of $300,000, to purchase an additional 1,800,000 shares of common stock at a purchase price of $1.75 per share before December 1, 2003. We issued the common stock related to this transaction in February 2002. Additionally, in connection with this transaction, we entered into a standstill agreement with Sigma-Tau whereby Sigma-Tau and its affiliates agreed to limit purchases of common stock on the open market to no more that 2,000,000 shares through July 2003. Assuming Sigma-Tau exercises its warrants in full, they would own approximately 34% (including the 640,000 shares of common stock issued in February 2002) of our outstanding common stock as of December 31, 2001.
On April 30, 2001, we closed a financing with various investors which totaled $442,000. This investment came from a group of individual investors. We issued an aggregate of 816,800 shares of common stock and sold warrants to purchase an additional 408,400 shares of common stock with an exercise price equal to $0.64 per share. The warrants are exercisable from the date of issuance until the close of business on April 30, 2006.
On March 15, 2002, in two separate transactions, we issued $4.0 million of 8% convertible debentures to an institutional investor and Sigma-Tau. We will pay interest on the debentures at a rate of 8% per annum on a quarterly basis. The debentures are convertible into shares of our common stock at a fixed conversion price of $1.58 per share (subject to adjustment for stock splits and reclassifications). At the end of the term of the debenture, under certain circumstances, we have the option to repay the principal in stock and, under certain circumstances, we can also redeem the debenture for cash prior to maturity. The debentures mature on March 15, 2005. In conjunction with this transaction, we issued warrants to both the institutional investor and Sigma-Tau to acquire an aggregate of 1,518,988 shares of common stock at an exercise price of $1.70 per share. Both warrants expire on March 15, 2006. In connection with the issuance of the debentures and warrants, we expect to record a deferred expense related to a beneficial conversion feature. This amount will be amortized to interest expense over the term of the debentures. Assuming the conversion and exercise of the above-mentioned
34
Table of Contents
We have sustained an accumulated deficit of $74,183,000 from inception through December 31, 2001. At December 31, 2001, we had $10.2 million of cash on hand. On January 18, 2002, we paid our $5 million note and reduced our cash balance accordingly. Based on our internal forecast and projections, we believe that our cash on hand at December 31, 2001, together with the $4.0 million of cash raised through the issuance of the above-mentioned convertible debentures and the cash to be generated through the expected sale of our products, will be sufficient to fund operations through December 31, 2002.
While it is our goal to reach cash flow breakeven before the end of 2002, if we are unable to achieve the revenue forecast for 2002 or if our expenses and costs associated with running our operations exceed our estimates, we may not reach cash flow breakeven before the end of 2002, if ever, and we may incur significant operating losses over the next several years. Results of operations may vary significantly from quarter to quarter depending on, among other factors, the results of our sales efforts, the availability of finished goods from our sole-source manufacturers, the timing of certain expenses, the establishment of strategic alliances and corporate partnering and the receipt of milestone payments.
Critical Accounting Policies
Our management discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. On an on-going basis, we evaluate our estimates, including those related to sales allowances, bad debts, inventories, investments and intangible assets. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
| Sales Allowances |
We record estimated sales allowances against product revenues for expected returns, chargebacks and cash discounts for prompt payment. We estimate product returns based on historical return experience, the shelf life of our products (ranging from 45 days to 3 years) and compliance with our return goods policy. If historical return experience differs from estimated future returns, or if a new product has return experience different than our estimate, this could negatively impact our revenue.
| Intangible Assets |
We have intangible assets related to goodwill and other acquired intangibles. The determination of related estimated useful lives and whether or not these assets are impaired involves significant judgment. Changes in strategy and/or market conditions could significantly impact these judgments and require adjustments to recorded asset balances. We review intangible assets, as well as other long-lived assets, for impairment whenever events or circumstances indicate that the carrying amount may not be fully recoverable.
Results of Operations
| Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000 |
For the year ended December 31, 2001, we incurred a net loss of $8,697,000 (or $0.28 per share), compared to a net loss of $13,762,000 (or $0.56 per share) for the year ended December 31, 2000.
35
Table of Contents
Product revenues increased 143% for the year ended December 31, 2001 to $5,196,000 from $2,134,000 for the year ended December 31, 2000. This increase was primarily due to increased product sales and the introduction of Acthar. We began shipping the Acthar product in the third quarter of 2001 and recognized sales of $2,141,000 for the year ended December 31, 2001. In addition, excluding revenues from the discontinued Neoflo product line, we experienced an overall increase of 97% in revenues from existing products when compared to last year’s sales. Revenues of Ethamolin increased 174% to $1,695,000, Glofil-125 increased 42% to $982,000, Inulin increased 53% to $317,000, as compared to $618,000, $691,000 and $207,000, respectively, for the year ended December 31, 2000. The total increase in product revenues from these core products was $1,478,000 of which 25% of this increase is related to unit growth in 2001 as compared to 2000, with the remainder of this increase related to a price increase in 2001 as compared to 2000. We estimate the use of Ethamolin for the year ended December 31, 2001 increased 7% from the year ended December 31, 2000. We are at times unable to stock a sufficient supply of Acthar and Ethamolin to meet the demand for these products. Ethamolin was placed on backorder at the end of October 2001 and Acthar was placed on backorder to customers at the end of November 2001. At December 31, 2001 we had backorders amounting to $334,000 for Acthar and $408,000 for Ethamolin. All backorders for Acthar and Ethamolin as of December 31, 2001 were shipped in January 2002.
In May 2000, our sole customer for our Neoflo product, NutraMax Products, Inc., filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code. On April 2, 2001, the U.S. Bankruptcy Court granted NutraMax a motion to terminate our supply agreement effective that date. In May 2001, we closed our Lee’s Summit manufacturing facility where the NutraMax product was being produced. Net sales to NutraMax totaled $61,000 and $618,000 for the years ended December 31, 2001 and 2000 respectively, $35,000 for the five months ended December 31, 1999 and $167,000 for the year ended July 31, 1999, representing 1%, 17%, 4% and 7% of total revenues, respectively.
Contract research and grant revenue increased 77% to $367,000 for the year ended December 31, 2001 due to a full year of revenue recognized for government reimbursement under the SBIR grant previously awarded to fund the GERI project. We do not anticipate any additional contract revenue after the SBIR grant expires on April 30, 2002. Technology revenue for the year ended December 31, 2001 decreased to $90,000 from $1,250,000 for the year ended December 31, 2000, due to the recognition of $1,250,000 in technology revenue from the sale of our proprietary antiviral drug research technology to Rigel Pharmaceuticals, Inc. in 2000. We do not anticipate much, if any, technology revenue in the future. Royalty revenue increased 367% to $14,000 due to increased sales of Pramidin in Italy by Crinos.
Total revenue for the year ended December 31, 2001 increased 58% to $5,667,000 as compared to $3,594,000 for the year ended December 31, 2000.
Cost of product sales decreased 23% to $1,483,000 for the year ended December 31, 2001 from $1,938,000 for the year ended December 31, 2000. These costs decreased primarily as a result of our discontinuance of the Neoflo product line in 2001. The Neoflo product had the highest overhead and material costs relative to our other products. Excluding the cost of product sales associated with Neoflo, cost of product sales increased by 43% to $1,260,000 from $880,000 for the years ended December 31, 2001 and 2000, respectively. This increase is related to the increased volume of product sales in 2001 as compared to 2000.
Gross margins for marketed products for the year ended December 31, 2001 were 82% for Acthar, 80% for Ethamolin, 59% for Glofil-125 and 57% for Inulin, compared to 0%, 59%, 36% and 35%, respectively, for the year ended December 31, 2000. Gross margins for the products other than Acthar improved as a result of increased sales volume, and product price increases in 2001. Acthar was introduced in September 2001.
Sales and marketing expense increased by 23% to $3,129,000 for the year ended December 31, 2001, from $2,539,000 for the year ended December 31, 2000. This increase is primarily due to increased headcount associated with the expansion of our sales force, which began in late 2000. However, as a percentage of total revenues, sales and marketing expenses decreased to 55% for the year ended December 31, 2001 from 71% for the year ended December 31, 2000. We expect sales and marketing expenses to increase in the future as we expand our sales and marketing efforts on our existing product lines and prepare for the launch of VSL#3.
36
Table of Contents
General and administrative expenses decreased 14% to $4,707,000 for the year ended December 31, 2001 from $5,495,000 for the year ended December 31, 2000. This decrease was related to our cost reduction program that resulted in a decrease in personnel and related expenses, lower facility costs, legal fees, bad debt expense and professional services costs, offset by an increase in non-cash equity related compensation expense. We expect general and administrative costs may slightly increase in the future as compared to 2001 if the revenue levels exceed those for 2001, however, general and administrative costs as a percentage of revenues should decline in 2002.
Research and development expense decreased 45% to $2,847,000 for the year ended December 31, 2001, from $5,221,000 for the year ended December 31, 2000. Since the completion of our merger with RiboGene in 1999, we have reduced our focus on research and development of non-marketed products. The decrease was related to lower development expenses for EmitasolTM and an overall reduction of expenses related to our research and development activities. Should we elect to undertake any development work, we expect to fund future clinical trials and additional research and development from our anticipated revenues. Should our revenue projections differ from actual results we would expect our research and development costs to increase or decrease accordingly.
Since we no longer market or sell the Neoflo product we recorded a loss related to the discontinued Neoflo product line in the amount of $677,000 as of December 31, 2001. This loss represents a writedown of the assets directly related to the Neoflo product line and the estimated remaining lease payments for the Lee’s Summit manufacturing facility.
Depreciation and amortization expense for the period decreased by 14% to $2,207,000 for the year ended December 31, 2001 from $2,559,000 for the year ended December 31, 2000 due to an additional charge of $303,000 in 2000 to depreciation expense in order to reflect the change in the estimated useful life of certain laboratory and manufacturing equipment.
Net interest and other income decreased by 45% to $74,000 for the year ended December 31, 2001 from $135,000 for the year ended December 31, 2000 principally due to a lower return on invested cash, as well as a lower average cash balance, partially offset by reduced interest expense due to lower rates.
Net rental income increased by 134% to $612,000 for the year ended December 31, 2001 from $261,000 for the year ended December 31, 2000 due to the receipt of a one-time payment of $250,000 for vacating our Hayward facility in May 2001. When we moved to our new headquarters in Union City, CA., we subleased 100% of our Hayward facility. All sublease income, and the related costs for the Hayward premises are classified as rental income, net. Although the current rental income from the sublessee exceeds the current rental expense on the Hayward facility, there can be no assurance our sublessee will not default on the sublease agreement, and if they were to do so, we would still be obligated to pay rent expense on this property. Estimated 2002 sublease income and rent expense for the Hayward facility is $949,000 and $651,000, respectively.
| Year Ended December 31, 2000 Compared to the Five Months Ended December 31, 1999 |
The comparison data presented below is for information purposes. It is difficult to analyze variances between the year ended December 31, 2000 and the five months ended December 31, 1999 for two reasons: (1) the comparative periods are different and (2) the five months ended December 31, 1999 includes merger related restructuring charges. For a more meaningful comparison, please refer to the information presented in the “Year ended December 31, 2000 compared to the year ended July 31, 1999”.
For the year ended December 31, 2000, we incurred a net loss of $13,762,000 (or $0.56 per share), compared to a net loss of $22,210,000 (or $1.22 per share) for the five months ended December 31, 1999. During the five months ended December 31, 1999, we completed our merger with RiboGene, Inc. As a result of the merger, operations for the period include a one-time non-cash charge of $15,168,000 for acquired in-process research and development and a $1,530,000 one-time charge for restructuring costs, primarily related to severance of former Cypros employees.
37
Table of Contents
Revenue for the year ended December 31, 2000 totaled $3,594,000 as compared to $956,000 for the five months ended December 31, 1999. This relative increase was primarily due to the recognition of $1,250,000 in technology revenue from the sale our proprietary antiviral drug research technology, HCV IRES and HCV NS5A-PKR, to Rigel Pharmaceuticals, Inc. In addition, product sales increased to $2,134,000 for the year ended December 31, 2000 from $624,000 for the five months ended December 31, 1999. The increase in product sales consisted of $618,000 in Ethamolin sales, $691,000 in Glofil-125 sales, and $207,000 in Inulin sales for the year ended December 31, 2000 compared to $319,000, $251,000 and $20,000, respectively for the five month period ended December 31, 1999. In addition, the startup of the supplies of rolled padded stock (Neoflo) amounted to $618,000 for the year ended December 31, 2000 compared to $35,000 for the five months ended December 31, 1999. During 2000, we hired additional sales personnel and initiated a sales and marketing plan to increase product sales.
In May 2000, one of our major customers, NutraMax Products, Inc. (“NutraMax”) filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code. We had a multi-year marketing and joint venture agreement with NutraMax Products, Inc. under which were supplying its proprietary triple antibiotic product using the Dermaflo technology to NutraMax for conversion and sale in the form of adhesive strips and patches. NutraMax had the exclusive right to sell the finished products to the retail and industrial first aid markets. Further, the agreement called for Questcor and NutraMax to jointly develop several new products using the Dermaflo technology and to share the development expense and profits from future sales. We began shipping the products to NutraMax in March 1999. Net sales to NutraMax totaled $618,000 for the year ended December 31, 2000, $35,000 for the five months ended December 31, 1999 and $167,000 for the year ended July 31, 1999, representing 17%, 4% and 7% of total revenues, respectively. As of May 2, 2000, NutraMax filed for protection under Chapter 11 of the U.S. Bankruptcy Code, we had a claim outstanding of $190,000 as an unsecured creditor. We were able to recover $19,000 for this claim. Since the filing date, we have agreed on new payment terms with NutraMax and have sold $293,000 of product for which we were paid in accordance with the revised terms. In February 2001, NutraMax’s plan of reorganization was approved by the U.S. Bankruptcy Court. Since NutraMax emerged from Chapter 11, NutraMax has further reduced its forecast for adhesive strips to be supplied. On April 2, 2001, NutraMax filed a motion with the U.S. Bankruptcy Court to reject our supply agreement effective that date.
Costs of product sales increased to $1,938,000 for the year ended December 31, 2000 from $500,000 for the five months ended December 31, 1999. The relative increase in cost resulted from the increase in production of our topical triple antibiotic rolled padded stock and higher product sales for Glofil-125 and Inulin, in addition to a $50,000 write-down to accurately reflect the current value of inventory in stock.
Gross margins for the marketed products for the year ended December 31, 2000 were 59% for Ethamolin, 36% for Glofil-125, 35% for Inulin, and (80%) for the rolled padded stock, compared to the 54%, 51%, 1% and (504%), respectively, for the five month period ended December 31, 1999. The negative gross margin in rolled padded stock for the 1999 period resulted from the initial production and start up costs for that product. The rolled padded stock is made with costly raw materials, and, in addition, our sales price to NutraMax is contractually fixed by our agreement with them. The gross margins for Glofil-125 and Inulin have been historically affected by shrinkage resulting from short shelf lives.
Sales and marketing expense increased to $2,539,000 for the year ended December 31, 2000 from $946,000 for the five month period ended December 31, 1999. This relative increase is principally due to salary and recruiting costs associated with the expansion of the sales force from seven people at December 31, 1999 to nineteen people at December 31, 2000.
General and administrative expense increased to $5,495,000 for the year ended December 31, 2000 from $1,684,000 for the five month period ended December 31, 1999. This relative increase resulted from merger related expenses associated with the consolidation of our corporate offices and a combination of administrative functions, higher expenses for audit, legal and other professional services, a charge for the settlement of the A. R. Baron litigation, as well as a $144,000 write-off of accounts receivable associated with NutraMax.
38
Table of Contents
Research and development expense increased to $5,221,000 for the year ended December 31, 2000 from $2,855,000 for the five month period ended December 31, 1999, due to the increased costs associated with the clinical co-development of Emitasol acquired in the RiboGene merger, legal costs and ongoing obligations associated with drug discovery programs, including those acquired in the RiboGene merger, offset by the termination of our research collaboration with Dainippon in January 2000. As a result we discontinued all related early stage drug discovery programs.
Depreciation and amortization expense increased to $2,559,000 for the year ended December 31, 2000 from $574,000 for the five month period ended December 31, 1999, due to the additional tangible and intangible assets acquired in the RiboGene merger as well as an additional charge of $303,000 to depreciation expense in order to reflect a change in the estimated useful life of certain leased laboratory and manufacturing equipment.
Net interest and other income for the year ended December 31, 2000 increased to $135,000 from $86,000 for the five month period ended December 31, 1999, principally due to the addition of debt and capital lease obligations for leased laboratory equipment with the acquisition of RiboGene.
Net rental income, increased to $261,000 for the year ended December 31, 2000 from $5,000 for the five month period ended December 31, 1999 primarily due to the sublease of a portion of our Hayward facility, commencing in July 2000.
| Year Ended December 31, 2000 Compared to the Year Ended July 31, 1999 |
For the year ended December 31, 2000, we incurred a net loss of $13,762,000 (or $0.56 per share), compared to a net loss of $6,784,000 (or $0.43 per share) for the year ended July 31, 1999.
Revenue for the year ended December 31, 2000 increased 40% to $3,594,000 as compared to $2,569,000 for the year ended July 31, 1999. This increase was primarily due to the recognition of $1,250,000 of technology revenue from the sale of our proprietary antiviral drug research technology, HCV IRES and HCV NS5A-PKR, to Rigel Pharmaceuticals, Inc.
Product sales decreased 15% to $2,134,000 for the year ended December 31, 2000 from $2,518,000 for the year ended July 31, 1999. This decrease was primarily due to a 63% decline in Ethamolin sales versus the prior period. This decrease was partially offset by an increase in sales of our rolled padded stock of Neoflo. Ethamolin sales declines were a result of wholesale stocking during the 1999 period and competition from certain medical devices in the Ethamolin market.
Costs of product sales increased 151% to $1,938,000 for the year ended December 31, 2000 from $771,000 for the year ended July 31, 1999. The increase in cost resulted from the increase in the sales of Neoflo, and, therefore, the related cost of goods sold in addition to a $50,000 write-down to accurately reflect the current value of inventory in stock.
Gross margins for the marketed products for the year ended December 31, 2000 were 59% for Ethamolin, 36% for Glofil-125, 35% for Inulin, and (80%) for the rolled padded stock compared to the 82%, 46%, 55%, and 62%, respectively, for the year ended July 31, 1999.
Sales and marketing expense increased by 49% to $2,539,000 for the year ended December 31, 2000 from $1,703,000 for the year ended July 31, 1999. This increase is principally due to salary and recruiting costs associated with the expansion of the sales force.
General and administrative expense increased 143% to $5,495,000 for the year ended December 31, 2000 from $2,261,000 for the year ended July 31, 1999. This increase resulted from merger related expenses associated with the consolidation of our corporate offices and a combination of administrative functions, higher expenses for audit, legal and other professional services, a charge for the settlement of the A. R. Baron litigation, as well as a write-off of $144,000 of accounts receivable associated with NutraMax.
Research and development expense increased 29% to $5,221,000 for the year ended December 31, 2000 from $4,052,000 for the year ended July 31, 1999, due to the increased costs associated with the clinical
39
Table of Contents
Depreciation and amortization expense increased 107% to $2,559,000 for the year ended December 31, 2000 from $1,239,000 for the year ended July 31, 1999, due to the additional tangible and intangible assets acquired in the RiboGene merger as well as an additional charge of $303,000 to depreciation in order to reflect a change in the estimated useful life of certain leased laboratory and manufacturing equipment.
Net interest and other income for the year ended December 31, 2000 decreased 77% to $135,000 from $590,000 for the year ended July 31, 1999, principally due to the addition of debt and capital lease obligations for leased laboratory equipment with the acquisition of RiboGene.
Net rental income increased to $261,000 for the year ended December 31, 2000 from $83,000 for the year ended July 31, 1999 primarily due to the sublease of a portion of our Hayward facility, commencing in July 2000.
Liquidity and Capital Resources
We have principally funded our activities to date through various issuances of equity securities, which, through December 31, 2001, have raised total net proceeds of $45.6 million, and to a lesser extent through product sales.
At December 31, 2001, we had cash, cash equivalents and short-term investments of $10,571,000 compared to $8,151,000 at December 31, 2000, including a compensating balance of $5,000,000 in each period. At December 31, 2001, working capital was $2,591,000 compared to $1,201,000 at December 31, 2000. The increase in working capital was principally due to the equity investments from Sigma-Tau, coupled with lower operating expenses.
As a result of the merger with RiboGene, we assumed $5 million of long-term debt financing with a bank. The note required us to make monthly interest payments, at prime plus 1% (5.75% at December 31, 2001), with the principal payment due at the end of the three-year term (December 2001). The note was collateralized by a perfected security interest in all of our unencumbered assets of Questcor and required that we maintain depository balances. We were also required to comply with financial covenants based on certain ratios. At June 30, 2000 we were not in compliance with at least one such financial covenant. Hence, we reclassified the $5 million note payable from long-term to short-term debt. In November 2000, the $5 million note payable was converted into a $5 million cash secured facility, the financial covenants were removed and the blanket lien on all assets were released. The interest expense on the $5 million note was fixed at a rate of 2% greater than the Certificate of Deposit interest rate earned on the underlying $5 million cash investment which serves as a compensating bank balance with its use restricted. The note had a 90 day extension period, and the note’s term was extended to March 2002. We paid the note in full on January 18, 2002.
On January 2, 2002, we entered into a revolving accounts receivable line of credit with Pacific Business Funding, a division of Greater Bay Bancorp, the parent company of Cupertino National Bank. Cupertino National Bank previously held the $5 million note. Under the agreement, we can borrow up to the lesser of 80% of our eligible accounts receivable balance or $3,000,000. Interest accrues on outstanding advances at an annual rate equal to prime rate plus four and one-half percent. The term of the agreement is one year and the note automatically renews annually, unless we terminate the agreement. As of March 15, 2002 there were no borrowings under this line of credit.
We lease four buildings with lease terms expiring in 2004 to 2012. Annual rent payments for all of our facilities in 2002 are estimated to be $1,449,000. We use the Union City facility as our headquarters and the Carlsbad facility as our warehousing and distribution center. Annual rent payments for 2002 for these facilities are $660,000. We have subleased laboratory space and laboratory equipment in Hayward, California for a term of six years and anticipate that we will receive $949,000 in 2002 as sublease income to be used to pay the annual rental expense of $651,000 in 2002. The Lee’s Summit facility was closed in May 2001 and this facility
40
Table of Contents
| Payments Due by Period | ||||||||||||||||||||
| Greater Than | 4 to 5 | After 5 | ||||||||||||||||||
| Contractual Obligations | Total | 1 Year or Less | 1 to 3 Years | Years | Years | |||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Long Term Debt
|
$ | 5,489 | $ | 5,368 | $ | 121 | $ | — | $ | — | ||||||||||
|
Capital Lease Obligations
|
58 | 57 | 1 | — | — | |||||||||||||||
|
Operating Leases
|
14,819 | 1,449 | 3,046 | 2,760 | 7,564 | |||||||||||||||
|
Total Contractual Cash Obligations
|
$ | 20,366 | $ | 6,874 | $ | 3,168 | $ | 2,760 | $ | 7,564 | ||||||||||
We also held 83,333 shares of Rigel Pharmaceuticals Inc. (NASD: RIGL) common stock that we received in conjunction with the agreement to sell Rigel exclusive rights to certain of our proprietary antiviral drug research technology. As of December 31, 2001, the shares had a market value of $388,000. It is our intention to sell these securities when it is practical.
On March 15, 2002, in two separate transactions, we issued $4.0 million of 8% convertible debentures to an institutional investor and Sigma-Tau. We will pay interest on the debentures at a rate of 8% per annum on a quarterly basis. The debentures are convertible into shares of our common stock at a fixed conversion price of $1.58 per share (subject to adjustment for stock splits and reclassifications). At the end of the term of the debenture, under certain circumstances, we have the option to repay the principal in stock and, under certain circumstances, we can also redeem the debenture for cash prior to maturity. The debentures mature on March 15, 2005. In conjunction with this transaction, we issued a warrant to both the institutional investor and Sigma-Tau to acquire 1,518,988 shares of common stock at an exercise price of $1.70 per share. Both warrants expire on March 15, 2006. Assuming the conversion and exercise of the above-mentioned debenture and warrant by Sigma-Tau and assuming the exercise of all other outstanding warrants held by Sigma-Tau, Sigma-Tau would own approximately 38% of our outstanding common stock as of March 15, 2002.
We anticipate that our capital needs will decrease in 2002 as compared to the capital required during 2001. We anticipate increased product sales in 2002 as compared to 2001, which should result in a decrease of capital requirements for 2002. Based on our internal forecasts and projections, we believe that our working capital, together with the $4.0 million of cash raised through the above-mentioned convertible debentures and the cash to be generated through the expected sales of our products, will be sufficient to fund operations through the end of 2002. Our future funding requirements will depend on many factors, including; the timing and extent of product sales any expansion or acceleration of our development programs; the results of preclinical studies and clinical trials conducted by Questcor or our collaborative partners or licensees, if any; the acquisition and licensing of products, technologies or compounds, if any; our ability to manage growth; competing technological and market developments; costs involved in filing, prosecuting, defending and enforcing patent and intellectual property claims; the receipt of licensing or milestone fees from current or future collaborative and license agreements, if established; the timing of regulatory approvals; the timing and extent of product sales, and other factors.
We are funding a portion of our operating expenses through our cash flow from product sales, but expect to seek additional funds through public or private equity financing or from other sources. There can be no assurance that additional funds can be obtained on desirable terms or at all. We may seek to raise additional capital whenever conditions in the financial markets are favorable, even if we do not have an immediate need for additional cash at that time.
Sigma-Tau Investment
In April 2001, we entered into a Stock and Warrant Purchase Agreement with Sigma-Tau Finance Holding S.A. (“Sigma-Tau”) pursuant to which Sigma-Tau purchased (i) an aggregate of 2,873,563 shares of common stock at a purchase price of $0.52 per share, for an aggregate purchase price of $1,500,000, and (ii) a warrant to purchase an additional 2,873,563 shares of common stock at a purchase price of $0.52 per share. In May 2001, as required under the rules of AMEX, we sought and received shareholder approval to
41
Table of Contents
In July 2001, we entered into a Stock Purchase Agreement with Sigma-Tau pursuant to which Sigma-Tau purchased 5,279,034 shares of common stock at a purchase price of $0.66 per share, for an aggregate purchase price of $3,500,000.
In December 2001, we entered into a Promotion Agreement with VSL Pharmaceuticals, Inc., a private company owned in part by the principal shareholders of Sigma-Tau, to promote, sell and distribute the product VSL#3 in the U.S. In connection with this Promotion Agreement, we entered into two Stock and Warrant Purchase Agreements, one with Paolo Cavazza and one with Claudio Cavazza, to purchase (i) an aggregate of 640,000 shares of common stock for a purchase price of $1.50 per share (representing a twenty percent premium to our market price for the five days prior to execution of the Purchase Agreements), for an aggregate purchase price of $960,000, and (ii) warrants, at an aggregate purchase price of $300,000, to purchase an additional 1,800,000 shares of common stock at a purchase price of $1.75 per share before December 1, 2003. We issued the common stock related to this transaction in February 2002. Additionally, in connection with this transaction, we entered into a standstill agreement with Sigma-Tau whereby Sigma-Tau and its affiliates agreed to limit purchases of common stock on the open market to no more that 2,000,000 shares through July 2003. Assuming Sigma-Tau exercises its warrants in full, they would own approximately 34% (including the 640,000 shares of common stock issued in February 2002) of our outstanding common stock as of December 31, 2001.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board (“FASB”) Issued Statement of Financial Accounts Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires companies to recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. Our adoption of SFAS 133 as of January 1, 2001, did not have a material impact on our financial statements.
In July 2001, the FASB issued Statement No. 141, Business Combinations (“SFAS 141”) and Statement No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). SFAS 141 establishes new standards for accounting and reporting for business combinations and will require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method will be prohibited. SFAS 142 establishes new standards for goodwill, including the elimination of goodwill amortization to be replaced with methods of periodically evaluating goodwill for impairment. We will adopt these statements during the first quarter of fiscal 2002. We are currently evaluating the provisions of SFAS 142 related to $479,000 of unamortized goodwill and workforce at December 31, 2001.
In August 2001, the FASB issued SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144 supercedes SFAS 121, “Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of” and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business. SFAS 144 establishes a single accounting model for assets to be disposed of by sale whether previously held and used or newly acquired. SFAS 144 retains the provisions of APB No. 30 for presentation of discontinued operations in the income statement, but broadens the presentation to include a component of an entity. SFAS 144 is effective for fiscal years beginning after December 15, 2001 and the interim periods within. We do not believe that the adoption of SFAS 144 on January 1, 2002 will have a material impact on our financial position or results of operations.
42
Table of Contents
Income Taxes
As of December 31, 2001, the Company had federal and state net operating loss carryforwards of approximately $92.1 million and $16.5 million, respectively. The Company also had federal and California research and development tax credits of approximately $1.8 million and $1.1 million. The federal and state net operating loss and credit carryforwards expire at various dates beginning in the years 2006 through 2021, if not utilized.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Rate Risk
Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. We place our investments with high quality issuers and follow internally developed guidelines to limit the amount of credit exposure to any one issuer. Additionally, in an attempt to limit interest rate risk, we follow guidelines to limit the average and longest single maturity dates. We are adverse to principal loss and ensure the safety and preservation of our invested funds by limiting default, market and reinvestment risk. Our investments include money market accounts, commercial paper and corporate notes. The table below presents the amounts and related interest rates of our investment portfolio as of December 31, 2001.
| Fair Value | ||||||||||||
| 2001 | Total | 12/31/01 | ||||||||||
| (In thousands, except | ||||||||||||
| interest rates) | ||||||||||||
|
Assets
|
||||||||||||
|
Cash and cash equivalents (includes a
compensating balance of $5,000)
|
$ | 10,183 | $ | 10,183 | $ | 10,183 | ||||||
|
Average interest rate
|
4.36 | % | — | — | ||||||||
|
Liabilities
|
||||||||||||
|
Notes payable — Short term
|
$ | 5,368 | $ | 5,368 | $ | 5,368 | ||||||
|
Average interest rate
|
8.66 | % | — | — | ||||||||
Item 8. Financial Statements and Supplementary Data
QUESTCOR PHARMACEUTICALS, INC.
CONTENTS
| Page | |||||
|
Report of Ernst & Young LLP, Independent
Auditors
|
46 | ||||
|
Audited Financial Statements
|
|||||
|
Consolidated Balance Sheets
|
47 | ||||
|
Consolidated Statements of Operations
|
48 | ||||
|
Consolidated Statement of Preferred Stock and
Stockholders’ Equity (Deficit)
|
49 | ||||
|
Consolidated Statements of Cash Flows
|
50 | ||||
|
Notes to Consolidated Financial Statements
|
51 | ||||
|
Financial Statement Schedule
|
69 | ||||
43
Table of Contents
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Not Applicable
PART III.
The information required is hereby incorporated by reference from the information contained in our definitive Proxy Statement with respect to our 2002 Annual Meeting of Shareholders, filed with the Commission pursuant to Regulation 14A (the “Proxy Statement”) under the headings “Nominees” and “Company Management”.
Item 11. Executive Compensation
The information required by this item is hereby incorporated by reference from information contained in the Proxy Statement under the heading “Compensation of Directors and Executive Officers.”
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is hereby incorporated by reference from information contained in the Proxy Statement under the heading of “Security Ownership of Certain Beneficial Owners and Management”.
Item 13. Certain Relationships and Related Transactions
The information required by this item is hereby incorporated by reference from information contained in the Proxy Statement under the heading “Certain Relationships and Related Transactions” and “Executive Compensation”.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) The following financial statements are included in Item 8.
Report of Ernst & Young LLP
Balance Sheet as of December 31, 2001 and 2000
| Statements of Operations for years ended December 31, 2001 and 2000, the five months ended December 31, 1999 and 1998 and the year ended July 31, 1999 | |
| Statement of Preferred Stock and Stockholders’ Equity (Deficit) for the years ended December 31, 2001 and 2000, the five months ended December 31, 1999 and the year ended July 31, 1999 | |
| Statements of Cash Flows for years ended December 31, 2001 and 2000 and the five months ended December 31, 1999 and 1998 and the year ended July 31, 1999 |
(a)(2) The following financial statement schedule is included in Item 14(a)(2) Valuation and Qualifying Accounts.
44
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| QUESTCOR PHARMACEUTICALS, INC. |
| BY | /s/ CHARLES J. CASAMENTO |
|
|
|
| Charles J. Casamento | |
| Chairman, President and | |
| Chief Executive Officer |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Charles J. Casamento and Timothy E. Morris, and each of them, his attorney-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
|
/s/ CHARLES J. CASAMENTO
Charles J. Casamento |
Chairman, President and Chief Executive Officer and Director (Principal Executive Officer) | March 19, 2002 | ||
|
/s/ TIMOTHY E. MORRIS
Timothy E. Morris |
Vice President, Finance & Administration and Chief Financial Officer (Principal Financial and Accounting Officer) | March 19, 2002 | ||
|
/s/ ROBERT F. ALLNUTT
Robert F. Allnutt |
Director | March 19, 2002 | ||
|
/s/ FRANK J. SASINOWSKI
Frank J. Sasinowski |
Director | March 19, 2002 | ||
|
/s/ JON S. SAXE
Jon S. Saxe |
Director | March 19, 2002 | ||
|
/s/ JOHN T. SPITZNAGEL
John T. Spitznagel |
Director | March 19, 2002 | ||
|
/s/ ROGER G. STOLL, PH.D.
Roger G. Stoll |
Director | March 19, 2002 | ||
|
/s/ VIRGIL D. THOMPSON
Virgil D. Thompson |
Director | March 19, 2002 | ||
45
Table of Contents
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
We have audited the accompanying consolidated balance sheets of Questcor Pharmaceuticals, Inc. as of December 31, 2001 and 2000, and the related consolidated statements of operations, preferred stock and stockholders’ equity (deficit), and cash flows for the years ended December 31, 2001 and 2000, the five months ended December 31, 1999 and for the year ended July 31, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Questcor Pharmaceuticals, Inc. as of December 31, 2001 and 2000, and the results of its operations and its cash flows for the years ended December 31, 2001 and 2000, the five months ended December 31, 1999 and for the year ended July 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
| /s/ ERNST & YOUNG LLP |
Palo Alto, California
46
Table of Contents
QUESTCOR PHARMACEUTICALS, INC.
| December 31, | December 31, | ||||||||||
| 2001 | 2000 | ||||||||||
| (In thousands, except share | |||||||||||
| amounts) | |||||||||||
| ASSETS | |||||||||||
|
Current assets:
|
|||||||||||
|
Cash and cash equivalents (includes a
compensating balance of $5,000 see Note 9)
|
$ | 10,183 | $ | 6,818 | |||||||
|
Short-term investments
|
388 | 1,333 | |||||||||
|
Accounts receivable, net of allowance for
doubtful accounts of $78 and $56 at December 31, 2001 and
2000, respectively
|
672 | 172 | |||||||||
|
Inventories
|
96 | 56 | |||||||||
|
Prepaid expenses and other current assets
|
377 | 499 | |||||||||
|
Total current assets
|
11,716 | 8,878 | |||||||||
|
Property and equipment, net
|
602 | 1,427 | |||||||||
|
Goodwill and other intangibles, net
|
1,638 | 3,357 | |||||||||
|
Deposits and other assets
|
1,116 | 1,307 | |||||||||
|
Total assets
|
$ | 15,072 | $ | 14,969 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | |||||||||||
|
Current liabilities:
|
|||||||||||
|
Accounts payable
|
$ | 1,095 | $ | 476 | |||||||
|
Accrued compensation
|
575 | 392 | |||||||||
|
Accrued development costs
|
— | 541 | |||||||||
|
Unissued common stock
|
960 | — | |||||||||
|
Other accrued liabilities
|
1,070 | 798 | |||||||||
|
Short-term debt and current portion of long-term
debt
|
5,368 | 5,382 | |||||||||
|
Current portion of capital lease obligations
|
57 | 88 | |||||||||
|
Total current liabilities
|
9,125 | 7,677 | |||||||||
|
Long-term debt
|
121 | 489 | |||||||||
|
Capital lease obligations
|
1 | 59 | |||||||||
|
Other non-current liabilities
|
1,044 | 736 | |||||||||
|
Commitments
|
|||||||||||
|
Preferred stock, no par value, 7,500,000 shares
authorized; 2,155,715 Series A shares issued and
outstanding at December 31, 2001 and 2000 (aggregate
liquidation of $10,000 at December 31, 2001 and 2000)
|
5,081 | 5,081 | |||||||||
|
Stockholders’ equity (deficit):
|
|||||||||||
|
Common stock, no par value, 75,000,000 shares
authorized; 37,389,603 and 25,303,091 shares issued and
outstanding at December 31, 2001 and 2000, respectively
|
74,018 | 66,152 | |||||||||
|
Deferred compensation
|
(20 | ) | (71 | ) | |||||||
|
Accumulated deficit
|
(74,183 | ) | (65,486 | ) | |||||||
|
Accumulated other comprehensive gain (loss)
|
(115 | ) | 332 | ||||||||
|
Total stockholders’ equity (deficit)
|
(300 | ) | 927 | ||||||||
|
Total liabilities and stockholders’ equity
(deficit)
|
$ | 15,072 | $ | 14,969 | |||||||
See accompanying notes.
47
Table of Contents
QUESTCOR PHARMACEUTICALS, INC.
| Year Ended | Five Months Ended | |||||||||||||||||||||
| December 31, | December 31, | Year Ended | ||||||||||||||||||||
| July 31, | ||||||||||||||||||||||
| 2001 | 2000 | 1999 | 1998 | 1999 | ||||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||
|
Revenue:
|
||||||||||||||||||||||
|
Net product sales
|
$ | 5,196 | $ | 2,134 | $ | 624 | $ | 897 | $ | 2,518 | ||||||||||||
|
Contract research and grant revenue
|
367 | 207 | 332 | 11 | 51 | |||||||||||||||||
|
Technology revenue
|
90 | 1,250 | — | — | — | |||||||||||||||||
|
Royalty revenue
|
14 | 3 | — | — | — | |||||||||||||||||
|
Total revenues
|
5,667 | 3,594 | 956 | 908 | 2,569 | |||||||||||||||||
|
Operating costs and expenses:
|
||||||||||||||||||||||
|
Cost of product sales
|
1,483 | 1,938 | 500 | 271 | 771 | |||||||||||||||||
|
Sales and marketing
|
3,129 | 2,539 | 946 | 733 | 1,703 | |||||||||||||||||
|
General and administrative
|
4,707 | 5,495 | 1,684 | 837 | 2,261 | |||||||||||||||||
|
Research and development
|
2,847 | 5,221 | 2,855 | 1,634 | 4,052 | |||||||||||||||||
|
Restructuring costs
|
— | — | 1,530 | — | — | |||||||||||||||||
|
Depreciation and amortization
|
2,207 | 2,559 | 574 | 507 | 1,239 | |||||||||||||||||
|
Loss on discontinued product line
|
677 | — | — | — | — | |||||||||||||||||
|
Acquired in process research and development
|
— | — | 15,168 | — | — | |||||||||||||||||
|
Total operating costs and expenses
|
15,050 | 17,752 | 23,257 | 3,982 | 10,026 | |||||||||||||||||
|
Loss from operations
|
(9,383 | ) | (14,158 | ) | (22,301 | ) | (3,074 | ) | (7,457 | ) | ||||||||||||
|
Interest and other income, net
|
74 | 135 | 86 | 300 | 590 | |||||||||||||||||
|
Rental income, net
|
612 | 261 | 5 | 35 | 83 | |||||||||||||||||
|
Net loss
|
$ | (8,697 | ) | $ | (13,762 | ) | $ | (22,210 | ) | $ | (2,739 | ) | $ | (6,784 | ) | |||||||
|
Net loss per common share:
|
||||||||||||||||||||||
|
Basic and diluted
|
$ | (0.28 | ) | $ | (0.56 | ) | $ | (1.22 | ) | $ | (0.17 | ) | $ | (0.43 | ) | |||||||
|
Weighted average shares of common stock
outstanding
|
31,425 | 24,722 | 18,240 | 15,712 | 15,712 | |||||||||||||||||
See accompanying notes.
48
Table of Contents
QUESTCOR PHARMACEUTICALS, INC.
| Accumulated | ||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Other | Total | |||||||||||||||||||||||||||||||
| Deferred | Accumulated | Comprehensive | Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Compensation | Deficit | Gain/(Loss) | Equity/(Deficit) | |||||||||||||||||||||||||||
| (In thousands, except share amounts) | ||||||||||||||||||||||||||||||||||
|
Balances at July 31, 1998.
|
— | — | 15,711,877 | $ | 41,328 | $ | (87 | ) | $ | (22,730 | ) | $ | — | $ | 18,511 | |||||||||||||||||||
|
Deferred compensation
|
— | — | — | 169 | (169 | ) | — | — | — | |||||||||||||||||||||||||
|
Amortization of deferred compensation
|
— | — | — | — | 187 | — | — | 187 | ||||||||||||||||||||||||||
|
Net loss
|
— | — | — | — | — | (6,784 | ) | — | (6,784 | ) | ||||||||||||||||||||||||
|
Balances at July 31, 1999
|
— | — | 15,711,877 | 41,497 | (69 | ) | (29,514 | ) | — | 11,914 | ||||||||||||||||||||||||
|
Issuance of preferred stock in business
acquisition
|
2,155,715 | 5,081 | — | — | — | — | — | — | ||||||||||||||||||||||||||
|
Issuance of common stock in business acquisition
|
— | — | 8,735,061 | 18,562 | — | — | — | 18,562 | ||||||||||||||||||||||||||
|
Issuance of stock options in business acquisition
|
— | — | — | 5,310 | — | — | — | 5,310 | ||||||||||||||||||||||||||
|
Issuance of common stock to board members
|
— | — | 23,130 | 54 | — | — | — | 54 | ||||||||||||||||||||||||||
|
Amortization of deferred compensation
|
— | — | — | — | 16 | — | — | 16 | ||||||||||||||||||||||||||
|
Comprehensive income (loss):
|
||||||||||||||||||||||||||||||||||
|
Net unrealized loss on investments
|
— | — | — | — | — | — | (20 | ) | (20 | ) | ||||||||||||||||||||||||
|
Net loss
|
— | — | — | — | — | (22,210 | ) | — | (22,210 | ) | ||||||||||||||||||||||||
|
Total comprehensive income/(loss)
|
— | — | — | — | — | — | — | (22,230 | ) | |||||||||||||||||||||||||
|
Balances at December 31, 1999
|
2,155,715 | 5,081 | 24,470,068 | 65,423 | (53 | ) | (51,724 | ) | (20 | ) | 13,626 | |||||||||||||||||||||||
|
Stock compensation for options and warrant
granted to consultants
|
— | — | — | 15 | — | — | — | 15 | ||||||||||||||||||||||||||
|
Deferred compensation
|
— | — | — | 46 | (46 | ) | — | — | — | |||||||||||||||||||||||||
|
Amortization of deferred compensation
|
— | — | — | — | 28 | — | — | 28 | ||||||||||||||||||||||||||
|
Issuance of common stock upon exercise of stock
options
|
— | — | 298,665 | 602 | — | — | — | 602 | ||||||||||||||||||||||||||
|
Issuance of common stock to board members
|
— | — | 60,000 | 16 | — | — | — | 16 | ||||||||||||||||||||||||||
|
Issuance of shares pursuant to employee stock
purchase plan
|
— | — | 93,666 | 50 | — | — | — | 50 | ||||||||||||||||||||||||||
|
Other issuance of common stock
|
— | — | 380,692 | — | — | — | — | — | ||||||||||||||||||||||||||
|
Comprehensive income (loss):
|
||||||||||||||||||||||||||||||||||
|
Net unrealized gain on investments
|
— | — | — | — | — | — | 352 | 352 | ||||||||||||||||||||||||||
|
Net loss
|
— | — | — | — | — | (13,762 | ) | — | (13,762 | ) | ||||||||||||||||||||||||
|
Total comprehensive loss
|
— | — | — | — | — | — | — | (13,410 | ) | |||||||||||||||||||||||||
|
Balances at December 31, 2000
|
2,155,715 | 5,081 | 25,303,091 | 66,152 | (71 | ) | (65,486 | ) | 332 | 927 | ||||||||||||||||||||||||
|
Deferred compensation offset by cancellation of
unvested options to a director
|
— | — | — | (26 | ) | 26 | — | — | — | |||||||||||||||||||||||||
|
Stock compensation for options and warrants
granted to consultants
|
— | — | — | 601 | — | — | — | 601 | ||||||||||||||||||||||||||
|
Amortization of deferred compensation
|
— | — | — | — | 25 | — | — | 25 | ||||||||||||||||||||||||||
|
Issuance of shares pursuant to employee stock
purchase plan
|
— | — | 193,214 | 112 | — | — | — | 112 | ||||||||||||||||||||||||||
|
Issuance of common stock to investors, net of
issuance costs
|
— | — | 8,969,397 | 5,270 | — | — | — | 5,270 | ||||||||||||||||||||||||||
|
Issuance of common stock upon exercise of warrant
|
— | — | 2,873,563 | 1,500 | — | — | — | 1,500 | ||||||||||||||||||||||||||
|
Issuance of common stock upon exercise of stock
options
|
— | — | 50,338 | 58 | — | — | — | 58 | ||||||||||||||||||||||||||
|
Warrant issuances for cash
|
— | — | — | 351 | — | — | — | 351 | ||||||||||||||||||||||||||
|
Comprehensive income (loss)
|
||||||||||||||||||||||||||||||||||
|
Net unrealized loss on investments
|
— | — | — | — | — | — | (447 | ) | (447 | ) | ||||||||||||||||||||||||
|
Net loss
|
— | — | — | — | — | (8,697 | ) | — | (8,697 | ) | ||||||||||||||||||||||||
|
Total comprehensive loss:
|
(9,144 | ) | ||||||||||||||||||||||||||||||||
|
Balances at December 31, 2001
|
2,155,715 | $ | 5,081 | 37,389,603 | $ | 74,018 | $ | (20 | ) | $ | (74,183 | ) | $ | (115 | ) | $ | (300 | ) | ||||||||||||||||
See accompanying notes.
49
Table of Contents
QUESTCOR PHARMACEUTICALS, INC.
| Years Ended | Five Months Ended | ||||||||||||||||||||
| December 31, | December 31, | Year Ended | |||||||||||||||||||
| July 31, | |||||||||||||||||||||
| 2001 | 2000 | 1999 | 1998 | 1999 | |||||||||||||||||
| (In thousands) | |||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||
|
Operating Activities
|
|||||||||||||||||||||
|
Net loss
|
$ | (8,697 | ) | $ | (13,762 | ) | $ | (22,210 | ) | $ | (2,739 | ) | $ | (6,784 | ) | ||||||
|
Adjustments to reconcile net loss to net cash
used in operating activities:
|
|||||||||||||||||||||
|
Stock compensation for options and warrants
granted to consultants
|
601 | 15 | — | — | — | ||||||||||||||||
|
Amortization of deferred compensation
|
25 | 28 | 16 | 123 | 187 | ||||||||||||||||
|
Depreciation and amortization
|
2,207 | 2,559 | 661 | 520 | 1,273 | ||||||||||||||||
|
Charge for in process research and development
|
— | — | 15,168 | — | — | ||||||||||||||||
|
Issuance of common stock to board members
|
— | 16 | 54 | — | — | ||||||||||||||||
|
Loss (gain) on the sale of equipment
|
43 | 21 | 30 | (6 | ) | (6 | ) | ||||||||||||||
|
Loss on discontinued product line
|
677 | — | — | — | — | ||||||||||||||||
|
Write down of licenses and patents
|
81 | — | — | — | — | ||||||||||||||||
|
Changes in operating assets and liabilities, net
of effects from acquisitions:
|
|||||||||||||||||||||
|
Accounts receivable
|
(500 | ) | 1,717 | 303 | 306 | 125 | |||||||||||||||
|
Inventories
|
(40 | ) | 120 | 29 | (70 | ) | (122 | ) | |||||||||||||
|
Prepaid expenses and other current assets
|
122 | (87 | ) | (183 | ) | 15 | 102 | ||||||||||||||
|
Accounts payable
|
619 | (1,968 | ) | (134 | ) | (246 | ) | (53 | ) | ||||||||||||
|
Accrued compensation
|
183 | (1,290 | ) | 1,217 | — | — | |||||||||||||||
|
Deferred revenue
|
— | (167 | ) | (239 | ) | — | — | ||||||||||||||
|
Accrued development costs
|
(541 | ) | (1,038 | ) | (36 | ) | — | — | |||||||||||||
|
Other accrued liabilities
|
149 | 25 | 380 | 23 | — | ||||||||||||||||
|
Other non-current liabilities
|
105 | 532 | — | (6 | ) | 154 | |||||||||||||||
|
Net cash used in operating activities
|
(4,966 | ) | (13,279 | ) | (4,944 | ) | (2,080 | ) | (5,124 | ) | |||||||||||
|
Investing Activities
|
|||||||||||||||||||||
|
Purchase of short-term investments
|
— | — | (909 | ) | (2,308 | ) | (1,148 | ) | |||||||||||||
|
Proceeds from the maturity of short-term
investments
|
— | — | 2,292 | 5,140 | 6,821 | ||||||||||||||||
|
Proceeds from the sale of short-term investments
|
499 | 9,806 | 2,667 | — | — | ||||||||||||||||
|
Net cash from RiboGene acquisition
|
— | — | 9,258 | — | — | ||||||||||||||||
|
Purchase of property, equipment and leasehold
improvements
|
(183 | ) | (85 | ) | (100 | ) | (139 | ) | (651 | ) | |||||||||||
|
Proceeds from the sale of equipment
|
44 | 10 | — | 11 | 11 | ||||||||||||||||
|
Increase in licenses and patents
|
— | — | — | (10 | ) | (14 | ) | ||||||||||||||
|
Increase (decrease) in deposits and other
assets
|
191 | (550 | ) | 269 | 21 | (198 | ) | ||||||||||||||
|
Net cash provided by investing activities
|
551 | 9,181 | 13,477 | 2,715 | 4,820 | ||||||||||||||||
|
Financing Activities
|
|||||||||||||||||||||
|
Issuance of common stock and warrants, net
|
7,290 | 652 | — | — | — | ||||||||||||||||
|
Net proceeds from common stock to be issued
|
960 | — | — | — | — | ||||||||||||||||
|
Issuance of long-term debt
|
— | — | — | 4 | — | ||||||||||||||||
|
Issuance of capital leases
|
— | — | — | 100 | — | ||||||||||||||||
|
Repayment of long-term debt
|
(382 | ) | (370 | ) | (71 | ) | (52 | ) | (95 | ) | |||||||||||
|
Repayments of capital lease obligations
|
(88 | ) | (278 | ) | (59 | ) | (39 | ) | (108 | ) | |||||||||||
|
Net cash (used in) provided by financing
activities
|
7,780 | 4 | (130 | ) | 13 | (203 | ) | ||||||||||||||
|
Increase (decrease) in cash and cash
equivalents
|
3,365 | (4,094 | ) | 8,403 | 648 | (507 | ) | ||||||||||||||
|
Cash and cash equivalents at beginning of period
|
6,818 | 10,912 | 2,509 | 3,016 | 3,016 | ||||||||||||||||
|
Cash and cash equivalents at end of period
|
$ | 10,183 | $ | 6,818 | $ | 10,912 | $ | 3,664 | $ | 2,509 | |||||||||||
|
Supplemental Disclosures of Cash Flow
Information:
|
|||||||||||||||||||||
|
Cash paid for interest
|
$ | 466 | $ | 667 | $ | 11 | $ | 23 | $ | 47 | |||||||||||
|
Noncash Investing and Financing
Activities:
|
|||||||||||||||||||||
|
Equipment subleased under direct finance lease
|
$ | — | $ | 591 | $ | — | $ | — | $ | 104 | |||||||||||
|
Cash Flow for Acquisition of
RiboGene
|
|||||||||||||||||||||
|
Tangible assets acquired (net of $10,324 cash
received)
|
$ | 2,417 | |||||||||||||||||||
|
Acquired in process research and development
|
15,168 | ||||||||||||||||||||
|
Goodwill and other intangibles
|
2,110 | ||||||||||||||||||||
|
Common stock issued
|
(18,562 | ) | |||||||||||||||||||
|
Preferred stock issued
|
(5,081 | ) | |||||||||||||||||||
|
Stock issued
|
(5,310 | ) | |||||||||||||||||||
|
Cash received for acquisition (net of $1,066
acquisition costs)
|
$ | (9,258 | ) | ||||||||||||||||||
See accompanying notes.
50
Table of Contents
QUESTCOR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
| Organization and Business Activity |
Questcor Pharmaceuticals, Inc., formerly Cypros Pharmaceutical Corporation, (the “Company”) was incorporated in California in 1990. The Company markets and sells acute-care, hospital-based products. The Company sells four products, HP Acthar® Gel (“Acthar”), an injectable drug that treats seriously ill children with a seizure complex, referred to as infantile spasm or West Syndrome, Ethamolin®, an injectable drug that treats bleeding esophageal varices, GlofilTM-125 and Inulin, both injectable drugs that assess kidney function by measuring glomerular filtration rate. In conjunction with the acquisition of RiboGene, Inc. (“RiboGene”), the Company changed its fiscal year end from July 31 to December 31. RiboGene had operated using a fiscal year ending December 31. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
| Matters Affecting Ongoing Operations |
In May 2000, the Company’s sole customer for its NeofloTM product, NutraMax Products, Inc., filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code. The NutraMax bankruptcy filing has had a negative impact on the Company’s sales and cash flow during calendar year 2000 and first quarter of 2001. On April 2, 2001, the U.S. Bankruptcy Court granted NutraMax a motion to terminate the Company’s supply agreement effective that date. In May 2001, the Company closed its Lee’s Summit manufacturing facility where the NeofloTM product was being produced. As of December 31, 2001, there were no definitive purchasers of the NeofloTM product and its related assets, and as a result, the Company recorded a loss on the discontinuance of the NeofloTM product line of $677,000.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has experienced recurring operating losses since inception. From inception to December 31, 2001, the Company incurred cumulative net losses of approximately $74.2 million. The Company has cash, cash equivalents and short-term investments at December 31, 2001 of $10.6 million (including a compensating balance of $5 million, see Note 9).
On March 15, 2002, in two separate transactions, the Company issued $4.0 million of 8% convertible debentures to an institutional investor and Sigma-Tau. The Company will pay interest on the debentures at a rate of 8% per annum on a quarterly basis. The debentures are convertible into shares of the Company’s common stock at a fixed conversion price of $1.58 per share (subject to adjustment for stock splits and reclassifications). The debentures mature on March 15, 2005. In conjunction with this transaction, the Company issued warrants to both the institutional investor and Sigma-Tau to acquire an aggregate of 1,518,988 shares of common stock at an exercise price of $1.70 per share. Both warrants expire on March 15, 2006 (see Note 17).
While historical losses have been significant, the Company expects that based upon funds received from the convertible debentures, together with the expected sales from its marketed products, it will have sufficient capital to fund its operating requirements through the end of 2002.
| Use of Estimates |
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. Actual results could differ from those estimates.
51
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Cash Equivalents and Investments |
The Company considers highly liquid investments with maturities from the date of purchase of three months or less to be cash equivalents. The Company determines the appropriate classification of investment securities at the time of purchase and reaffirms such designation as of each balance sheet date. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, if any, reported in a separate component of stockholders’ equity. The cost of securities sold is based on the specific identification method. Realized gains and losses, if any, are included in the statement of operations, in interest and other income, net.
| Concentration of Risk |
Financial instruments which subject the Company to potential credit risk consist of cash, cash equivalents, short-term investments and accounts receivable. The Company invests its cash in high credit quality government and corporate debt instruments and believes the financial risks associated with these instruments are minimal. The Company extends credit to its customers, primarily large drug wholesalers and distributors and certain hospitals and treatment centers, in connection with its product sales. The Company has not experienced significant credit losses on its customer accounts, with the exception of the product sales to NutraMax on which the Company wrote off $29,000 in 2001 and $144,000 in 2000. Three customers accounted for 29%, 23% and 22% of product sales for the year ended December 31, 2001. NutraMax individually accounted for 29% of product sales for the year ended December 31, 2000. Three customers individually accounted for 24%, 17% and 14% of sales for the five months ended December 31, 1999. Two customers individually accounted for 23% and 21% of sales for the year ended July 31, 1999. The percentages above represent different customers for each year.
The Company relies on third party sole-source manufacturers to produce its finished goods and raw materials. Third party manufacturers may not be able to meet the Company’s needs with respect to timing, quantity or quality. All of the Company’s manufacturers are sole-source manufacturers and no alternative suppliers exist.
| Inventories |
Inventories are stated at the lower of cost (first-in, first-out method) or market value.
| Property and Equipment |
Property and equipment are stated at cost and depreciated over the estimated useful lives of the assets (generally five years) using the straight-line method. Leasehold improvements are amortized over the lesser of the estimated useful lives (five years) or the remaining term of the lease.
| Goodwill and Other Intangible Assets |
Goodwill was generated from the merger with RiboGene and is being amortized on a straight-line basis over three years. Other intangible assets consist of the assembled workforce, purchased technology and license and patent costs. Purchased technology associated with the acquisitions of GlofilTM-125, Inulin and Ethamolin® is stated at cost and amortized over the estimated sales life of the product (seven years). The assembled workforce and purchased technology acquired from the merger with RiboGene are amortized on a straight-line basis over the period estimated to be benefited (three years). License and patent costs are amortized over the estimated economic lives (generally six years) commencing at the time the license rights are granted or the patents are issued (see Note 8).
52
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Accounting Standard on Impairment of Long-Lived Assets |
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Company regularly evaluates its long-lived assets for indicators of possible impairment, whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Under SFAS 121, an impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Impairment, if any, is assessed using discounted cash flows.
| Revenue Recognition |
Revenues from product sales of Acthar®, Ethamolin®, GlofilTM-125, and Inulin are recognized based upon shipping terms, net of estimated reserves for sales returns and discounts. Revenues from GlofilTM-125 unit dose sales are recognized upon receipt by the Company of monthly sales reports from its third-party distributor. The Company sells product to wholesalers, who in turn sell our products to doctors and hospitals. The Company’s return policy allows customers to return expired product within six months beyond the expiration date. All returns are subject to quality assurance reviews prior to acceptance. We do not require collateral from our customers.
Revenue earned under collaborative research agreements is recognized as the related services are performed and research expenses are incurred. Amounts received in advance of services to be performed are recorded as deferred revenue until the related expenses are incurred.
The Company has received government grants which support the Company’s research effort in specific research projects. These grants generally provide for reimbursement of approved costs incurred as defined in the various awards.
| Research and Development |
Research and development expenditures, including direct and allocated expenses, are charged to expense as incurred.
| Net Loss Per Share |
Basic and diluted net loss per share is based on net loss for the relevant period, divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share gives effect to all potential dilutive common shares outstanding during the period such as options, warrants, convertible preferred stock, and contingently issuable shares. Diluted net loss per share has not been presented separately as, due to the Company’s net loss position, it is anti-dilutive. Had the Company been in a net income position at December 31, 2001, shares used in calculating diluted earnings per share would have included the dilutive effect of an additional 6,878,466 stock options, 2,155,715 convertible preferred shares, placement unit options for 986,898 shares and 3,185,185 warrants. For the twelve months ended December 31, 2000 shares used in calculating diluted earnings per share would have included the dilutive effect of an additional 5,580,068 stock options, 2,155,715 convertible preferred shares, placement unit options for 986,898 shares and 989,664 warrants. For the five months ended December 31, 1999, an aggregate of 9,308,734 stock options, preferred shares, placement unit options and warrants would have been included in the diluted net loss per share calculation. For the year ended July 31, 1999, an aggregate of 2,268,686 stock options and warrants would have been included in the diluted net loss per share calculation.
53
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Stock Compensation |
The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) and related interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under SFAS No. 123, “Accounting for Stock-Based Compensation” requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, when the exercise price of the Company’s employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized.
For equity awards to non-employees, including lenders and lessors and consultants, the Company applies the Black-Scholes method to determine the fair value of such instruments. The options and warrants granted to non employees are re-measured as they vest and the resulting value is recognized as expense over the period of services received or the term of the related financing.
| Comprehensive Income |
SFAS No. 130, “Reporting Comprehensive Income” established standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. The Company provides the required disclosure in the Statement of Preferred Stock and Stockholders’ Equity (Deficit).
| Segment Information |
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” redefines segments and requires companies to report financial and descriptive information about their operating segments. The Company has determined that it operates in one business segment and therefore SFAS 131 does not affect the Company’s financial statements.
Product sales revenue consists of the following (in thousands):
| Five Months | ||||||||||||||||
| Year Ended | Year Ended | Ended | Year Ended | |||||||||||||
| December 31, | December 31, | December 31, | July 31, | |||||||||||||
| 2001 | 2000 | 1999 | 1999 | |||||||||||||
|
HP Acthar® Gel
|
$ | 2,141 | $ | — | $ | — | $ | — | ||||||||
|
Ethamolin®
|
1,695 | 618 | 319 | 1,522 | ||||||||||||
|
GlofilTM-125
|
982 | 691 | 251 | 621 | ||||||||||||
|
Inulin
|
317 | 207 | 19 | 208 | ||||||||||||
|
NeofloTM
|
61 | 618 | 35 | 167 | ||||||||||||
| $ | 5,196 | $ | 2,134 | $ | 624 | $ | 2,518 | |||||||||
| Recently Issued Accounting Standards |
In June 1998, the Financial Accounting Standards Board Issued Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires companies to recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. The Company’s adoption of SFAS 133 as of January 1, 2001 did not have a material impact on its financial statements.
54
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In July 2001, the FASB issued Statement No. 141, “Business Combinations” (SFAS 141) and Statement No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). SFAS 141 establishes new standards for accounting and reporting for business combinations and will require that the purchase method of accounting be used for all business combinations initiated after June 30, 200l. Use of the pooling-of-interests method will be prohibited. SFAS 142 establishes new standards for goodwill, including the elimination of goodwill amortization to be replaced with methods of periodically evaluating goodwill for impairment. The Company will adopt these statements during the first quarter of fiscal 2002. The Company is currently evaluating the provisions of SFAS 142 related to $479,000 of unamortized goodwill and workforce at December 31, 2001.
In August 2001, the FASB issued SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144 supercedes SFAS 121, “Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of” and the accounting and reporting provisions of Accounting Principals Board Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business. SFAS 144 establishes a single accounting model for assets to be disposed of by sale whether previously held and used or newly acquired. SFAS 144 retains the provisions of APB No. 30 for presentation of discontinued operations in the income statements, but broadens the presentation to include a component of an entity. SFAS 144 is effective for fiscal years beginning after December 15, 2001 and the interim periods within. The Company does not believe that the adoption of SFAS 144 on January 1, 2002 will have a material impact on the Company’s financial position or results of operations.
| Reclassifications |
Certain amounts in the prior years’ financial statements have been reclassified to conform with the current year presentation.
2. Acquisition of RiboGene, Inc.
On November 17, 1999 the Company completed its merger with RiboGene. The Company issued 8,735,061 shares of its common stock and 2,155,715 shares of its preferred stock, valued at $18.6 million and $5.1 million, respectively, for all the outstanding common and preferred stock of RiboGene. In addition, the Company assumed RiboGene’s outstanding stock options and warrants, valued at $5.3 million, and incurred transaction and other costs of approximately $1.0 million. The transaction was accounted for under the purchase method of accounting. Accordingly, the results of operations of RiboGene are included in the consolidated statement of operations from the acquisition date.
The purchase price was allocated based upon the estimated fair value of the assets acquired as follows (in thousands):
|
In process research and development
|
$ | 15,168 | ||
|
Net tangible assets acquired
|
12,742 | |||
|
Goodwill
|
1,023 | |||
|
Developed technology
|
470 | |||
|
Assembled workforce
|
616 | |||
| $ | 30,019 | |||
The Company calculated amounts allocated to in-process research and development using established valuation techniques in the pharmaceutical industry, and expensed such amounts in the quarter the acquisition was consummated because technological feasibility of the in-process technologies acquired had not been
55
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
achieved and no alternative future uses had been established. The Company computed its valuation of purchased in-process research and development using a discounted cash flow analysis on the anticipated income stream to be generated by the purchased technologies. In process research and development represents the estimated value of EmitasolTM which was being tested in a Phase II clinical trial.
In addition to in-process research and development, the excess purchase price over the estimated value of the net tangible assets acquired was allocated to developed technology, assembled work force and goodwill. The value assigned to developed technology was based upon future discounted cash flows related to the projected income streams from sales of EmitasolTM in a particular country where the drug has received regulatory approval. The value of the assembled workforces was based upon the cost to replace those work forces. Amounts allocated to goodwill and other intangibles are amortized on a straight-line basis over a three-year period.
The following summary unaudited proforma information shows the proforma combined results of Questcor and RiboGene for the five months ended December 31, 1999 and for the year ended July 31, 1999, as if the RiboGene acquisition had occurred on August 1, 1998 at the purchase price established in December 1999. Accordingly, the results are not necessarily indicative of those which would have occurred had the acquisition actually been made on August 1, 1998 or of future operations of the combined companies. The following net loss and loss per share amounts have been adjusted to exclude the write-off of acquired in process research and development of $15.2 million and include the goodwill and other intangible amortization of $293,000 for the five months ended December 31, 1999 and $703,000 for the year ended July 31, 1999.
| Five Months Ended | Year Ended | |||||||
| December 31, | July 31, | |||||||
| 1999 | 1999 | |||||||
| (In thousands except per share | ||||||||
| amounts) | ||||||||
|
Net revenue
|
$ | 1,698 | $ | 4,948 | ||||
|
Net loss
|
(12,746 | ) | (18,366 | ) | ||||
|
Basic and diluted net loss per share
|
(0.52 | ) | (0.75 | ) | ||||
As a result of the RiboGene acquisition, the Company incurred restructuring costs of $1.5 million that consisted primarily of employee severance costs, of which $594,000 was accrued at December 31, 1999 and paid in the first quarter of 2000. Employee severance costs relate to the termination of approximately 20 former Cypros Pharmaceutical’s employees in the general and administrative, research and development, clinical and regulatory, and sales and marketing departments following the merger with RiboGene.
During 2000, the Company issued 380,692 common stock to certain former stockholders to replace their shares of Questcor common stock which should have been issued in the RiboGene acquisition but which apparently had been lost. The Company decided to not establish a bond required by the transfer agent to cancel the original shares.
3. Development and Collaboration Agreements
In January 1998, RiboGene entered into a collaboration with Dainippon for two of its targets in the antibacterial program. As part of the collaboration, Dainippon agreed to provide research support payments over three years, and fund additional research and development at Dainippon. Following the merger with RiboGene, the Company recognized approximately $240,000 of research revenue related to this agreement. Collaborative research payments from Dainippon are non-refundable. In January 2000, the Company modified its existing agreement with Dainippon. In exchange for a $2.0 million cash payment and potential future milestone and royalty payments, the Company has granted an exclusive, worldwide license to Dainippon to use the Company’s ppGpp Degradase and Peptide Deformylase technology for the research, development and commercialization of pharmaceutical products. The Company has retained the right to co-promote, in Europe
56
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and the U.S., certain products resulting from the arrangement. The Company will be entitled to receive milestone payments upon the achievement of clinical and regulatory milestones in the amount of $5.0 million in Japan and $5.0 million in one other major market. Additionally, the Company will receive a royalty on net sales that will range from 5% to 10%, depending on sales volume and territory. Both companies have agreed to terminate the antibacterial research collaboration that was established in January 1998 between the two companies. The original agreement anticipated a third year of research collaboration between the two firms. Hence, all drug discovery efforts at the Company have ceased and have been transferred to Dainippon in Osaka, Japan.
On September 27, 2000 Questcor entered into an agreement with Rigel Pharmaceuticals, Inc. to sell exclusive rights to certain proprietary antiviral drug research technology. In exchange for a cash payment of $750,000, 83,333 shares of Rigel’s preferred stock valued at $500,000 (or $6 per share) and potential future milestone and royalty payments, Questcor has assigned to Rigel certain antiviral technology, including its Hepatitis C drug discovery technology for the research, development and commercialization of pharmaceutical products. As part of this agreement the Company assigned to Rigel the exclusive worldwide license to certain patent rights and technology relating to the interaction of the hepatitis C virus NS5A protein and PKR which the Company received from the University of Washington pursuant to an agreement entered into with the University of Washington in 1997. As a result, the Company has no further interest in any patent or technology rights under any agreement with the University of Washington.
As a result of the merger with RiboGene, the Company assumed an option and license agreement entered into with Roberts Pharmaceutical Corporation, a subsidiary of Shire Pharmaceuticals Ltd, (“Shire”) in July 1998 for the development of EmitasolTM, an intranasally administered drug being developed for the treatment of diabetic gastroparesis and for the prevention of delayed onset emesis. Under the terms of the agreement, Shire had the option to acquire exclusive North American rights to EmitasolTM. This option expired in July 2001. Under the collaboration agreement, the Company was obligated to fund one-half of the clinical development expenses for EmitasolTM up to an aggregate of $7.0 million. Through December 31, 2001 the Company has made development payments for EmitasolTM, under the terms of the agreement with Shire, totaling $4.6 million, consisting of $4.1 million paid to Shire and approximately $500,000 paid to other parties for allowable expenses including patent and trademark costs. Shire asserts that the Company owes $348,000 in development expenses incurred by it under the collaboration agreement prior to the expiration of the option, which the Company has accrued for as of December 31, 2001. The Company has requested that Shire return certain items to the Company, including the transfer of the Investigational New Drug applications (“INDs”) relating to EmitasolTM and the assignment of the intellectual property relating to EmitasolTM generated in the course of the development program. Shire also holds all 2,155,715 outstanding shares of the Company’s Series A preferred stock which it originally acquired from RiboGene for a payment of $10 million. The Company intends to seek a new corporate partner to continue the development of EmitasolTM in North America.
The Company had licenses to various patents for Cordox. The license agreements require payments of cash, warrants or the issuance of stock options to the licensors upon accomplishment of various milestones and the payment of royalties to the licensors upon the commercial sale of products incorporating the licensed compound. In September 2001 the Company completed its final review of a study conducted on CordoxTM, and based on the results, decided to discontinue all further work on CordoxTM. The Company intends to, therefore, terminate all agreements related to CordoxTM. The Company has also abandoned any patents related to CordoxTM.
In February 2001, the Company announced that it had exclusively licensed certain antifungal drug research technology to Tularik, Inc. In exchange, the Company received a $90,000 cash payment, $30,000 for the reimbursement of patent expenses and is entitled to future potential milestone and royalty payments. In
57
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
addition, the Company transferred to Tularik certain biological and chemical reagents to be used in the discovery and development of novel antifungal agents.
In June 2001, the Company signed a Letter of Understanding with Fabre Kramer Pharmaceuticals, Inc (“Fabre Kramer”) of Houston, TX, to jointly pursue the worldwide development and commercialization of HypnostatTM (intranasal traizolam) for insomnia and PanistatTM (intranasal alprazolam) for panic disorders, two of its product candidates. In January 2002 the Company modified the original Letter of Understanding and signed a new Letter of Understanding with Fabre Kramer whereby the firms anticipate to license these products to Fabre Kramer in exchange for milestone and revenue share payments.
In December 2001, the Company entered into a promotion agreement with VSL Pharmaceuticals, Inc., a private company owned in part by the major shareholders of Sigma-Tau to promote, sell and distribute VSL#3TM in the U.S. VSL#3TM is a patented probiotic dietary supplement used to promote normal gastrointestinal (GI) function. The promotion agreement requires the Company to remit quarterly payments, based on a percentage of net sales of VSL#3TM, to VSL Pharmaceuticals. The Company will also receive from VSL Pharmaceuticals a percentage of net sales for incremental expenses related to certain warehousing and customer support services.
4. Product Acquisition
In July 2001, the Company had entered into an Asset Purchase agreement with Aventis Pharmaceuticals Inc. (“Aventis”) to acquire the worldwide rights to Acthar® as well as inventory and certain assets used to manufacture Acthar®. Acthar® is a corticotropin product that has been used, as part of a special program administered by the National Organization for Rare Disorders (“NORD”), to treat seriously ill children with a seizure complex, referred to as infantile spasm or West Syndrome, a potentially fatal disorder, and patients with multiple sclerosis who experience severe and painful episodes of “flare”. The Company paid an upfront fee, has agreed to pay an annual royalty on net sales above a predetermined amount and has agreed to acquire certain remaining inventory at a predetermined price. Aventis has also agreed to supply Acthar® at the predetermined price until the earlier of the transfer of the manufacturing process to another vendor of July 27, 2002. The Company expects to have adequate supply of Acthar® to support forecasted demand through December 2002. The Company began shipping Acthar® in the third quarter of 2001.
5. Investments
Following is a summary of investments, at fair value, based on quoted market prices for these investments (in thousands):
| December 31, | December 31, | |||||||
| 2001 | 2000 | |||||||
|
Money market funds
|
$ | 4,943 | $ | 1,275 | ||||
|
Certificates of deposit (compensating balance,
see Note 9)
|
5,000 | 5,000 | ||||||
|
Corporate debt securities
|
— | 499 | ||||||
|
Corporate equity investments
|
388 | 834 | ||||||
| 10,331 | 7,608 | |||||||
|
Less amounts classified as cash equivalents
|
(9,943 | ) | (6,275 | ) | ||||
|
Short-term investments
|
$ | 388 | $ | 1,333 | ||||
At December 31, 2001, the equity investment had a cost of $500,000 and an unrealized loss of $112,000. At December 31, 2000, the equity investment had a cost of $500,000 and an unrealized gain of $334,000. At December 31, 2001, and 2000, the differences between the fair value and amortized cost of all other
58
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
investments were insignificant. The Company has not experienced any significant realized gains or losses on its investments.
6. Inventories
Inventories consist of the following (in thousands):
| December 31, | December 31, | |||||||
| 2001 | 2000 | |||||||
|
Raw materials
|
$ | — | $ | 41 | ||||
|
Finished goods
|
152 | 43 | ||||||
|
Less allowance for obsolete inventories
|
(56 | ) | (28 | ) | ||||
| $ | 96 | $ | 56 | |||||
7. Property and Equipment
Property and equipment consist of the following (in thousands):
| December 31, | December 31, | |||||||
| 2001 | 2000 | |||||||
|
Laboratory equipment
|
$ | 477 | $ | 1,014 | ||||
|
Office equipment, furniture and fixtures
|
895 | 887 | ||||||
|
Leasehold improvements
|
206 | 806 | ||||||
| 1,578 | 2,707 | |||||||
|
Less accumulated depreciation and amortization
|
(976 | ) | (1,280 | ) | ||||
| $ | 602 | $ | 1,427 | |||||
Depreciation and amortization expense totaled $580,000 for the year ended December 31, 2001 and $886,000 for the year ended December 31, 2000, respectively.
8. Goodwill and Other Intangibles
Goodwill and other intangibles consist of the following (in thousands):
| December 31, | December 31, | |||||||
| 2001 | 2000 | |||||||
|
Goodwill
|
$ | 1,023 | $ | 1,023 | ||||
|
Purchased technology
|
6,752 | 6,752 | ||||||
|
Assembled workforce
|
616 | 616 | ||||||
|
Licenses and patents
|
— | 351 | ||||||
| 8,391 | 8,742 | |||||||
|
Less accumulated amortization
|
(6,753 | ) | (5,385 | ) | ||||
| $ | 1,638 | $ | 3,357 | |||||
The Company wrote off the remaining unamortized balance associated with licenses and patents of $81,000 as these were related to drugs that are no longer in development.
59
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
9. Long-Term Debt
Long-term debt consists of the following (in thousands):
| December 31, | December 31, | ||||||||
| 2001 | 2000 | ||||||||
|
Note payable to a bank due March 2002 (with
exercise of 90 day extension), collateralized by a cash
secured facility, bearing interest at CD Rate plus 2%
|
$ | 5,000 | $ | 5,000 | |||||
|
Notes payable for equipment financing due August
2002, November 2002, February 2003, and April 2003
collateralized by the underlying equipment, bearing interest at
12.72%
|
489 | 871 | |||||||
| 5,489 | 5,871 | ||||||||
|
Less current portion
|
(5,368 | ) | (5,382 | ) | |||||
|
Total
|
$ | 121 | $ | 489 | |||||
The cost of equipment specifically pledged under these agreements totals $1.5 million and $1.7 million at December 31, 2001 and 2000, respectively.
In December 1998, RiboGene borrowed $5.0 million pursuant to a long-term note payable to a bank. The note required monthly interest only payments at prime plus 1.0%. The rate at December 31, 2001 was 5.75%. In November 2000, the $5.0 million long-term note payable was converted into $5.0 million cash secured facility. The minimum $5.0 million compensatory balance, which was invested in certificates of deposit, is included in cash and cash equivalents. The note was paid in full on January 18, 2002.
The amounts due for notes payable for equipment financing in 2002 and 2003, are $368,000 and $121,000, respectively.
The fair value of notes payable is estimated based on current interest rates available to the Company for debt instruments of similar terms, degrees of risk and remaining maturities. The carrying value of these obligations approximate their respective fair values as of December 31, 2001 and 2000. Interest expense was $465,000, $729,000 and $10,000 for the years ended December 31, 2001 and 2000 and the five months ended December 31, 1999, respectively.
60
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
10. Commitments
| Leases |
The Company leases its office and distribution facilities under operating lease agreements and certain equipment under capital lease agreements, the terms of which range from 5 years to 15 years. Minimum future obligations under both operating and capital leases as of December 31, 2001 are as follows (in thousands):
| Operating | Capital | |||||||
| Leases | Leases | |||||||
|
2002
|
$ | 1,449 | $ | 60 | ||||
|
2003
|
1,497 | 1 | ||||||
|
2004
|
1,549 | — | ||||||
|
2005
|
1,466 | — | ||||||
|
2006
|
1,294 | — | ||||||
|
Thereafter
|
7,564 | — | ||||||
| 14,819 | 61 | |||||||
|
Less amounts representing interest
|
(3 | ) | ||||||
|
Present value of minimum lease payments
|
58 | |||||||
|
Current portion of capital lease obligations
|
(57 | ) | ||||||
|
Long-term capital lease obligations
|
$ | 1 | ||||||
The net book value of the equipment acquired under capital leases totaled $153,000 (net of accumulated amortization of $370,000) at December 31, 2001, and $319,000 (net of accumulated amortization of $191,000) at December 31, 2000. Amortization of equipment under capital leases is included within depreciation expense.
In July 2000, the Company entered into an agreement to sublease 15,000 square feet of laboratory and office space including sub-leasing its laboratory equipment for its Hayward, California facility. Due to the termination of the Company’s drug discovery programs, the space and equipment were no longer needed. Thus, the Company subleased this space. The current sublessee of the Hayward facility subleased and fully occupied the 30,000 square feet facility after the Company’s relocation occurred in May 2001.
On October 26, 2000, the Company entered into an agreement to lease a new facility in Union City, California. The initial lease term is for 120 months, with an option for an additional five years. As a condition of this agreement, the Company provided an irrevocable Letter of Credit in the amount of $659,000 for a period of 24 months, with the face value of the Letter of Credit, subject to certain conditions, declining thereafter. The Company entered into this new lease agreement in order to take advantage of lower rent costs as laboratory space is no longer necessary. This letter of credit is included in “Deposits and other assets” on the balance sheet.
Rent expense totaled $1,556,000 for the year ended December 31, 2001, $1,037,000 for the year ended December 31, 2000, $313,000 for the five months ended December 31, 1999 and $509,000 for the year ended July 31, 1999. Rent expense comprises the cost associated with four buildings leased by the Company including its current headquarters located in Union City, California, its former headquarters in Hayward, California, Carlsbad, California, and a production facility in Lee’s Summit, Missouri. Net rental income totaled $612,000 for the year ended December 31, 2001, $261,000 for the year ended December 31, 2000, $5,000 for the five months ended December 31, 1999 and $83,000 for the year ended July 31, 1999. In the above table, minimum lease payments have not been reduced by minimum sublease income of approximately
61
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$949,000, $997,000, $1,048,000, $1,100,000 and $563,000 in the years ended December 31, 2002, 2003, 2004, 2005 and 2006, respectively.
11. Preferred Stock and Stockholders’ Equity
| Preferred Stock |
Pursuant to its Articles of Incorporation, the Company is authorized to issue up to 7,500,000 shares of Preferred Stock in one or more series and has issued 2,155,715 shares of its Series A Preferred Stock, as of December 31, 2001. The holders of outstanding shares of Series A Preferred Stock are entitled to receive dividends concurrently with the Common Stock, if any, as may be declared from time to time by the Board of Directors out of assets legally available therefrom. The holders of Series A Preferred Stock are entitled to the number of votes equal to the number of shares of Common Stock into which each share of Series A Preferred Stock could be converted on the record date. Each share of Series A Preferred Stock is convertible, at the option of the holder of such share, into one share of Common Stock, subject to adjustments for stock splits, stock dividends or combinations of outstanding shares of Common Stock. The Articles of Incorporation authorizes the issuance of Preferred Stock in classes, and the Board of Directors may designate and determine the voting rights, redemption rights, conversion rights and other rights relating to such class of Preferred Stock, and to issue such stock in either public or private transactions.
The Series A Preferred Stock has a liquidation preference equal to $4.64 per share plus all declared and unpaid dividends which is payable upon the occurrence of a liquidation, consolidation, merger or the sale of substantially all of the Company’s stock or assets. The Company excluded the Series A Preferred Stock from total stockholders’ equity due to the nature of the liquidation preference of the preferred stock.
| Common Stock |
The holders of outstanding shares of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of assets legally available therefore, subject to the payment of preferential dividends with respect to any Preferred Stock that may be outstanding. In the event of a liquidation, dissolution and winding-up of the Company, the holders of outstanding Common Stock are entitled to share ratably in all assets available for distribution to the Common Stock shareholders after payment of all liabilities of the Company, subject to rights of the Preferred Stock. The holders of the Common Stock are entitled to one vote per share.
In April 2001, the Company entered into a Stock and Warrant Purchase Agreement with Sigma-Tau pursuant to which Sigma-Tau purchased (i) an aggregate of 2,873,563 shares of common stock at a purchase price of $0.52 per share, for an aggregate purchase price of $1,500,000, and (ii) a warrant to purchase an additional 2,873,563 shares of common stock at a purchase price of $0.52 per share. In May 2001, as required under the rules of AMEX, the Company sought and received shareholder approval to allow for full exercise of the warrant. In July 2001, Sigma-Tau assigned the warrant to Paolo Cavazza and Claudio Cavazza, the principal shareholders of Sigma-Tau, who exercised the warrant in full, purchasing 2,873,563 shares of common stock at a purchase price of $0.52 per share, resulting in aggregate proceeds to the Company of $1,500,000 (including the $100,000 originally paid by Sigma-Tau to acquire the warrant).
In July 2001, the Company entered into a Stock Purchase Agreement with Sigma-Tau pursuant to which Sigma-Tau purchased 5,279,034 shares of common stock at a purchase price of $0.66 per share, for an aggregate purchase price of $3,500,000.
In December 2001, the Company entered into a Promotion Agreement with VSL Pharmaceuticals, Inc., a private company owned in part by the principal shareholders of Sigma-Tau, to promote, sell and distribute the product VSL#3 in the U.S. In connection with this Promotion Agreement, the Company entered into two Stock and Warrant Purchase Agreements, one with Paolo Cavazza and one with Claudio Cavazza, to
62
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
purchase (i) an aggregate of 640,000 shares of common stock for a purchase price of $1.50 per share (representing a twenty percent premium to its market price for the five days prior to execution of the Purchase Agreements), for an aggregate purchase price of $960,000, and (ii) warrants, at an aggregate purchase price of $300,000, to purchase an additional 1,800,000 shares of common stock at a purchase price of $1.75 per share before December 1, 2003. The Company issued the common stock related to this transaction in February 2002, and as such, it is reflected as “Unissued common stock” on the Company’s balance sheet. Additionally, in connection with this transaction, the Company entered into a standstill agreement with Sigma-Tau whereby Sigma-Tau and its affiliates agreed to limit purchases of common stock on the open market to no more that 2,000,000 shares through July 2003. Assuming Sigma-Tau exercises its warrants in full, they would own approximately 34% (including the 640,000 shares of common stock issued in February 2002) of the Company’s outstanding common stock as of December 31, 2001.
On April 30, 2001, the Company closed a financing which totaled $442,000. This investment came from a group of individual investors. The Company issued an aggregate of 816,800 shares of common stock and sold warrants to purchase an additional 408,400 shares of common stock with an exercise price of these warrants of $0.64 per share. The warrants are exercisable from the date of issuance until the close of business on April 30, 2006.
| Placement Agent Unit Options |
As part of the acquisition of RiboGene, the Company assumed placement agent options from a 1997 offering of preferred stock by RiboGene. At December 31, 2001, options to purchase 986,898 shares of common stock and 61,475 Class A warrants were outstanding at an aggregate exercise price of approximately $1,096,000. The Class A warrants have an exercise price of $4.64 per share.
| Warrants |
The Company has 3,123,710 warrants outstanding at December 31, 2001 (excluding 61,475 Class A warrants underlying Placement Agent Unit Options), entitling the holders thereof to purchase a total of 4,172,083 shares of Common Stock.
| Weighted Average | Weighted Average | ||||||||||||
| Exercise Price | Remaining | ||||||||||||
| per Share of | Contractual Life | ||||||||||||
| Shares | Common Stock | (In Years) | |||||||||||
|
Class A common stock
|
245,917 | $ | 4.64 | 2.5 | |||||||||
|
Other common stock warrants
|
2,877,793 | $ | 1.86 | 2.2 | |||||||||
|
Total
|
3,123,710 | $ | 2.08 | 2.2 | |||||||||
| Stock Option Plans |
For the years ended December 31, 2001 and 2000, the five months ended December 31, 1999 and the year ended July 31, 1999, the Company recorded amortization of deferred stock compensation of $25,000, $28,000, $16,000 and $187,000, respectively. As of December 31, 2001 the Company had $20,000 of remaining unamortized deferred compensation. This amount is included as a deduction of stockholders’ equity and is being amortized over the vesting period of the underlying options.
Pro forma information regarding net loss and loss per share is required by SFAS 123, and has been determined as if the Company has accounted for its employee stock options under the fair value method set forth in SFAS 123. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price
63
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a single reliable measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period.
The weighted-average fair value of granted options was $1.65, $2.19, $2.70 and $2.14 for the years ended December 31, 2001 and 2000, the five months ended December 31, 1999 and the year ended July 31, 1999, respectively. The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model and a graded-vesting approach using the following weighted-average assumptions for years ended December 31, 2001 and 2000, the five months ended December 31, 1999, and the year ended July 31, 1999, respectively: risk-free interest rate of 5%, 5%, 6% and 6%, respectively; weighted-average expected option life of 7.6 years; volatility of 86%, 72%, 85% and 85%, respectively, and no dividends.
The Company’s pro forma net loss was $9.9 million, $15.3 million, $22.9 million and $10.5 million for the years ended December 31, 2001 and 2000 the five months ended December 31, 1999 and the year ended July 31, 1999, respectively. The Company’s pro forma net loss per share was $0.31, $0.62, $1.26 and $0.67 for the years ended December 31, 2001 and 2000, for the five months ended December 31, 1999 and the year ended July 31, 1999, respectively.
On September 28, 2000, the Company adopted the Employee Stock Purchase Plan (“ESPP”). As of December 31, 2001, 600,000 shares of common stock were reserved for issuance under the ESPP. The ESPP provides for payroll deductions for eligible employees to purchase common stock at the lesser of (i) 85% of the fair market value of the common stock on the offering date and (ii) 85% of the fair market value of the common stock on the purchase date. The first purchase date was December 31, 2000. On this date 93,666 shares were purchased at $0.53 per share. For the year ended December 31, 2001, 193,214 shares have been purchased under this plan at an average purchase price of $0.58 per share.
As of December 31, 2001, 12,500,000 shares of common stock were reserved for issuance under the 1992 Stock Option Plan (the “1992 Plan”). The 1992 Plan provides for the grant of incentive and nonstatutory stock options with various vesting periods, generally four years, to employees, directors and consultants. The exercise price of incentive stock options must equal at least the fair market value on the date of grant, and the exercise price of nonstatutory stock options may be no less than 85% of the fair market value on the date of grant. The maximum term of options granted under the 1992 Plan is ten years.
As of December 31, 2001, 1,250,000 shares of common stock were reserved for issuance under the 1993 Non Employee Directors Stock Option Plan (the “Director’s Plan”). The Director’s Plan provides for the granting of 25,000 options to purchase common stock upon appointment as a non-employee director and an additional 10,000 options each January thereafter upon reappointment. Additionally, each director received payment of $2,000 for each board meeting attended. The options vest over four years and the exercise price of the options is 85% of the fair market value on the date of grant. The maximum term of options granted under the 1993 Directors Plan is ten years.
For the calendar year 2001, the Company compensated members of the Board of Directors for attending the Board of Directors meetings, by granting them 30,000 options each to purchase common stock in lieu of the $2,000 payment per meeting. The options were issued under the 1992 Plan and vest over twelve months. For the calendar year 2000, the Company paid members of the Board of Directors in cash ($2,000) for attending the Board of Directors meetings, and terminated the stock bonus program, which was in effect for the five month period ended December 31, 1999, during which the Company paid directors in shares of common stock (“stock bonus”). The number of shares of common stock issued with each stock bonus was equal to $2,000 divided by the ten-day average of the closing sales price for the common stock as quoted on the American Stock Exchange for the ten trading days immediately preceding the date of the board meeting
64
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
at which the Stock Bonus is earned. Stock bonuses were 100% vested on the date of the grant. The Company recognized $16,000 of expense related to stock bonuses for the year ended December 31, 2000 and $54,000 for the five months ended December 31, 1999.
The following table summarizes stock option activity under the 1992 and 1993 Plans:
| Options | Weighted Average | ||||||||
| Outstanding | Exercise Price | ||||||||
|
Balance at July 31, 1998.
|
1,892,489 | $ | 4.36 | ||||||
|
Granted
|
570,550 | $ | 2.78 | ||||||
|
Canceled
|
(194,353 | ) | $ | 3.44 | |||||
|
Balance at July 31, 1999.
|
2,268,686 | $ | 3.94 | ||||||
|
Granted
|
3,003,791 | $ | 1.27 | ||||||
|
Canceled
|
(83,563 | ) | $ | 2.48 | |||||
|
Balance at December 31, 1999
|
5,188,914 | $ | 2.70 | ||||||
|
Granted
|
1,732,015 | $ | 1.34 | ||||||
|
Exercised
|
(298,665 | ) | $ | 2.14 | |||||
|
Canceled
|
(1,042,196 | ) | $ | 3.44 | |||||
|
Balance at December 31, 2000
|
5,580,068 | $ | 2.19 | ||||||
|
Granted
|
3,284,900 | $ | 1.00 | ||||||
|
Exercised
|
(50,338 | ) | $ | 1.15 | |||||
|
Canceled
|
(1,936,164 | ) | $ | 2.11 | |||||
|
Balance at December 31, 2001
|
6,878,466 | $ | 1.65 | ||||||
Options granted in 1999 include options granted at the close of the merger to former employees of RiboGene in exchange for their RiboGene options.
At December 31, 2001, options to purchase 3,346,440 shares of common stock were exercisable and there were 6,471,402 shares available for future grant under both plans.
At December 31, 2001 and 2000, there were 743,633 and 173,633 options outstanding that were granted to consultants. These options are re-measured as they vest, using the Black-Scholes pricing model, and the resulting value is recognized as expense over the period of services received. For the years ended December 31, 2001 and 2000 the Company recorded $601,000 and $15,000, respectively, as compensation expense.
65
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Exercise prices and weighted average remaining contractual life for the options outstanding as of December 31, 2001 are as follows:
| Options Outstanding | ||||||||||||||||||||
| Options Exercisable | ||||||||||||||||||||
| Weighted Average | ||||||||||||||||||||
| Range of | Number | Remaining | Weighted Average | Number | Weighted Average | |||||||||||||||
| Exercise Price | Outstanding | Contractual Life | Exercise Price | Exercisable | Exercise Price | |||||||||||||||
|
$ 0.47 - $ 0.67
|
549,550 | 9.03 | $ | 0.60 | 116,484 | $ | 0.59 | |||||||||||||
|
$ 0.75 - $ 0.75
|
760,000 | 8.92 | $ | 0.75 | 232,291 | $ | 0.75 | |||||||||||||
|
$ 0.81 - $ 1.10
|
820,270 | 7.47 | $ | 0.95 | 357,451 | $ | 0.86 | |||||||||||||
|
$ 1.13 - $ 1.21
|
523,000 | 9.53 | $ | 1.20 | 25,769 | $ | 1.15 | |||||||||||||
|
$ 1.24 - $ 1.25
|
1,417,115 | 7.90 | $ | 1.25 | 781,565 | $ | 1.25 | |||||||||||||
|
$ 1.30 - $ 1.53
|
725,755 | 8.17 | $ | 1.45 | 205,648 | $ | 1.38 | |||||||||||||
|
$ 1.56 - $ 1.69
|
721,376 | 7.24 | $ | 1.65 | 464,232 | $ | 1.65 | |||||||||||||
|
$ 1.69 - $ 3.73
|
920,967 | 5.76 | $ | 3.06 | 722,567 | $ | 3.17 | |||||||||||||
|
$ 3.83 - $ 5.50
|
437,200 | 4.40 | $ | 4.87 | 437,200 | $ | 4.87 | |||||||||||||
|
$20.88 - $20.88
|
3,233 | 4.72 | $ | 20.88 | 3,233 | $ | 20.88 | |||||||||||||
| 6,878,466 | 7.62 | $ | 1.65 | 3,346,440 | $ | 2.12 | ||||||||||||||
| Reserved Shares |
The Company has reserved shares of common stock for future issuance as follows:
| December 31, | ||||
| 2001 | ||||
|
Outstanding options
|
6,878,466 | |||
|
Convertible preferred stock issued and outstanding
|
2,155,715 | |||
|
Placement agent unit options
|
986,898 | |||
|
Class A warrants (including Class A
warrants underlying Placement Agent Unit Options)
|
307,392 | |||
|
Common stock warrants
|
2,877,793 | |||
|
Reserved for future grant or sale under option
plans
|
6,471,402 | |||
| 19,677,666 | ||||
12. Discontinued Product Line
As a result of the Company’s sole customer for its NeofloTM product, NutraMax Products, Inc., filing a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code and the Company’s inability to produce NeofloTM profitably, the Company has discontinued its NeofloTM product line. In May 2001, the Company closed its Lee’s Summit manufacturing facility where the NeofloTM product was produced. As of December 31, 2001, the Company was unable to find a purchaser for the NeofloTM product and associated assets. As such, the Company has determined that it is appropriate to record a loss related to the discontinuance of the NeofloTM product line. The loss of $677,000 represents a writedown of the assets of approximately $262,000 consisting mainly of manufacturing equipment directly related to the NeofloTM product line and estimated remaining lease payments of $415,000 for the Lee’s Summit facility.
66
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
13. Income Taxes
As of December 31, 2001, the Company had federal and state net operating loss carryforwards of approximately $92.1 million and $16.5 million, respectively. The Company also had federal and California research and development tax credits of approximately $1.8 million and $1.1 million. The federal and state net operating loss and credit carryforwards expire at various dates beginning in the years 2006 through 2021, if not utilized.
Utilization of the Company’s net operating loss and credit carryforwards may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss and credit carryforwards before utilization.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets for financial reporting and the amount used for income tax purposes. Significant components of the Company’s deferred tax assets for federal and state income taxes are as follows (in thousands):
| December 31, | December 31, | ||||||||
| 2001 | 2000 | ||||||||
|
Deferred tax liabilities:
|
|||||||||
|
Goodwill and purchased intangibles
|
$ | 500 | $ | 600 | |||||
|
Deferred tax assets:
|
|||||||||
|
Net operating loss carryforwards
|
$ | 32,300 | $ | 30,700 | |||||
|
Research and development credits
|
2,500 | 2,400 | |||||||
|
Capitalized research and development expenses
|
1,200 | 3,200 | |||||||
|
Acquired research and development
|
1,100 | 1,100 | |||||||
|
Other, net
|
900 | 500 | |||||||
|
Total deferred tax assets
|
38,000 | 37,900 | |||||||
|
Valuation allowance
|
(37,500 | ) | (37,300 | ) | |||||
|
Net deferred taxes
|
$ | — | $ | — | |||||
Due to the Company’s lack of earnings history, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $200,000, 22.3 million and $2.6 million during the periods ended December 31, 2001, 2000, and 1999, respectively.
14. Legal Proceedings
In July 1998, the Company was served with a complaint in the U.S. Bankruptcy Court for the southern District of New York by the Trustee for the liquidation of the business of A.R. Baron & Co., Inc. (“A.R. Baron”) and the Trustee of The Baron Group, Inc. (the “Baron Group”), the parent of A.R. Baron. The complaint alleged that A.R. Baron and the Baron Group made certain preferential or fraudulent transfers of funds to the Company prior to the commencement of bankruptcy proceedings involving A.R. Baron and the Baron Group. The Trustee sought return of the funds totaling $3.2 million.
During the quarter ended June 30, 2000, the Company reached an agreement to settle the Baron litigation and pay a total amount of $525,000 to the bankruptcy estates of the Baron entities. Additionally, the Company also reached a settlement agreement with a former insurer in connection with the Baron litigation in which the insurer would pay the company $150,000 in exchange for policy releases. The Company believes that settling this claim for a new payment of $375,000 which was charged to operations in 2000, was an
67
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
acceptable outcome to avoid incurring further legal fees and management diversion. On September 26, 2000, the courts formally approved the settlement and the case is now closed.
15. Related Party Transactions
Sigma Tau owns approximately 30% of the Company’s outstanding common stock as of December 31, 2001. In December 2001, the Company entered into a promotion agreement with VSL Pharmaceuticals Inc., a private company owned in part by the major shareholders of Sigma Tau, to promote, sell and distribute VSL#3TM in the U.S.
In January 2002, the Company entered into a royalty agreement with Glenridge Pharmaceuticals LLC, (“Glenridge”). Kenneth R. Greathouse, the Company’s Vice President of Commercial Operations, is a part owner of Glenridge. This agreement calls for the payment of royalties on a quarterly basis on the net sales of Acthar®. The Company paid Glenridge $104,000 in February 2002 related to 2001 royalties on Acthar® sales.
16. Defined Contribution Plan
The Company sponsors a defined-contribution savings plan under Section 401(k) of the Internal Revenue Code covering substantially all full-time U.S. employees. Participating employees may contribute up to 15% of their eligible compensation up to the annual Internal Revenue Service contribution limit and the Plan was adopted in 2000. The Company matched employee contributions according to specified formulas and contributed $48,000 and $64,000 for the years ended December 31, 2001 and 2000, respectively.
17. Subsequent Events
On January 2, 2002, the Company entered into a revolving accounts receivable line of credit with Pacific Business Funding, a division of Greater Bay Bancorp, the parent company of Cupertino National Bank. Under the Agreement, the Company can borrow up to the lesser of 80% of the eligible accounts receivable balance or $3,000,000. Interest accrues on outstanding advances at an annual rate equal to prime rate plus four and one-half percent. The term of the note is one year and the note automatically renews annually, unless the Company terminates the agreement.
On March 15, 2002, in two separate transactions, the Company issued $4.0 million of 8% convertible debentures to an institutional investor and Sigma-Tau. The Company will pay interest on the debentures at a rate of 8% per annum on a quarterly basis. The debentures are convertible into shares of the Company’s common stock at a fixed conversion price of $1.58 per share (subject to adjustment for stock splits and reclassifications). At the end of the term of the debenture, under certain circumstances, the Company has the option to repay the principal in stock and, under certain circumstances, the Company can also redeem the debenture for cash prior to maturity. The debentures mature on March 15, 2005. In conjunction with this transaction, the Company issued warrants to both the institutional investor and Sigma-Tau to acquire an aggregate of 1,518,988 shares of common stock at an exercise price of $1.70 per share. Both warrants expire on March 15, 2006. In connection with the issuance of the debentures and warrants, the Company expects to record a deferred expense related to a beneficial conversion feature. This amount will be amortized to interest expense over the term of the debentures. Assuming the conversion and exercise of the above-mentioned debenture and warrant by Sigma-Tau and assuming the exercise of all other outstanding warrants held by Sigma-Tau, Sigma-Tau would own approximately 38% of the Company’s outstanding common stock as of March 15, 2002.
68
Table of Contents
QUESTCOR PHARMACEUTICALS, INC.
FINANCIAL STATEMENT SCHEDULES (ITEM 14(a)(2))
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
| Balance at | Additions | Deductions | ||||||||||||||
| Beginning | Charged to | and | Balance at | |||||||||||||
| Period | Income | Write-offs | Period | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Reserves for uncollectible accounts
|
||||||||||||||||
|
December 31, 2001
|
$ | 56 | $ | 51 | $ | 29 | $ | 78 | ||||||||
|
December 31, 2000
|
$ | 30 | $ | 170 | $ | 144 | $ | 56 | ||||||||
|
December 31, 1999
|
$ | 15 | $ | 15 | — | $ | 30 | |||||||||
|
July 31, 1999
|
— | $ | 16 | $ | 1 | $ | 15 | |||||||||
|
Reserves for sales returns and allowances
|
||||||||||||||||
|
December 31, 2001
|
— | $ | 271 | $ | 50 | $ | 221 | |||||||||
|
Reserves for obsolete inventories
|
||||||||||||||||
|
December 31, 2001
|
$ | 28 | $ | 45 | $ | 17 | $ | 56 | ||||||||
|
December 31, 2000
|
— | $ | 28 | — | $ | 28 | ||||||||||
All other financial statement schedules are omitted because the information described therein is not applicable, not required or is furnished in the financial statements or notes thereto.
69
Table of Contents
EXHIBIT INDEX
| Exhibit | ||
| Number | Description | |
|
2.1*
|
Merger agreement entered into August 4, 1999, by and among Cypros Pharmaceutical Corporation, a California corporation (“Parent”), Cypros Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”), and RiboGene, Inc., a Delaware corporation (the “Company”). | |
|
3.1*****
|
By-laws of the Registrant | |
|
3.2**
|
Restated Certificate of Incorporation of Cypros Pharmaceutical Corporation, a California corporation, dated November 5, 1999 | |
|
4.1
|
Warrant dated December 1, 2001 between Registrant and Paolo Cavazza | |
|
4.2
|
Warrant dated December 1, 2001 between Registrant and Claudio Cavazza | |
|
10.1***
|
Forms of Incentive Stock Option and Non-statutory Stock Option | |
|
10.2****
|
Amended 1992 Employee Stock Option Plan | |
|
10.3*****
|
1993 Non-employee Directors Equity Incentive Plan, as amended, and related form of Nonstatutory Stock Option | |
|
10.4*****
|
Employment Agreement dated as of August 4, 1999 between the Registrant and Charles J. Casamento | |
|
10.5******
|
2000 Employee Stock Purchase Plan | |
|
10.6
|
Asset Purchase Agreement dated July 27, 2001 between the Registrant and Aventis Pharmaceuticals Products, Inc.Δ | |
|
10.7
|
First Amendment to Asset Purchase Agreement dated January , between the Registrant and Aventis Pharmaceuticals Products, Inc. | |
|
23.1
|
Consent of Ernst & Young LLP, Independent Auditors |
| * | Filed as an exhibit to the Registrant’s Form 10-K for the fiscal year ended December 31, 1999 |
| ** | Filed as an exhibit to the Registrant’s Registration Statement on Form S-8, Registration Statement No. 333-30558, and incorporated herein by reference |
| *** | Filed as an exhibit to the Registrant’s Registration Statement on Form S-1, Registration No. 33-51682, and incorporated herein by reference |
| **** | Filed as an exhibit to the Registrant’s Proxy Statement for the 2002 Annual Meeting of Shareholders, and incorporated herein by reference |
| ***** | Filed as an exhibit to the Registrant’s Registration Statement Form S-4, Registration Statement No. 333-87611, and incorporated herein by reference |
| ****** | Filed as an exhibit to the Registrant’s Registration Statement on Form S-8, Registration Statement No. 333-46990, and incorporated herein by reference |
| Δ | Questcor has requested confidential treatment with respect to portions of this exhibit |
70
EXHIBIT 4.1 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. QUESTCOR PHARMACEUTICALS, INC. WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK December 1, 2001 900,000 Shares For Value Received, QUESTCOR PHARMACEUTICALS, INC., a California corporation (the "Company"), with its principal office at 3260 Whipple Road, Union City, CA 94587, hereby certifies that Paolo Cavazza, an individual ("Holder"), or its assigns, pursuant to the Stock and Warrant Purchase Agreement dated December 1, 2001, by and among the Company and the Purchaser (the "Purchase Agreement"), is entitled, subject to the provisions of this Warrant, to purchase from the Company, at any time before 5:00 p.m. (Pacific Standard Time) on December 1, 2003 (the "Expiration Date"), the number of fully paid and nonassessable shares of Common Stock of the Company set forth above, subject to adjustment as hereinafter provided. Holder may purchase such number of shares of Common Stock up to the number set forth above at an exercise price per share (as appropriately adjusted pursuant to Section 6 hereof) equal to $1.75 (the "Exercise Price"). The term "Common Stock" shall mean the aforementioned Common Stock of the Company, together with any other equity securities that may be issued by the Company in addition thereto or in substitution therefor as provided herein. The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for a share of Common Stock are subject to adjustment from time to time as hereinafter set forth. The shares of Common Stock deliverable upon such exercise, as adjusted from time to time, are hereinafter sometimes referred to as "Warrant Shares." 1
SECTION 1. EXERCISE OF WARRANT. (a) This Warrant may be exercised in whole or in part on any business day prior to the Expiration Date by presentation and surrender hereof to the Company at its principal office at the address set forth in the initial paragraph hereof (or at such other address as the Company may hereafter notify Holder in writing) with the Purchase Form annexed hereto duly executed and accompanied by proper payment of the Exercise Price in lawful money of the United States of America in the form of a check or wire transfer of immediately available funds, subject to collection, for the number of Warrant Shares specified in the Purchase Form. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant, execute and deliver a new Warrant evidencing the rights of Holder thereof to purchase the balance of the Warrant Shares purchasable hereunder. Upon receipt by the Company of this Warrant and such Purchase Form, together with proper payment of the Exercise Price, at the principal office of the Company, Holder shall be deemed to be the holder of record of the Warrant Shares, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such Warrant Shares shall not then be actually delivered to Holder. (b) Subject to the terms and conditions contained in this Warrant, in the event that the Holder has not exercised this Warrant in full prior to the Expiration Date, the Company shall have the option, in its sole discretion upon written notice to Holder ( the"Option Notice"), to require Holder to purchase part or all of the remaining unexercised Warrant Shares at a ten percent discount to the average closing market price of the Common Stock as quoted on the American Stock Exchange ("AMEX") for the five (5) business immediately prior to and including the Expiration Date; provided, however, that the Company shall not have the right to require Holder to purchase such Warrant Shares to the extent that to do so would require shareholder approval under AMEX's shareholder approval rules that has not been obtained. Upon receipt by the Holder of the Option Notice, Holder shall as soon as practicable, but in any event within thirty (30) days, tender payment to the Company in lawful money of the United States of America in the form of a check or wire transfer of immediately available funds, subject to collection, for the number of Warrant Shares to be purchased by Holder as specified in the Option Notice. Upon receipt by the Company of such proper payment for the Warrant Shares, at the principal office of the Company, Holder shall be deemed to be the holder of record of the Warrant Shares, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such Warrant Shares shall not then be actually delivered to Holder. SECTION 2. RESERVATION OF SHARES. The Company hereby agrees that at all times there shall be reserved for issuance and delivery upon exercise of this Warrant all shares of its Common Stock or other shares of capital stock of the Company from time to time issuable upon exercise of this Warrant. All such shares shall be duly authorized and, when issued upon such exercise in accordance with the terms of this Warrant, shall be validly issued, fully paid and nonassessable. 2
SECTION 3. FRACTIONAL INTEREST. The Company will not issue a fractional share of Common Stock upon exercise of this Warrant. Instead, the Company will deliver its check for the current market of the fractional share. The current market value of a fraction of a share is determined as follows: multiply the current market price of a full share by the fraction of a share and round the result to the nearest cent. SECTION 4. TRANSFERS; ASSIGNMENT OR LOSS OF WARRANT. (a) Subject to the terms and conditions contained in Section 9 hereof, this Warrant and all rights hereunder are transferable in whole or in part by Holder and any successor transferee. Notwithstanding the foregoing sentence, except in the case of a transfer pursuant to Section 4(b), prior to such transfer Holder shall give thirty (30) days prior written notice of any such transfer to the Company, and the Company shall have the right to acquire the Warrant under the identical provisions contained in such notice by giving Holder written notice within fifteen (15) days of receipt of such notice. The Company's failure to respond to said notice within said fifteen (15) days shall be deemed a waiver of this right of first refusal. The transfer shall be recorded on the books of the Company upon receipt by the Company of the Transfer Notice annexed hereto, at its principal offices and the payment to the Company of all transfer taxes and other governmental charges imposed on such transfer. (b) Without limiting the generality of the first sentence of clause (a) above, it is understood that Holder and its Affiliates may transfer the Shares and/or the Warrant to any other Affiliate and/or Relative; provided that such transfer is in accordance with an exemption from the registration requirements of the Securities Act. "Affiliate" shall mean (i) any corporation or business entity 30% or more of the capital or voting stock of which is owned directly or indirectly by Holder, Claudio Cavazza or Paolo Cavazza; (ii) any corporation or business entity which directly or indirectly owns 30% or more of the capital or voting stock of Holder, or (iii) any corporation or business entity under the direct or indirect control of such corporation or business entity as described in (i) or (ii) above. "Relative" shall mean Holder's spouse, children, parents or siblings, whether natural or adopted. (c) Subject to the provisions of Section 9, upon surrender of this Warrant to the Company or at the office of its transfer agent or warrant agent, with the Assignment Form annexed hereto duly executed and funds sufficient to pay any transfer tax, the Company shall, without charge, execute and deliver a new Warrant or Warrants in the name of the assignee or assignees named in such instrument of assignment (any such assignee will then be a "Holder" for purposes of this Warrant) and, if Holder's entire interest is not being assigned, in the name of Holder, and this Warrant shall promptly be canceled. (d) Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of indemnification satisfactory to the Company, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver a new Warrant of like tenor and date. In the event that this Warrant is lost, stolen, destroyed or mutilated, Holder shall pay all reasonable attorneys' fees and expenses incurred by the Company in connection with the replacement of this Warrant and the issuance of a new Warrant. 3
SECTION 5. RIGHTS OF HOLDER. Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in the Company, either at law or equity, and the rights of Holder are limited to those expressed in this Warrant. Nothing contained in this Warrant shall be construed as conferring upon Holder hereof the right to vote or to consent or to receive notice as a stockholder of the Company on any matters or with respect to any rights whatsoever as a stockholder of the Company. No dividends or interest shall be payable or accrued in respect of this Warrant or the interest represented hereby or the Warrant Shares purchasable hereunder until, and only to the extent that, this Warrant shall have been exercised in accordance with its terms. SECTION 6. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES. The number and kind of securities purchasable upon the exercise of the Warrant and the Exercise Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: (a) RECLASSIFICATION OF OUTSTANDING SECURITIES. In case of any reclassification, change or conversion of securities of the class issuable upon exercise of this Warrant (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), the Company shall execute a new Warrant (in form and substance reasonably satisfactory to the Holder of this Warrant) providing that the Holder of this Warrant shall have the right to exercise such new Warrant and upon such exercise to receive, in lieu of each share of Common Stock theretofore issuable upon exercise of this Warrant, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification or change by a holder of one share of Common Stock. Such new Warrant shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 6. The provisions of this subsection (a) shall similarly apply to successive reclassification or changes. (b) SUBDIVISIONS OR COMBINATION OF SHARES. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its Common Stock, the Exercise Price and the number of Warrant Shares issuable upon exercise hereof shall be proportionately adjusted. (c) STOCK DIVIDENDS. If the Company at any time while this Warrant is outstanding and unexpired shall pay a dividend payable in shares of Common Stock (except any distribution specifically provided for in the foregoing subsections (a) and (b)), then the Exercise Price shall be adjusted, from and after the date of determination of shareholders entitled to receive such dividend or distribution, to that price determined by multiplying the Exercise Price in effect immediately prior to such date of determination by a fraction (a) the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution, and (b) the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such dividend or distribution, and the number of Warrant Shares subject to this Warrant shall be proportionately adjusted. (d) NOTICE OF RECORD DATE. In the event of any taking by the Company of a record of its shareholders for the purpose of determining shareholders who are entitled to receive payment of any dividend (other than a cash dividend) or other distribution, any right to subscribe 4
for, purchase or otherwise acquire any share of any class or any other securities or property, or to receive any other right, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed merger or consolidation of the Company with or into any other corporation, or any proposed sale, lease or conveyance of all or substantially all of the assets of the Company, or any proposed liquidation, dissolution or winding up of the Company, the Company shall mail to the Holder of this Warrant, at least ten days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (e) NO ADJUSTMENT UPON EXERCISE OF WARRANTS. No adjustments shall be made under any Section herein in connection with the issuance of Warrant Shares upon exercise of the Warrants. SECTION 7. OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be adjusted as required by the provisions of Section 6, the Company shall deliver an officer's certificate showing the adjusted Exercise Price determined as herein provided, setting forth in reasonable detail the facts requiring such adjustment and the manner of computing such adjustment. Each such officer's certificate shall be signed by the chairman, president or chief financial officer of the Company. SECTION 8. TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933. This Warrant may not be exercised and neither this Warrant nor any of the Warrant Shares, nor any interest in either, may be offered, sold, assigned, pledged, hypothecated, encumbered or in any other manner transferred or disposed of, in whole or in part, except in compliance with applicable United states federal and state securities or blue sky laws and the terms and conditions hereof. Each Warrant shall bear a legend in substantially the same form as the legend set forth on the first page of this Warrant. Each certificate for Warrant Shares issued upon exercise of this Warrant shall bear a legend substantially in the following form: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS OF TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. Any certificate for any Warrant Shares issued at any time in exchange or substitution for any certificate for any Warrant Shares bearing such legend shall also bear such legend unless, in the opinion of counsel for the Company, the Warrant Shares represented thereby need no longer be 5
subject to the restriction contained herein. The provisions of this Section 8 shall be binding upon all subsequent holders of certificates for Warrant Shares bearing the above legend and all subsequent holders of this Warrant, if any. SECTION 9. REPRESENTATIONS AND COVENANTS OF HOLDER. This Warrant has been entered into by the Company in reliance upon the following representations and covenants of Holder, which by its execution hereof Holder herby confirms: (a) INVESTMENT PURPOSE. The right to acquire Common Stock, and any Common Stock issued upon exercise of Holder's rights contained herein, will be acquired for investment and not with a view to the sale or distribution of any part thereof, and Holder has no present intention of selling or engaging in any public distribution of the same except pursuant to a registration or exemption. (b) PRIVATE ISSUE. Holder understands (i) that the Common Stock issuable upon exercise of Holder's rights contained herein is not registered under the Securities Act or qualified under applicable state securities laws on the ground that the issuance contemplated by this Warrant will be exempt from the registration and qualification requirements thereof, and (ii) that the Company's reliance on such exemption is predicated on the representations set forth in this Section 9. (c) FINANCIAL RISK. Holder has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment and has the ability to bear the economic risks of its investment. (d) RULE 144. Holder also understands that any sale of its rights to purchase Common Stock, or of any Common Stock, which might be made by it in reliance upon Rule 144 under the Securities Act may be made only in accordance with the terms and conditions of that Rule. (e) ACCREDITED INVESTOR. Holder is an "accredited investor" within the meaning of the Securities Act Rule 501 of Regulation D, as presently in effect. SECTION 10. SATURDAYS, SUNDAYS AND HOLIDAYS. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday or a Sunday or shall be a legal holiday in the State of California, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday in the state of California. Section 11. ISSUE TAX. The issuance of certificates for Common Stock upon the exercise of the Warrant shall be made without charge to the holder of the Warrant for any issue tax (other than any applicable income taxes) in respect thereof; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificates in a name other than that of the then Holder of the Warrant being exercised. 6
SECTION 12. MODIFICATION AND WAIVER. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated other than by an instrument in writing signed by the Company and by Holder. SECTION 13. NOTICES. Unless otherwise specified herein, any notice, request or other document required or permitted to be given or delivered to Holder or the Company shall be given in writing and shall be deemed effectively given (i) upon personal delivery to the party to be notified, (ii) five (5) days after deposit in the United States mail if sent by registered or certified mail, postage prepaid, or (iii) one (1) day after deposit with an overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to Holder at its address as shown on the books of the Company, or to the Company at the address indicated therefor in the first paragraph of this Warrant. SECTION 14. DESCRIPTIVE HEADINGS AND GOVERNING LAW. The description headings of the several sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of California, without regard to its conflicts of laws principles. SECTION 15. ATTORNEYS' FEES. In any litigation, arbitration or court proceeding between the Company and Holder relating hereto, the prevailing party shall be entitled to attorneys' fees and expenses and all cost of proceedings incurred in enforcing this Warrant. SECTION 16. SURVIVAL. The representations, warranties, covenants and conditions of the respective parties contained herein or made pursuant to this Warrant shall be survive the execution and delivery of this Warrant. SECTION 17. SEVERABILITY. In the event any one or more of the provisions of this Warrant shall for any reason be held invalid, illegal or unenforceable, the remaining provisions of this Warrant shall be unimpaired, and the invalid, illegal or unenforceable provision shall be replaced by a mutually acceptable valid, legal and enforceable provision, which comes closest to the intention of the parties underlying the invalid, illegal or unenforceable provision. [Signature Page Follows] 7
IN WITNESS WHEREOF, the parties have caused this Warrant to be duly executed and delivered by their proper and duly authorized representatives as of the day and year first above written. Questcor Pharmaceuticals, Inc. By: /s/ CHARLES J. CASAMENTO ------------------------------------ Name: CHARLES J. CASAMENTO ----------------------------------- Title: CHAIRMAN, PRESIDENT and CEO ---------------------------------- Paolo Cavazza By: /s/ PAOLO CAVAZZA ------------------------------------- Name: ----------------------------------- 8
PURCHASE FORM Dated ____________, _____ The undersigned hereby irrevocably elects to exercise the within Warrant to purchase _______ shares of Common Stock and hereby makes payment of $ _______________ in payment of the exercise price thereof, together with all applicable transfer taxes, if any. In exercising its rights to purchase the Common Stock Questcor Pharmaceuticals, Inc., the undersigned hereby confirms and acknowledges the investment representations and warranties made in Section 9 of the Warrant. Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below. _________________________________________ (Name) _________________________________________ (Address) _________________________________________ HOLDER: PAOLO CAVAZZA By:______________________________________ Print Name:______________________________ 9
ASSIGNMENT FORM Dated _________, _____ FOR VALUE RECEIVED, Paolo Cavazza hereby sells, assigns and transfers unto _______________________________________________________ (the "Assignee"), (please type or print in block letters) ________________________________________________________________________________ (insert address) its right to purchase up to ____________ shares of Common Stock represented by this Warrant and does hereby irrevocably constitute and appoint ________________ attorney, to transfer the same on the books of the Company, with full power of substitution in the premises. PAOLO CAVAZZA By:______________________________________ Print Name:______________________________ 10
TRANSFER NOTICE (To transfer or assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares.) FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby transferred and assigned to: ________________________________________________________________________________ (Please Print) whose address is _______________________________________________________________ ________________________________________________________________________________ Dated ___________________________________ Holder's Signature ______________________ Holder's Address ________________________ _________________________________________ Note: The signature to this Transfer Notice must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant. 11
EXHIBIT 4.2 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. QUESTCOR PHARMACEUTICALS, INC. WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK December 1, 2001 900,000 Shares For Value Received, QUESTCOR PHARMACEUTICALS, INC., a California corporation (the "Company"), with its principal office at 2360 Whipple Road, Union City, CA 94587, hereby certifies that Claudio Cavazza, an individual ("Holder"), or its assigns, pursuant to the Stock and Warrant Purchase Agreement dated December 1, 2001, by and among the Company and the Purchaser (the "Purchase Agreement"), is entitled, subject to the provisions of this Warrant, to purchase from the Company, at any time before 5:00 p.m. (Pacific Standard Time) on December 1, 2003 (the "Expiration Date"), the number of fully paid and nonassessable shares of Common Stock of the Company set forth above, subject to adjustment as hereinafter provided. Holder may purchase such number of shares of Common Stock up to the number set forth above at an exercise price per share (as appropriately adjusted pursuant to Section 6 hereof) equal to $1.75 (the "Exercise Price"). The term "Common Stock" shall mean the aforementioned Common Stock of the Company, together with any other equity securities that may be issued by the Company in addition thereto or in substitution therefor as provided herein. The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for a share of Common Stock are subject to adjustment from time to time as hereinafter set forth. The shares of Common Stock deliverable upon such exercise, as adjusted from time to time, are hereinafter sometimes referred to as "Warrant Shares." 1
SECTION 1. EXERCISE OF WARRANT. (a) This Warrant may be exercised in whole or in part on any business day prior to the Expiration Date by presentation and surrender hereof to the Company at its principal office at the address set forth in the initial paragraph hereof (or at such other address as the Company may hereafter notify Holder in writing) with the Purchase Form annexed hereto duly executed and accompanied by proper payment of the Exercise Price in lawful money of the United States of America in the form of a check or wire transfer of immediately available funds, subject to collection, for the number of Warrant Shares specified in the Purchase Form. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant, execute and deliver a new Warrant evidencing the rights of Holder thereof to purchase the balance of the Warrant Shares purchasable hereunder. Upon receipt by the Company of this Warrant and such Purchase Form, together with proper payment of the Exercise Price, at the principal office of the Company, Holder shall be deemed to be the holder of record of the Warrant Shares, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such Warrant Shares shall not then be actually delivered to Holder. (b) Subject to the terms and conditions contained in this Warrant, in the event that the Holder has not exercised this Warrant in full prior to the Expiration Date, the Company shall have the option, in its sole discretion upon written notice to Holder (the "Option Notice"), to require Holder to purchase part or all of the remaining unexercised Warrant Shares at a ten percent discount to the average closing market price of the Common Stock as quoted on the American Stock Exchange ("AMEX") for the five (5) business immediately prior to and including the Expiration Date; provided, however, that the Company shall not have the right to require Holder to purchase such Warrant Shares to the extent that to do so would require shareholder approval under AMEX's shareholder approval rules that has not been obtained. Upon receipt by the Holder of the Option Notice, Holder shall as soon as practicable, but in any event within thirty (30) days, tender payment to the Company in lawful money of the United States of America in the form of a check or wire transfer of immediately available funds, subject to collection, for the number of Warrant Shares to be purchased by Holder as specified in the Option Notice. Upon receipt by the Company of such proper payment for the Warrant Shares, at the principal office of the Company, Holder shall be deemed to be the holder of record of the Warrant Shares, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such Warrant Shares shall not then be actually delivered to Holder. SECTION 2. RESERVATION OF SHARES. The Company hereby agrees that at all times there shall be reserved for issuance and delivery upon exercise of this Warrant all shares of its Common Stock or other shares of capital stock of the Company from time to time issuable upon exercise of this Warrant. All such shares shall by duly authorized and, when issued upon such exercise in accordance with the terms of this Warrant, shall be validly issued, fully paid and nonassessable. 2
SECTION 3. FRACTIONAL INTEREST. The Company will not issue a fractional share of Common Stock upon exercise of this Warrant. Instead, the Company will deliver its check for the current market value of the fractional share. The current market value of a fraction of a share is determined as follows: multiply the current market price of a full share by the fraction of a share and round the result to the nearest cent. SECTION 4. TRANSFERS; ASSIGNMENT OR LOSS OF WARRANT. (a) Subject to the terms and conditions contained in Section 9 hereof, this Warrant and all rights hereunder are transferable in whole or in part by Holder and any successor transferee. Notwithstanding the foregoing sentence, except in the case of a transfer pursuant to Section 4(b), prior to such transfer Holder shall give thirty (30) days prior written notice of any such transfer to the Company, and the Company shall have the right to acquire the Warrant under the identical provisions contained in such notice by giving Holder written notice within fifteen (15) days of receipt of such notice. The Company's failure to respond to said notice within said fifteen (15) days shall be deemed a waiver of this right of first refusal. The transfer shall be recorded on the books of the Company upon receipt by the Company of the Transfer Notice annexed hereto, at its principal offices and the payment to the Company of all transfer taxes and other governmental charges imposed on such transfer. (b) Without limiting the generality of the first sentence of clause (a) above, it is understood that Holder and its Affiliates may transfer the Shares and/or the Warrant to any other Affiliate and/or Relative; provided that such transfer is in accordance with an exemption from the registration requirements of the Securities Act. "Affiliate" shall mean (i) any corporation or business entity 30% or more of the capital or voting stock of which is owned directly or indirectly by Holder, Claudio Cavazza or Paolo Cavazza; (ii) any corporation or business entity which directly or indirectly owns 30% or more of the capital or voting stock of Holder, or (iii) any corporation or business entity under the direct or indirect control of such corporation or business entity as described in (i) or (ii) above. "Relative" shall mean Holder's spouse, children, parents or siblings, whether natural or adopted. (c) Subject to the provisions of Section 9, upon surrender of this Warrant to the Company or at the office of its stock transfer agent or warrant agent, with the Assignment Form annexed hereto duly executed and funds sufficient to pay any transfer tax, the Company shall, without charge, execute and deliver a new Warrant or Warrants in the name of the assignee or assignees named in such instrument of assignment (any such assignee will then be a "Holder" for purposes of this Warrant) and, if Holder's entire interest is not being assigned, in the name of Holder, and this Warrant shall promptly be cancelled. (d) Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of indemnification satisfactory to the Company, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver a new Warrant of like tenor and date. In the event that this Warrant is lost, stolen, destroyed or mutilated, Holder shall pay all reasonable attorneys' fees and expenses incurred by the Company in connection with the replacement of this Warrant and the issuance of a new Warrant. 3
SECTION 5. RIGHTS OF HOLDER. Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in the Company, either at law or equity, and the rights of Holder are limited to those expressed in this Warrant. Nothing contained in this Warrant shall be construed as conferring upon Holder hereof the right to vote or to consent or to receive notice as a stockholder of the Company on any matters or with respect to any rights whatsoever as a stockholder of the Company. No dividends or interest shall be payable or accrued in respect of this Warrant or the interest represented hereby or the Warrant Shares purchaseable hereunder until, and only to the extent that, this Warrant shall have been exercised in accordance with its terms. SECTION 6. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES. The number and kind of securities purchaseable upon the exercise of the Warrant and the Exercise Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: (a) RECLASSIFICATION OF OUTSTANDING SECURITIES. In case of any reclassification, change or conversion of securities of the class issuable upon exercise of this Warrant (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), the Company shall execute a new Warrant (in form and substance reasonably satisfactory to the Holder of this Warrant) providing that the Holder of this Warrant shall have the right to exercise such new Warrant and upon such exercise to receive, in lieu of each share of Common Stock theretofore issuable upon exercise of this Warrant, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification or change by a holder of one share of Common Stock. Such new Warrant shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 6. The provisions of this subsection (a) shall similarly apply to successive reclassification or changes. (b) SUBDIVISIONS OR COMBINATION OF SHARES. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its Common Stock, the Exercise Price and the number of Warrant Shares issuable upon exercise hereof shall be proportionately adjusted. (c) STOCK DIVIDENDS. If the Company at any time while this Warrant is outstanding and unexpired shall pay a dividend payable in shares of Common Stock (except any distribution specifically provided for in the foregoing subsections (a) and (b)), then the Exercise Price shall be adjusted, from and after the date of determination of shareholders entitled to receive such dividend or distribution, to that price determined by multiplying the Exercise Price in effect immediately prior to such date of determination by a fraction (a) the numerator of which shall be the total number of shares of Common Stock outstanding immediately after such dividend or distribution, (b) and the number of Warrant Shares subject to this Warrant shall be proportionately adjusted. (d) NOTICE OF RECORD DATE. In the event of any taking by the Company of a record of its shareholders for the purpose of determining shareholders who are entitled to receive payment of any dividend (other than a cash dividend) or other distribution, any right to subscribe 4
for, purchase or otherwise acquire any share of any class or any other securities or property, or to receive any other right, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed merger or consolidation of the Company with or into any other corporation, or any proposed sale, lease or conveyance of all or substantially all of the assets of the Company, or any proposed liquidation, dissolution or winding up of the Company, the Company shall mail to the Holder of this Warrant, at least ten days prior to the date specified therein, a notice specifying the date on which such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (e) NO ADJUSTMENT UPON EXERCISE OF WARRANTS. No adjustments shall be made under any Section herein in connection with the issuance of Warrant Shares upon exercise of the Warrants. SECTION 7. OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be adjusted as required by the provisions of Section 6, the Company shall deliver an officer's certificate showing the adjusted Exercise Price determined as herein provided, setting forth in reasonable detail the facts requiring such adjustment and the manner of computing such adjustment. Each such officer's certificate shall be signed by the chairman, president or chief financial officer of the Company. SECTION 8. TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933. This Warrant may not be exercised and neither this Warrant nor any of the Warrant Shares, nor any interest in either, may be offered, sold, assigned, pledged, hypothecated, encumbered or in any other manner transferred or disposed of, in whole or in part, except in compliance with applicable United States federal and state securities or blue sky laws and the terms and conditions hereof. Each Warrant shall bear a legend in substantially the same form as the legend set forth on the first page of this Warrant. Each certificate for Warrant Shares issued upon exercise of this Warrant shall bear a legend substantially in the following form: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. Any certificate for any Warrant Shares issued at any time in exchange or substitution for any certificate for any Warrant Shares bearing such legend shall also bear such legends unless, in the opinion of counsel for the Company, the Warrant Shares, represented thereby need no longer be 5
subject to the restriction contained herein. The provisions of this Section 8 shall be binding upon all subsequent holders of certificates for Warrant Shares bearing the above legend and all subsequent holders of this Warrant, if any. SECTION 9. REPRESENTATIONS AND COVENANTS OF HOLDER. This Warrant has been entered into by the Company in reliance upon the following representations and covenants of Holder, which by its execution hereof Holder hereby confirms: (a) INVESTMENT PURPOSE. The right to acquire Common Stock, and any Common Stock issued upon exercise of Holder's rights contained herein, will be acquired for investment and not with a view to the sale of distribution of any part thereof, and Holder has no present intention of selling or engaging in any public distribution of the same except pursuant to a registration or exemption. (b) PRIVATE ISSUE. Holder understands (i) that the Common Stock issuable upon exercise of Holder's rights contained herein is not registered under the Securities Act or qualified under applicable state securities laws on the ground that the issuance contemplated by this Warrant will be exempt from the registration and qualification requirements thereof, and (ii) that the Company's reliance on such exemption is predicated on the representations set forth in this Section 9. (c) FINANCIAL RISK. Holder has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment and has the ability to bear the economic risks of its investment. (d) RULE 144. Holder also understands that any sale of its rights to purchase Common Stock, or of any Common Stock, which might be made by it in reliance upon Rule 144 under the Securities Act may be made only in accordance with the terms and conditions that Rule. (e) ACCREDITED INVESTOR. Holder is an "accredited investor" within the meaning of the Securities Act Rule 501 of Regulation D, as presently in effect. SECTION 10. SATURDAYS, SUNDAYS AND HOLIDAYS. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday or a Sunday or shall be a legal holiday in the State of California, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday in the State of California. SECTION 11. ISSUE TAX. The issuance of certificates for Common Stock upon the exercise of the Warrant shall be made without charge to the holder of the Warrant for any issue tax (other than any applicable income taxes) in respect thereof, provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificates in a name other than that of the then Holder of the Warrant being exercised. 6
SECTION 12. MODIFICATION AND WAIVER. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated other than by an instrument in writing signed by the Company and by Holder. SECTION 13. NOTICES. Unless otherwise specified herein, any notice, request or other document required or permitted to be given or delivered to Holder or the Company shall be given in writing and shall be deemed effectively given (i) upon personal delivery to the party to be notified, (ii) five (5) days after deposit in the United States mail if sent by registered or certified mail, postage prepaid, or (iii) one (1) day after deposit with an overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to Holder at its address as shown on the books of the Company, or to the Company at the address indicated therefor in the first paragraph of this Warrant. SECTION 14. DESCRIPTIVE HEADINGS AND GOVERNING LAW. The description headings of the several sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of California, without regard to its conflicts of laws principles. SECTION 15. ATTORNEYS' FEES. In any litigation, arbitration or court proceeding between the Company and Holder relating hereto, the prevailing party shall be entitled to attorneys' fees and expenses and all costs of proceedings incurred in enforcing this Warrant. SECTION 16. SURVIVAL. The representations, warranties, covenants and conditions of the respective parties contained herein or made pursuant to this Warrant shall survive the execution and delivery of this Warrant. SECTION 17. SEVERABILITY. In the event any one or more of the provisions of this Warrant shall for any reason be held invalid, illegal or unenforceable, the remaining provisions of this Warrant shall be unimpaired, and the invalid, illegal or unenforceable provision shall be replaced by a mutually acceptable valid, legal and enforceable provision, which comes closest to the intention of the parties underlying the invalid, illegal or unenforceable provision. [Signature Page Follows] 7
IN WITNESS WHEREOF, the parties have caused this Warrant to be duly executed and delivered by their proper and duly authorized representatives as of the day and year first above written. Questcor Pharmaceuticals, Inc. By: /s/ Charles J. Casamento -------------------------- Name: Charles J. Casamento ------------------------ Title: Chairman, President and CEO Claudio Cavazza By: /s/ Claudio Cavazza --------------------------- Name: Claudio Cavazza -------------------------- 8
PURCHASE FORM Dated__________, _____ The undersigned hereby irrevocably elects to exercise the within Warrant to purchase ______ shares of Common Stock and hereby makes payment of $_________ in payment of the exercise price thereof, together with all applicable transfer taxes, if any. In exercising its rights to purchase the Common Stock of Questcor Pharmaceuticals, Inc., the undersigned hereby confirms and acknowledges the investment representations and warranties made in Section 9 of the Warrant. Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below. ______________________________________ (Name) ______________________________________ (Address) ______________________________________ HOLDER: CLAUDIO CAVAZZA By:____________________________________ Print Name: ___________________________ 9
ASSIGNMENT FORM Dated:______________,_______ FOR VALUE RECEIVED, Claudio Cavazza hereby sells, assigns and transfers unto ________________________________________________________ (the "Assignee"), (please type or print in block letters). _______________________________________________________________________________ (insert address) its right to purchase up to __________ shares of Common Stock represented by this Warrant and does hereby irrevocably constitute and appoint _________________________ attorney, to transfer the same on the books of the Company, with full power of substitution in the premises. CLAUDIO CAVAZZA By:________________________ Print Name:________________ 10
TRANSFER NOTICE (To transfer or assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares). FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby transferred and assigned to: ______________________________________________________________________________ (Please Print) whose address is______________________________________________________________ ______________________________________________________________________________ Dated___________________________________________ Holder's Signature______________________________ Holder's Address________________________________ ________________________________________________ Note: The signature to this Transfer Notice must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant. 11
EXHIBIT 10.6 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (the "Agreement"), dated as of July 27, 2001, (the "Effective Date"), is made and entered into by and between AVENTIS PHARMACEUTICALS PRODUCTS INC., a Delaware corporation ("Seller"), and QUESTCOR PHARMACEUTICALS, INC., a California corporation ("Purchaser"). Capitalized terms used in this Agreement shall have the meanings ascribed to them in Article I hereof or as otherwise set forth herein. RECITALS WHEREAS, Seller is engaged in business of manufacturing and selling the Product (as defined herein), with such Product being sold under the Trademarks (as defined herein); and WHEREAS, Seller desires to sell, transfer and assign to Purchaser, and Purchaser desires to purchase and acquire from Seller, any and all rights in, to and under the Product and related Assets (as defined herein), and in connection therewith. Purchaser has agreed to assume certain liabilities of Seller relating to the Product and such Assets, all on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE 1 DEFINITIONS The following terms shall have the meanings set forth below. Unless the context indicates otherwise, the singular shall include the plural and the plural shall include the singular. 1.1 "AFFILIATE" shall mean any entity that directly, or indirectly through one or more intermediaries, controls or is controlled by or is under common control with the party specified. For the purposes of this Section 1.1 only, "control" will refer to (a) the possession, directly or indirectly, of the power to direct the management or policies of a person or entity, whether through the ownership of voting securities, by contract or otherwise, or (b) the ownership, directly or indirectly, of at least fifty percent (50%) (or, if less, the maximum ownership interest permitted by law)of the voting securities or other ownership interest of an entity. 1.2 "AGREEMENT" shall have the meaning set forth in the preamble. 1.3 "ASSETS" shall have the meaning set forth in Section 2.1 herein. 1.4 "ASSUMED LIABILITIES" shall have the meaning set forth in Section 2.2(a) herein. 1.5 "ATHENA AGREEMENT" shall mean any and all agreements, written or oral, between Seller or any of its Affiliates and Athena Rx Home Pharmacy, a division of Elan Pharmaceuticals, Inc. 1.
1.6 "BUSINESS DAY" OR "business day" shall mean a day other than Saturday, Sunday or any day on which banks located in the State of Delaware are authorized or obligated to close. Whenever this Agreement refers to a number of days, such number shall refer to calendar days unless Business Days (or business days) are specified. 1.7 "EFFECTIVE DATE" shall have the meaning set forth in the preamble. 1.8 "EQUIPMENT" shall have the meaning set forth in Section 2.1(d) herein. 1.9 "FDA" shall mean the United States Food and Drug Administration or any successor entity thereto. 1.10 "FDA MEETING" shall mean the February 7, 2001 meeting between representatives of the FDA, Seller and Purchaser. 1.11 "FINISHED PRODUCT INVENTORY" shall have the meaning set forth in Section 2.3(b). 1.12 "GOVERNMENTAL OR REGULATORY AUTHORITY" shall mean any court, tribunal, arbitrator, authority, agency, commission, official or other instrumentality of the United States or any state, county, city or other political subdivision within the United States. 1.13 "INDEMNITEE" shall have the meaning set forth in Section 5.2 herein. 1.14 "INDEMNITOR" shall have the meaning set forth in Section 5.2(a) herein. 1.15 "INVENTORY" shall have the meaning set forth in Section 2.1(e) herein. 1.16 "KNOWLEDGE" or "knowledge" shall mean actual knowledge after reasonable investigation by any executive officer of those things which a reasonably diligent inquiry and exercise of means of information at hand would have disclosed. 1.17 "LABELING MATERIAL" shall have the meaning set forth in Section 6.3 herein. 1.18 "LAWS" shall mean all laws, statues, rules, regulations, ordinances and other pronouncements having the effect of law of the United States or any state, county, city or other political subdivision within the United States or of any Governmental or Regulatory Authority. 1.19 "LOSSES" shall mean any and all liabilities, debts, obligations, damages, fines, penalties, deficiencies, losses and expenses (including, without limitation, interest, court costs, amounts paid in settlement, reasonable fees of attorneys, accountants and other experts or other reasonable expenses of litigation or other proceedings or of any claim, default or assessment). 1.20 "NDA" shall mean the New Drug Application filed with the FDA under application number 8-372. 1.21 "NET SALES" shall mean total gross invoiced sales of the Product, including any sales of the Product under any trademark other than the Trademark, by Purchaser, its Affiliates
and/or their respective assignees, licensees or distributors to a Third Party end user, less the following deductions to the extent included in such gross invoiced sales price for the Product, or otherwise directly paid or incurred by Purchaser, its Affiliates, sublicensees and/or their respective assignees, licensees or distributors with respect to the sale of the Product to non-Affiliates: (a) any rebates, quantity, trade and cash discounts, retroactive price reductions, and other usual and customary discounts to customers accrued and subsequently paid, in the ordinary course of business; (b) returns; (c) freight, transportation, postage and insurance to the extent included in the invoice price; and (d) sales taxes, tariffs, duties and other governmental charges (including value added tax) actually paid in connection with the sale (but excluding income taxes). 1.22 "NORD AGREEMENT" shall mean any and all agreements, written or oral, between Seller or any of its Affiliates and the National Organization for Rare Disorders, Inc. 1.23 "PRODUCT" shall mean any and all dosage forms of the finished product that have corticotropin as such product's active ingredient that Seller has rights to. 1.24 "PROPRIETARY RIGHTS" shall have the meaning set forth in Section 2.1(c) herein. 1.25 "PURCHASE PRICE" shall have the meaning set forth in Section 2.3 herein. 1.26 "PURCHASER" shall have the meaning set forth in the preamble. 1.27 "REGULATORY DOCUMENTS" shall have the meaning set forth in Section 2.1(b) herein. 1.28 "REMAINING INVENTORY" shall have the meaning set forth in Section 2.3(b) herein. 1.29 "RETAINED LIABILITIES" shall have the meaning set forth in Section 2.2(b) herein. 1.30 "ROYALTY PAYMENT" shall have the meaning set forth in Section 2.3(c) herein. 1.31 "SELLER" shall have the meaning set forth in the preamble. 1.32 "THIRD PARTY" shall mean a person or entity other than Seller, Purchaser or Affiliates of either. 1.33 "TRADEMARKS" shall mean ACTHAR and ACTHAR GEL.
ARTICLE 2 SALE OF ASSETS, LICENSE GRANT, CLOSING AND CERTAIN POST-CLOSING OBLIGATIONS 2.1 SALE OF ASSETS. As of the Effective Date, and subject to the terms and conditions of this Agreement, Seller hereby sells, assigns, conveys, transfers, and delivers to Purchaser, and Purchaser purchases and accepts from Seller, the following assets related to the Product (collectively, the "Assets"): (a) any and all of Seller's and its Affiliates' rights, title, and interests in, to and under the Trademarks in any country of the world, together with the goodwill of the business symbolized by the Trademarks, including but not limited to, common law rights and the registrations listed in SCHEDULE 2.1(a) attached hereto; (b) any and all of Seller's and its Affiliates' rights, title, and interest in, to and under the NDA and all related regulatory filings, and any regulatory filings of Seller for the Product outside the United States (if any), and including, without limitation, all documents related to the safety database and medical information files for the Product (collectively, the "Regulatory Documents"); (c) any and all of Seller's and its Affiliates' rights, title and interest in, to and under any and all know-how and other proprietary rights owned and/or controlled by Seller or its Affiliates and used in the manufacture and/or testing of the Product, including, without limitation, records, processes and procedures used in the extraction process, biological assay testing and manufacturing of the Product (collectively, the "Proprietary Rights"); (d) the equipment set forth on SCHEDULE 2.1(d) attached hereto (the "Equipment"); and (e) the Product inventory set forth on SCHEDULE 2.1(e) attached hereto delivered to Purchaser in accordance with the terms and conditions of this Agreement, consisting of finished Product, work-in-progress, raw materials (active ingredients and excipients), packaging materials and other supplies and materials on hand, to the extent used exclusively in the production of the Product (collectively, the "Inventory"). Inventory held pursuant to the terms of the Athena Agreement at Athena Rx Home Pharmacy's place of business is expressly excluded from the Assets. 2.2 LIABILITIES. (a) ASSUMED LIABILITIES. On the Effective Date, and subject to the terms and conditions of this Agreement, Purchaser assumes and agrees to pay, perform and discharge when due the following liabilities and obligations arising in connection with the Assets (the "Assumed Liabilities"): (i) OBLIGATIONS UNDER THE TRADEMARKS AND REGULATORY DOCUMENTS. All liabilities and obligations under the Trademarks and the Regulatory Documents arising and to be performed on or after the Effective Date.
(ii) MEDICAID/MEDICARE REBATES; CHARGEBACKS; CREDITS. (1) State and federal Medicaid/Medicare rebates in connection with the Product sold by Purchaser after the Effective Date; (2) Chargeback rebates and similar payments to wholesalers and other distributors in connection with the Product in the Territory beginning one month after the Effective Date; and (3) Credits, utilization based rebates, reimbursements, and similar payments to buying groups, insurers and other institutions in connection with the Product sold by Purchaser after the Effective Date. (iii) RECALLS. From and after the Effective Date, all liabilities, obligations and responsibilities relating to voluntary and involuntary recalls of units of the Product sold by Purchaser after the Effective Date. (iv) PRODUCTS LIABILITY. From and after the Effective Date, all liabilities, obligations and responsibilities relating to product liability claims or threatened claims relating to units of the Product sold by Purchaser after the Effective Date; provided, however, that liability for such claims or threatened claims shall not be assumed by Purchaser solely to the extent such claims arise from: (i) the manufacturing, storage or handling of Finished Product Inventory by Seller or its Affiliates before shipment of such Finished Product Inventory to Purchaser; and (ii) the storage or handling of the Remaining Inventory by Seller or its Affiliates after the Effective Date. (v) RETURNS. From and after the Effective Date, all liabilities and obligations with respect to return of units of Product, provided that Seller shall reimburse Purchaser for the actual cost of credits given to the trade for returned Product with respect to returns received at any time regarding units of Product sold by Seller prior to the Effective Date. Purchaser shall provide Seller with reasonably detailed documentation for any costs to be reimbursed by Seller hereunder and Seller shall have the right to audit such documentation pursuant to the procedures set forth in Section 2.6(d) herein. (b) RETAINED LIABILITIES. Except for the Assumed Liabilities and as set forth in this Agreement, Purchaser shall not assume by virtue of this Agreement or the transactions contemplated hereby, and shall have no liability for, any Losses of Seller of any kind, character or description whatsoever or wheresoever, including, but not limited to, any obligations or Losses with respect to the NORD Agreement, the Athena Agreement or distribution of Product by Seller pursuant to such Agreements (the "Retained Liabilities"). 2.3 PURCHASE PRICE. Subject to the terms and conditions of this Agreement, Purchaser shall pay to Seller as full and fair consideration for the Assets the following consideration (the "Purchase Price"): (a) Upon the later to occur of (i) the date of the first commercial shipment of Product by Purchaser to a Third Party or (ii) the date that is ninety (90) days after the Effective
Date, Purchaser shall pay to Seller * by wire transfer to an account designated by Seller; and (b) Upon the later to occur of (i) the date of the first commercial shipment of Product by Purchaser to a Third Party or (ii) the date that is ninety (90) days after the Effective Date, Purchaser shall pay Seller * per vial as the total purchase price for all of the filled and labeled vials of finished Product in the Inventory and available for sale to Purchaser as of the Effective Date (the "Finished Product Inventory"), an estimate of which is set forth on SCHEDULE 2.1(e) attached hereto. In addition, in accordance with the provisions of Section 2.5 herein, Purchaser shall pay Seller for any of the Inventory described on SCHEDULE 2.1(e) other than the Finished Product Inventory purchased as described in the first sentence of this Section 2.3(b), including any of the frozen mini-bombs of active raw ingredient, that is used by Purchaser to produce product to be sold by Purchaser to the trade, (the "Remaining Inventory"), such Inventory to be sold to Purchaser by Seller at a purchase price equal to Seller's standard costs for such Inventory, the standard costs for which are set forth on SCHEDULE 2.1(e), and payment shall be due and payable upon receipt of such Inventory delivered in accordance with Section 2.5; and provided, however, that Purchaser shall not be obligated to purchase any more than one hundred twenty five percent (125%) of the estimate set forth on SCHEDULE 2.1(e); and (c) for so long as Purchaser, any of its Affiliates or any of its licensees, or any of their respective successors or assigns, sells the Product, Purchaser shall pay to Seller an annual royalty equal to * in any given calendar year (the "Royalty Payment"), pursuant to the terms and conditions of Section 2.6 herein. 2.4 GRANT OF SECURITY INTEREST. Purchaser hereby grants to Seller a purchase money security interest in and to the Assets, as security solely for the performance by Purchaser of its payment obligations only for the portion of the Purchase Price set forth in Sections 2.3(a) and 2.3(b), together with the right of Seller to repossess the Assets with reasonable advance written notice in the event such obligations are not paid in full within (30) days after becoming due and payable (the "Security Interest"). Purchaser agrees to execute all documents, including without limitation, an UCC-1 Financing Statement or its equivalent, reasonably necessary for Seller to perfect the Security Interest. The Security Interest shall terminate automatically upon receipt by Seller of the payments set forth in Sections 2.3(a) and 2.3(b). Promptly upon receipt of such payments, Seller shall execute all documents reasonably necessary to remove and eliminate the Security Interest, including, without limitation, any liens arising therefrom. 2.5 INVENTORY. (a) FINISHED PRODUCT INVENTORY. Promptly after the Finished Product Inventory has been relabeled as provided in Section 6.3, Seller shall ship to Purchaser, FOB Seller's distribution facility on a carrier designated by Purchaser, all of such relabeled Finished Product Inventory. Payment for such Finished Product Inventory shall be made by Purchaser as described in Section 2.3(b) hereof. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.
(b) REMAINING INVENTORY. Seller shall retain the Remaining Inventory in Seller's possession and control after the Effective Date and until: (i) such Remaining Inventory is used by Seller to manufacture filled and labeled vials of finished Product from all or any part of such Remaining Inventory pursuant to Section 6.1(a); and/or (ii) Seller ships all or any part of such Remaining Inventory to Purchaser or to a Third Party designated by Purchaser. Notwithstanding the other provisions of this Section 2.5(b), Seller shall have no obligation to retain or maintain such Remaining Inventory longer than one (1) year after the Effective Date and Purchaser expressly acknowledges that Remaining Inventory may be used in manufacturing under the Supply Agreement and may be unavailable or available in different quantities thereafter as set forth herein. Payment for such Remaining Inventory shall be made by Purchaser as described in Section 2.3(b) hereof. During the period after the Effective Date that Seller remains in possession and control of the Remaining Inventory, Seller shall use reasonable commercial efforts to maintain such Remaining Inventory in accordance with the specifications therefor. (c) SHIPPING. All shipments hereunder shall be FOB Seller's distribution facility and the risk of loss for such shipments shall pass to Purchaser upon the transfer of the Inventory to the carrier designated by Purchaser for each such shipment. Seller shall, at its sole cost and expense, package and label Finished Product Inventory and Remaining Inventory (to the extent purchased by Purchaser) for shipping to Purchaser using reasonable commercial diligence to prevent breakage, spoilage or damage to such Finished Product Inventory and Remaining Inventory. 2.6 ROYALTY PAYMENTS. (a) ANNUAL REPORT AND PAYMENT. Within thirty (30) days after the end of each calendar year following the Effective Date during which Purchaser records any Net Sales, Purchaser shall provide to Seller a written report setting forth in reasonable detail, including, without limitation, the deductions taken in computing Net Sales, the total amount of Net Sales for such calendar year and the amount of any Royalty Payment due to Seller based on (i) the Net Sales for such calendar year and (ii) the Royalty Payment terms and conditions set forth in Section 2.3(c) herein. Each such annual report shall include payment in the amount of any Royalty Payment due to Seller for the calendar year to which the annual report relates. (b) TAXES. Any tax required to be withheld by Purchaser on Royalty Payments due Seller hereunder shall be deducted from the amount of Royalty Payments otherwise due, and Purchaser shall supply Seller with appropriate evidence of such tax and payment thereof. (c) BOOKS AND RECORDS. Purchaser shall, and shall require its licensees or distributors to, maintain full and complete books and records of all information necessary for the computation of Net Sales and the royalties payable hereunder for a period of three (3) years after the end of the fiscal year to which they relate. All such books and records shall be maintained in accordance with generally accepted accounting principles consistently applied. (d) AUDIT RIGHTS. Upon reasonable prior written notice to Purchaser, Seller shall have the right at any time (but no more often than once yearly and in any event within three
(3) years after the close of the year to which the audit relates) to have an audit performed of the books of account and other records of Purchaser during normal business hours for the sole purpose of verifying the Royalty Payments made hereunder. The fees and expenses of any such audit shall be borne by Seller, except in the event that the audit reveals an underpayment of more than five percent (5%) of the actual amount determined to be due, whereupon such fees and expenses shall be borne by Purchaser. Purchaser shall within sixty (60)days of the results of such audit provide for payment of amounts which are underpaid, unless a bona fide dispute exists as to the results of such audit. 2.7 DELIVERY OF DOCUMENTATION. Within twenty (20) days after the Effective Date, Seller shall, at its sole cost and expense, deliver to Purchaser, at the address set forth in Section 7.3 herein, originals of the materials comprising the Regulatory Documents (provided that Seller shall have the right to retain one copy of such Regulatory Documents solely for its archival purposes); provided, however, that if, Purchaser receives an inquiry from the FDA or an equivalent foreign regulatory agency relating to the Product, then Seller shall use its best efforts to deliver to Questcor such documentation within ten (10) days of the Effective Date or allow Questcor to have access to such documentation at its current location so that Questcor may respond as necessary to such inquiry. 2.8 TAXES. Purchaser shall be responsible for and shall promptly pay all federal, state, and local transfer, sales, and other taxes, if any, levied or imposed as a result of the transactions contemplated by this Agreement, excluding any tax payable on any income or gain of Seller. 2.9 FURTHER ACTION BY THE PARTIES. Each of the parties shall use its reasonable commercial efforts to take all actions and to do all things necessary, proper, or advisable in order to consummate and make effective the transactions contemplated by this Agreement. ARTICLE 3 REGULATORY MATTERS 3.1 FILINGS WITH GOVERNMENTAL OR REGULATORY AUTHORITIES REGARDING TRANSFER OF THE NDA AND FOREIGN EQUIVALENTS. (a) On or promptly after the Effective Date, but not later than ten (10) days after the Effective Date, the parties shall each file with the FDA a letter containing any information required pursuant to 21 C.F.R. Section 314.72, or any successor regulation thereto, regarding the transfer of ownership of the NDA from Seller to Purchaser (the "Notification Letters"). In their respective Notification Letters, Seller shall file the information required of a former owner of the NDA, and Purchaser shall file the information required of a new owner of the NDA. The parties shall file such Notification Letters in a form similar to the sample letters set forth in SCHEDULE 3.1. The parties also agree to use their best efforts to take any and all other actions required by the FDA, or other necessary Governmental or Regulatory Authorities, if any, to effect the transfer of the NDA from Seller to Purchaser. Seller may retain an archival copy of the NDA, including supplements and records that are required to be kept under 21 C.F.R. Section 314.81.
(b) Seller shall transfer to Purchaser, at Purchaser's request and sole expense, any Regulatory Documents relating to filings equivalent to the NDA made outside the United States. In addition, Seller will use its best efforts, at Purchaser's request and sole cost and expense, to cause its Affiliates to transfer any regulatory filings of Seller's Affiliates for the Product outside the United States (if any). 3.2 RESPONSIBILITY FOR THE ASSETS AND THE PRODUCT. (a) Subject to Section 6.1(b), on the date of receipt by the FDA of the Notification Letter of Seller, Purchaser shall assume all regulatory responsibilities permitted by applicable laws and regulations to be assumed by Purchaser, reporting and otherwise, in connection with the Assets and the Product including, but not limited to, responsibility for reporting any adverse drug events in connection with the Product, and responsibility for compliance with the Prescription Drug Marketing Act of 1987, as the same may be amended from time to time; provided however, that from the Effective Date until the date that the FDA is notified of such transfer, Purchasers shall only be obligated to assume such responsibilities to the extent permitted by law, and the parties shall work together to assure that such obligations are met during such period. (b) The parties will agree upon procedures to ensure a smooth transition from Seller to Purchaser of the activities required to be undertaken by the holder of the NDA. (c) Upon the Effective Date, Purchaser shall assume all responsibility for any and all fee obligations for holders or owners of approved new drug applications and approved, marketed prescription drug products relating to the Assets and Product, including, but not limited to, those defined under the Prescription Drug User Fee Act of 1992, as the same may be amended from time to time. (d) Promptly after the Effective Date, Purchaser and Seller shall take all actions necessary or required under applicable Laws to reflect that the Assets are owned by Purchaser and the Purchaser has responsibility therefor. ARTICLE 4 REPRESENTATIONS AND WARRANTIES 4.1 REPRESENTATIONS AND WARRANTIES OF SELLER. Seller represents and warrants to Purchaser as follows: (a) ORGANIZATION AND STANDING. Seller is a corporation, duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. (b) POWER AND AUTHORITY. Seller has all requisite corporate or limited liability company power and authority to execute, deliver, and perform this Agreement and the other agreements and instruments to be executed and delivered by it pursuant hereto and to consummate the transactions contemplated herein and therein. The execution, delivery, and performance of this Agreement by Seller does not, and the consummation of the transactions contemplated hereby will not, violate any provisions of Seller's organizational documents,
bylaws, any law or regulation applicable to Seller, or any agreement, mortgage, lease, instrument, order, judgment, or decree to which Seller is a party or by which Seller is bound or result in the creation or acceleration of any lien charge, security interest, or other encumbrance on the Assets. (c) CORPORATE ACTION; BINDING EFFECT. Seller has duly and properly taken all action required by law, its organizational documents, or otherwise, to authorize the execution, delivery, and performance of this Agreement and the other instruments to be executed and delivered by it pursuant hereto and the consummation of transactions contemplated hereby and thereby. This Agreement has been duly executed and delivered by Seller and constitutes, and the other instruments contemplated hereby when duly executed and delivered by Seller will constitute, legal, valid, and binding obligations of Seller enforceable against it in accordance with their respective terms, except as enforcement may be affected by bankruptcy, insolvency, or other similar laws and by general principles of equity as applied by a court of competent jurisdiction. (d) CONSENTS. No consent or approval of, or filing with or notice to, any Governmental or Regulatory Authority or any other person not a party to this Agreement is required or necessary to be obtained by Seller or on its behalf in connection with the execution, delivery, and performance of this Agreement or to consummate the transactions contemplated hereby, except as contemplated by Section 3.1 hereof. (e) OWNERSHIP OF ASSETS; CONDITION OF ASSETS. Seller is the sole owner of the Assets and the Assets are free and clear of all liens, claims, charges, or encumbrances. (f) FINISHED PRODUCT INVENTORY WARRANTY. The Finished Product Inventory delivered hereunder shall conform to the specifications therefor, and shall have been manufactured in accordance with cGMP and the manufacturing process as approved by the FDA at the time of manufacture. (g) LITIGATION OR DISPUTES. There is no claim, outstanding commitment to any governmental regulatory agency, action, suit, proceeding, investigation, or arbitration pending or, to Seller's knowledge, threatened against Seller relating to the Assets, and Seller is not in violation of or in default with respect to any applicable law, rule, regulation, judgment, order, writ, injunction, award, or decree of any arbitrator, court, or administrative body, the result of any of which, either individually or cumulatively, would have a materially adverse effect on the Assets or Seller's compliance with and performance under the terms of this Agreement. (h) PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS. (i) Seller is not aware of any unexpired patent that claims or covers any of the Assets owned by Seller (the "Patent"). To the extent that a Patent or patent application exists as of the Effective Date of this Agreement, Seller covenants not to sue Purchaser under such Patent or any other patent issuing from a patent application that claims priority to the patent application that issued into such Patent.
(ii) There is no claim, action, suit, or proceeding, pending or, to Seller's Knowledge, threatened alleging that the use by Seller or its Affiliates of the Trademarks or the Proprietary Rights infringes any intellectual property rights of third parties. (iii) Seller has not executed or granted to any Affiliate or any Third Party any license, sublicense, or contract covering the Trademarks or the Proprietary Rights. (i) EQUIPMENT. The equipment listed on Schedule 2.1(d) is all the equipment solely dedicated to the extraction process of the manufacture (but not the filling process) and testing of the Product in Seller's Kankakee, IL, plant. 4.2 REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents and warrants to Seller as follows: (a) ORGANIZATION AND STANDING. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of California. (b) POWER AND AUTHORITY. Purchaser has all requisite corporate power and authority to execute, deliver, and perform this Agreement, and the other agreements and instruments to be executed and delivered by it pursuant hereto and to consummate the transactions contemplated herein and therein. The execution, delivery, and performance of this Agreement by Purchaser do not, and the consummation of the transactions contemplated hereby will not, violate any provision of Purchaser's articles of incorporation, bylaws, any law or regulation applicable to Purchaser, or any agreement, mortgage, lease, instrument, order, judgment, or decree to which Purchaser is a party or by which Purchaser is bound. (c) CORPORATE ACTION; BINDING EFFECT. Purchaser has duly and properly taken all action required by law, its articles of incorporation, its bylaws, or otherwise, to authorize the execution, delivery, and performance by it of this Agreement and the other instruments to be executed by it pursuant hereto and the consummation of the transactions contemplated hereby and thereby. This Agreement has been duly executed and delivered by Purchaser and constitutes, and the other instruments contemplated hereby when duly executed and delivered by Purchaser will constitute, legal, valid, and binding obligations of Purchaser enforceable against it in accordance with their respective terms, except as enforcement may be affected by bankruptcy, insolvency, or other similar laws and by general principles of equity as applied by a court of competent jurisdiction. (d) CONSENTS. No consent or approval of, or filing with or notice to, any federal, state, or local governmental or regulatory authority, agency, or department or any other person not a party to this Agreement is required or necessary to be obtained by Purchaser or on its behalf in connection with the execution, delivery, and performance of this Agreement or to consummate the transactions contemplated hereby, except as contemplated by Section 3.1 hereof. 4.3 SURVIVAL OF REPRESENTATIONS/WARRANTIES. The representations and warranties contained in this Article IV, and that portion of the indemnification with respect thereto pursuant to Article V, shall survive the Effective Date and continue in effect for a period of one (1) year
thereafter, except for the representation set forth in Section 4.1(f) which shall survive beyond such one (1) year period. 4.4 BROKERS. Each party hereby represents that all negotiations relative to this Agreement and the transactions contemplated hereby have been carried out by each such party directly with the other party without the intervention of any Third Party on behalf of either party in such manner as to give rise to any valid claim by any Third Party against either party for a finder's fee, brokerage commission or similar payment. 4.5 MANUFACTURING PROCESS. Purchaser hereby acknowledges and agrees that the Assets and Product are being sold hereunder on an 'as is' compliance basis with respect to the manufacture of the Product in accordance with the FDA's position at the FDA Meeting and that Seller makes no representation or warranty or in any way guarantees that the FDA will issue minutes of the FDA Meeting that reflect the FDA's consent to allow the manufacture of the Product as it is being manufactured by Seller as of the Effective Date, or that the FDA will continue to allow the manufacture in such manner in the future, regardless of the FDA's position in the minutes of the FDA Meeting. Purchaser acknowledges that the FDA has not approved or issued minutes of the FDA Meeting documenting the FDA's consent to manufacture in the manner set forth at the FDA Meeting, and Purchaser accepts any risk associated therewith. Accordingly, Purchaser accepts any and all risks of Losses associated with any change of the FDA's position from that set forth at the FDA Meeting regarding the manufacture of the Product. 4.6 DISCLAIMER OF WARRANTIES. EXCEPT AS EXPRESSLY PROVIDED HEREIN, SELLER DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, WITH REGARD TO THE ASSETS AND THE PRODUCT, INCLUDING, BUT NOT LIMITED TO, THE WARRANTY OF MERCHANTABILITY AND THE WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE. 4.7 AS-IS ACKNOWLEDGEMENT. Except as expressly set forth herein, Purchaser acknowledges that the Assets are being sold hereunder on an as-is basis, the Assets are being sold with no representations made by Seller as to condition of the Assets. 4.8 PATENT ACKNOWLEDGEMENT. Purchaser acknowledges that other parties, including without limitation American Medical Technologies, may have filed patent applications claiming or covering products that have corticotropin as an active ingredient, and that Seller has done no investigation with respect to such patent applications. ARTICLE 5 INDEMNIFICATION 5.1 INDEMNIFICATION. (a) Subject to Section 5.1(c) and Section 5.2, Seller shall indemnify Purchaser and its officers, directors, employees, agents and Affiliates in respect of, and hold each of them harmless from and against, any and all Losses suffered, incurred or sustained by any of them or to which any of them becomes subject, resulting from arising out of, or relating to,:
(i) The Retained Liabilities; and (ii) For the term set forth in Section 4.3 misrepresentation or breach of any warranty or covenant by Seller made or contained in this Agreement; and (iii) Litigation or other claims arising from acts failures to act or events relating to the Assets or the Product which occurred prior to the Effective Date; and (iv) The use, storage or transportation of the Products before the Effective Date; and (v) The testing performed by Seller pursuant to Section 6.1(b). Notwithstanding any provision herein to the contrary the parties agree that in no event will Seller be liable to Purchaser for special, consequential, indirect, punitive or similar damages; provided however, that indemnification claims for Losses arising solely out of third party claims shall not be so limited. (b) Subject to Section 5.1(c) and Section 5.2 Purchaser shall indemnify Seller and its officers, directors, employees, agents and Affiliates in respect of, and hold each of them harmless from and against, any and all Losses suffered, incurred or sustained by any of them or to which any of them becomes subject, resulting from, arising out of or relating to: (i) The Assumed Liabilities; and (ii) For the term set forth in Section 4.3, misrepresentation or breach of any warranty or covenant by the Purchaser made or contained in this Agreement; and (iii) Litigation or other claims arising from acts, failures to act or events relating to the Assets or the Product that occur on or after the Effective Date; except for claims arising from: (1) the manufacturing, storage or handling of Finished Product Inventory by Seller or its Affiliates before shipment of such Finished Product Inventory to Purchaser; and (2) the storage or handling of the Remaining Inventory by Seller or its Affiliates after the Effective Date. (iv) the use of the Assets on or after the Effective Date, except those Assets that remain within Seller's exclusive control. (v) The manufacture or testing of the Assets or the Products by Purchaser or a Third Party appointed by Purchaser; and (vi) Any cartons, package inserts, labels or any other supplies provided by Purchaser. Notwithstanding any provision herein to the contrary, the parties agree that in no event will Purchaser be liable to Seller for special, consequential, indirect, punitive or similar damages.
(c) Notwithstanding anything to the contrary contained in this Agreement, no amounts of indemnity shall be payable as a result of any claim in respect of any Losses arising under paragraph (a) or (b) of Section 5.1: (i) unless, until and then only to the extent that the Indemnified Parties thereunder have suffered, incurred, sustained or become subject to Losses referred to in such paragraphs in excess of Twenty-Five Thousand Dollars ($25,000) in the aggregate; (ii) with respect to any Losses, to the extent that the party seeking indemnification had a reasonable opportunity, but failed, in good faith to mitigate such Losses, including, but not limited to, the failure to use commercially reasonable efforts to recover under such party's policy of insurance or under a contractual right of set-off or indemnity; or (iii) with respect to any Losses, to the extent that such Losses are caused by (a) any inaccuracy of a representation or breach of a warranty made by the party seeking indemnification in the Agreement or (b) the gross negligence or intentional misconduct of such party or any of its officers, directors, employees, agents or Affiliates. 5.2 METHOD OF ASSERTING CLAIMS. A party (the "Indemnitee") that intends to claim indemnification under this Article V shall: (a) notify the other party (the "Indemnitor") in writing of any Losses with respect to which the Indemnitee intends to claim indemnification as soon as practicable after the Indemnitee becomes aware of any such Losses; (b) permit the Indemnitor to assume the defense thereof with counsel mutually satisfactory to the parties; and (c) cooperate with the Indemnitor, at the Indemnitor's expense, in the defense thereof. With respect to any matter for which the Indemnitor has an obligation to indemnify the Indemnitee under this Agreement, the Indemnitee shall have the right to participate and be represented (at the Indemnitor's expense) by legal counsel of the Indemnitee's choice in all proceedings and negotiations, if representation by counsel retained by Indemnitor would be inappropriate due to actual or potential differing interests between the Indemnitee and any other party represented by such counsel in such proceedings. The indemnity agreement in this Article V shall not apply to amounts paid in settlement of any Losses if such settlement is effected without the consent of the Indemnitor, which consent shall not be unreasonably withheld. Failure of the Indemnitee to deliver notice to the Indemnitor within a reasonable time after becoming aware of potential Losses shall not relieve the Indemnitor of any liability to the Indemnitee pursuant to this Article V, except to the extent such delay prejudices the Indemnitor's ability to defend such action. The Indemnitor shall not settle or compromise any claim or Losses in any manner that admits fault on the part of the Indemnitee without the express prior written consent of the Indemnitee, which consent may be withheld for any reason or no reason.
ARTICLE 6 TRANSITION SERVICES 6.1 PRODUCT SUPPLY AND TESTING. (a) SUPPLY. If needed by Purchaser and only until the earlier to occur of (i) such time as manufacturing of the Product can be transferred to Purchaser or its designated Third Party supplier or (ii) twelve (12) months following the Effective Date, Seller shall, at Purchaser's written request, manufacture, and fill and label vials of, finished Product from existing mini-bombs of raw active ingredient in the Remaining Inventory pursuant to terms and conditions of a supply agreement to be negotiated and agreed upon in good faith by and between the parties; provided that the price shall be * per vial of filled and labeled finished Product and the other terms and conditions of such manufacture shall be consistent with Seller's previous manufacture of filled and labeled vials of Product for its own use. (b) TESTING. Seller will perform, at its sole cost and expense, any and all testing of all batches of the Finished Product Inventory and related tasks that Seller has, as of the Effective Date, committed to the FDA to perform on the Finished Product Inventory produced by Seller prior to the Effective Date, such testing commitments consisting solely of stability testing on lots of Finished Product Inventory manufactured by Seller until the second anniversary of the manufacture of such lots. For purposes of clarity, this obligation relates solely to Finished Product Inventory manufactured before the date hereof. Any testing related to Products produced pursuant to Section 6.1(a) will be set forth in the supply agreement, which is described in Section 6.1(a). 6.2 TRANSFER OF PRODUCT MANUFACTURING AND TESTING. (a) SITE IDENTIFICATION; TIMETABLE. Subject to Section 6.1(a), Purchaser shall identify sites for the manufacture of the active ingredient for, and finished dosage forms of, the Product, and for the testing of the Product and the active ingredient, components and intermediates that is required by the FDA or similar regulatory agency. Seller shall transfer the manufacturing and testing of the active ingredient, components and intermediates and the finished Product to such sites as set forth on SCHEDULE 6.2 in accordance with the provisions of Section 6.2(b) herein. (b) SELLER'S OBLIGATIONS. Seller will provide Purchaser with assistance in transferring the manufacturing and testing of the Product and the active ingredient, components and intermediates to Purchaser or its designated Third Party suppliers, including the shipment of the Equipment to, and re-installation of the Equipment at, the applicable transferee site and the training of employees of Purchaser or its designated Third Party suppliers on the manufacturing and testing processes. SCHEDULE 6.2 sets forth the project team and a projected timeline for the transfers. The costs and expenses of preparing and shipping the Equipment to the Third Party sites and any Seller costs or expenses related to such training and/or consultation services provided by Seller or its Affiliates at the Kankakee, Illinois manufacturing site shall be at Seller's sole cost and expense. Purchaser shall reimburse Seller for all costs and expenses related to assistance with re-installing Equipment at the Third Party sites and any training and/or * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.
consulting services performed by Seller or its Affiliate at locations outside of the Kankakee, Illinois manufacturing site at a rate of One Thousand Dollars ($1,000) per person per day plus reasonable travel expenses. (c) PAYMENT. Purchaser shall pay Seller for the costs and expenses to be reimbursed by Purchaser to Seller pursuant to Section 6.2(b) herein within thirty (30) days after Purchaser's receipt of each invoice from Seller for such costs and expenses. Each Seller invoice shall include reasonable details and documentation regarding the costs and expenses being invoiced by Seller for services rendered pursuant to Section 6.2(b) herein. 6.3 RELABELING. Seller shall relabel such amount of the Finished Product Inventory as Purchaser shall request (which amount shall allow a reasonable number of vials to not be relabeled and remain available to Athena for use in administration of the NORD program until such program is terminated by Seller) using such materials ("Labeling Materials") as Purchaser shall make available to Seller. Seller shall use commercially reasonable efforts to complete such relabeling no later than 8 weeks after receipt of the last to be received Labeling Materials. Such relabeling shall be performed in accordance with Seller's standard procedures for such relabeling. The cost for such relabeling shall be * per vial. ARTICLE 7 GENERAL PROVISIONS 7.1 PAYMENT OF TRANSACTION EXPENSES. All legal fees and other expenses incurred on behalf of Seller in connection with the negotiation of this Agreement and the consummation of the transactions contemplated herein will be borne by Seller; and all legal fees and other expenses incurred on behalf of Purchaser in connection with the negotiation of this Agreement and the consummation of the transactions contemplated herein will be borne by Purchaser. 7.2 NO OTHER REPRESENTATIONS. Except as expressly set forth in this Agreement, neither Seller nor Purchaser are making any representation or warranty whatsoever, express or implied, including, but not limited to, any implied representation or warranty as to condition, merchantability or suitability as to any of the Assets. In particular, Seller does not make any representation or warranty to Purchaser with respect to (i) the information set forth in the offering materials provided to Purchaser by Seller or (ii) any financial projection or forecast relating to the business prospects for the Product. With respect to any projection or forecast delivered by or on behalf of Seller to Purchaser, Purchaser acknowledges that (i) there are uncertainties inherent in attempting to make such projections and forecasts, (ii) it is familiar with such uncertainties, (iii) it is taking full responsibility for making its own evaluation of the adequacy and accuracy of all such projections and forecasts furnished to it and (iv) it shall have no claim against Seller with respect to such projections and forecasts prepared in good faith by Seller. 7.3 NOTICES. (a) Except as otherwise specifically provided herein, any notice or other documents to be given under this Agreement shall be in writing and shall be deemed to have * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.
been duly given if sent by registered post, nationally recognized overnight courier or facsimile transmission to a party or delivered in person to a party at the address or facsimile number set out below for such party or such other address as the party may from time to time designate by written notice to the other: If to Purchaser, to: Questcor Pharmaceuticals, Inc. 3260 Whipple Road Union City, California 94587 Attn: Vice President, Sales & Marketing Facsimile: 510-400-0719 If to Seller, to: Aventis Pharmaceuticals Products Inc. 300 Somerset Corporate Center Bridgewater, New Jersey 08807-2854 Attn: Vice President, Business Development Facsimile: 908-243-7219 with a copy to: Aventis Pharmaceuticals Products Inc. 300 Somerset Corporate Center Bridgewater, New Jersey 08807-2854 Attn: General Counsel North America Facsimile: 908-243-7220 (b) Any such notice or other document shall be deemed to have been received by the addressee three (3) business days following the date of dispatch of the notice or other document by post or, where the notice or other document is sent by overnight courier, by hand or is given by facsimile, simultaneously with the transmission or delivery. To prove the giving of a notice or other document it shall be sufficient to show that it was dispatched. 7.4 LATE PAYMENTS. Any payments due to Seller hereunder that are not received within thirty (30) days of the date on which such payment is due shall accrue interest on any amount overdue, at the lesser of (i) the prime rate as reported by the Morgan Guaranty Bank and Trust, New York, New York (the "Prime Rate") on the date such payment is due, plus an additional three percent (3%) or (ii) the maximum rate permitted by law, such interest to begin accruing on a daily basis from the date of invoice or the date the payment is due hereunder, as the case may be, and shall accrue both before and after any judgment rendered with respect thereto by a court of competent jurisdiction. 7.4 ENTIRE AGREEMENT; AMENDMENT. (a) This Agreement, together with the Schedules attached hereto, embodies and sets forth the entire agreement and understanding of the parties with respect to the subject
matter herein and there are no promises terms, conditions or obligations, oral or written, expressed or implied, other than those contained herein. The terms of this Agreement shall supersede all previous and contemporaneous oral or written agreements which may exist or have existed between the parties relating to the subject matter of this Agreement. No party shall be entitled to rely on any agreement, understanding or arrangement which is not expressly set forth in this Agreement. Any other terms and conditions are hereby expressly excluded. (b) This Agreement shall not be amended, modified, varied or supplemented except in writing signed by duly authorized representatives of the parties. 7.6 ASSIGNMENT. No party shall be entitled to assign its rights and obligations hereunder without the prior written consent of the other party; provided, however, a party shall be entitled, without the prior written consent of the other party, to assign its rights and obligations hereunder to an Affiliate, but such assignment to an Affiliate shall not relieve the assigning party of its obligations hereunder. No permitted assignment hereunder shall be deemed effective until the assignee shall have executed and delivered an instrument in writing reasonably satisfactory in form and substance to the other parties pursuant to which the assignee assumes all of the obligations of the assigning party hereunder. Any purported assignment of this Agreement in violation of this Section 7.6 shall be void. This Agreement shall be binding upon the successors and permitted assigns of the parties and the name of a party appearing herein shall be deemed to include the names of its successors and assigns. 7.7 HEADINGS, INTERPRETATION. The headings used in this Agreement are for convenience only and are not a part of this Agreement nor affect the interpretation of any of its provisions. 7.8 ATTACHMENTS. All Schedules referenced herein are hereby made a part of this Agreement. 7.9 INDEPENDENT PARTIES. This Agreement shall not be deemed to create any partnership, joint venture, amalgamation or agency relationship between the parties. Each party shall act hereunder as an independent contractor. 7.10 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of Delaware, without giving effect to the choice of law provisions thereof. 7.11 DISPUTE RESOLUTION. If a dispute or claim relating to or arising from this Agreement cannot be resolved by representatives of the parties in the ordinary course of business, then such dispute or claim shall be referred in writing and by referencing this Section 7.11 to the President of Seller and the Chief Executive Officer of Purchaser, respectively. If such officers are unable to resolve such dispute or claim presented to them under the preceding sentence within thirty (30) days of referral, then either party may take whatever action is available to it under law and equity. 7.12 NO WAIVER. Neither the failure nor delay on the part of either party to require the strict performance of any term, covenant or condition of this Agreement or to exercise any right or remedy available on a breach thereof shall constitute a waiver of any such breach or of any such term or condition. The consent to, or the waiver of, any breach, or the failure to require on
any single occasion the performance or timely performance of any term, covenant, or condition of this Agreement shall not be construed as authorizing any subsequent or additional breach and shall not prevent a subsequent enforcement of such term, covenant, or condition. 7.13 SEVERABILITY. In the event that any provision of this Agreement or the application thereof to any party or circumstance shall be finally determined by a court of proper jurisdiction to be invalid or unenforceable to any extent, then (i) a suitable and equitable provision shall be agreed to by the Parties in writing and substituted for the invalid or unenforceable provision in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid and unenforceable provision and (ii) the remainder of this Agreement and the application of such provision to the parties or circumstances other than those to which it is held invalid or unenforceable shall not be affected thereby. 7.14 INTERPRETATION. The parties hereto acknowledge and agree that (i) each party and its representatives has reviewed and negotiated the terms and provisions of this Agreement and have contributed to its revision, (ii) the rule of construction to the effect that any ambiguities are resolved against the drafting party shall not be employed in the interpretation of this Agreement and (iii) the terms and provisions of this Agreement shall be construed fairly as to each party hereto and not in favor of or against either party regardless of which party was generally responsible for the preparation of this Agreement. 7.15 COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but both of which together shall constitute a single agreement. 7.16 THIRD PARTY BENEFICIARIES. This Agreement is not intended to confer upon any Third Party rights or remedies hereunder, except as may be received or created as part of a valid assignment. 7.17 FURTHER ASSURANCES. Each party shall execute and deliver such additional instruments and other documents and use all commercially reasonable efforts to take or cause to be taken, all actions and to do, or cause to be done, all things necessary under applicable law to consummate the transactions expressly set forth in this Agreement. 7.18 TERMS OF THIS AGREEMENT. The parties agree not to disclose any terms or conditions of this Agreement to any Third Party without the prior written consent of the other party, except to advisors, investors, lenders and others on a need-to-know basis under conditions which reasonably ensure the confidentiality thereof or for disclosures only of the existence and general subject matter of this Agreement, or to the extent required by applicable Laws; provided, however, prior to any such required disclosure the non-disclosing party shall be allowed to review the proposed disclosure, and the disclosing party agrees to consider in good faith any proposed revisions thereof provided to the disclosing party within two (2) business days of the non-disclosing party's receipt of the proposed disclosure and the disclosing party shall seek confidential treatment for such disclosure as permitted by applicable Laws.
IN WITNESS WHEREOF, the parties hereto have each caused this Agreement to be duly executed as of the date first above written. SELLER: AVENTIS PHARMACEUTICALS PRODUCTS INC. By: /s/ JOHN R. LEONE ________________________________ Name: John R. Leone ______________________________ Title: Sr. Vice President _____________________________ Date: 7/27/01 ______________________________ PURCHASER: QUESTCOR PHARMACEUTICALS, INC. By: /s/ CHARLES J. CASAMENTO ________________________________ Name: Charles J. Casamento ______________________________ Title: CHAIRMAN, PRESIDENT and CEO _____________________________ Date: July 27, 2001 ______________________________
SCHEDULE 2.1(a) TRADEMARKS
SCHEDULE 2.1(d) LIST OF EQUIPMENT
SCHEDULE 2.1(d) (CONT.)
SCHEDULE 2.1(e) LIST OF INVENTORY As of 06/14/01
SCHEDULE 3.1 FORM OF NOTIFICATION LETTERS [Questcor Pharmaceuticals, Inc. Letterhead] July____, 2001 [ADDRESS TO FDA CONTACT PERSON FOR THIS NDA] Re: NDA #08-372, H.P. Acthar Gel (corticotropin) Dear [NAME OF FDA CONTACT PERSON]: Reference is made to NDA 08-372 for H.P. Acthar Gel (corticotropin). In accordance with 21 C.F.R. Section 314.72, the purpose of this letter is to inform the Food and Drug Administration that ownership of, and all rights and responsibilities for, the referenced NDA have been transferred to Questcor Pharmaceuticals, Inc. (Questcor) from Aventis Pharmaceuticals, Inc. (Aventis), effective July____, 2001. Questcor is committed to complying with all agreements, promises and conditions made by Aventis, as the former owner, and contained in the NDA. Aventis has provided Questcor with a complete copy of the NDA. If you have any questions, please contact me at [PHONE]. Sincerely, [NAME] Director of Scientific and Regulatory Affairs
SCHEDULE 3.1 (CONT.) [Aventis Pharmaceuticals, Inc. Letterhead] July __, 2001 [ADDRESS TO FDA CONTACT PERSON FOR THIS NDA] Re: NDA #08-372, H.P. Acthar Gel (corticotropin) Dear [NAME OF FDA CONTACT PERSON]: Reference is made to NDA 08-372 for H.P. Acthar Gel (corticotropin). In accordance with 21 C.F.R. Section 314.72, the purpose of this letter is to inform the Food and Drug Administration that Aventis Pharmaceuticals, Inc. has transferred all rights to the referenced NDA to Questcor Pharmaceuticals, Inc. effective July __, 2001. Please contact me at (816) 966-7104 if you have any questions. Sincerely, Dhiren N. Shah, Ph.D. Director, CMC-US Drug Regulatory Affairs cc: [NAME] Director of Regulatory Affairs, Questcor Pharmaceuticals, Inc.
SCHEDULE 6.2 MANUFACTURING AND TESTING TRANSFER TIMETABLE AND PROJECT TEAM July 20, 2001 Steve Gould Senior Director, Business Development Aventis Behring 1020 1st Ave KING OF PRUSSIA, PA 19406-0901 Dear Steve, You had asked last week for a statement of intent from us regarding the site transfer plan for Acthar Gel. The sequence of events, as contemplated at this time, are as follows: 1. Immediately following the signing of the definitive agreement, QSC will request a meeting with the FDA to discuss the proposed site transfer plan for Acthar Gel. 2. Unless modified following the FDA meeting, QSC will first negotiate and sign the contract manufacturer agreement with the vial filler, the raw material manufacturer, and the assay testing laboratory. 3. Following the signing of the contract manufacturing agreements, it is our intention to proceed initially with the assay transfer to the new contract testing lab. 4. Concurrently with the assay transfer, we intend to begin the process development work at the new vial filler. 5. The raw material extraction vendor will come to Kankakee and observe the set-up of the current process, become familiar with all aspects of the extraction procedures, and then Kankakee will be able to dismantle the dedicated equipment and ready it for shipment. Steve, this site transfer process may be modified at a future point depending on agreements between QSC and the FDA, or upon further discussion with Aventis personnel. However, this represents our best description of the site transfer process at this time.
Exhibit 10.7 THIS FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT (this "Agreement"), is dated and effective as of January , 2002, by and among AVENTIS PHARMACEUTICALS INC., a Delaware corporation f/k/a AVENTIS PHARMACEUTICALS PRODUCTS INC. ("Seller"), and QUESTCOR PHARMACEUTICALS, INC., a California corporation ("Purchaser"). WITNESSETH WHEREAS, Purchaser and Seller entered into an Asset Purchase Agreement, dated as of July 27, 2001 (the "Asset Purchase Agreement"). WHEREAS, Purchaser and Seller wish the amend certain provisions thereof to correct the Asset Purchase Agreement to reflect the understanding of the parties, and correct certain scrivener's errors; NOW, THEREFORE, in mutual covenants, the parties hereto agree as follows: Section 1. Section 4.1(f) is hereby is hereby amended and restated in its entirety as follow: "FINISHED PRODUCT INVENTORY WARRANTY. The Finished Product Inventory delivered hereunder shall conform to the specifications therefor, and shall have been formulated, filled, tested, labeled and packaged in accordance with manufacturing procedures in effect as of the Effective Date, copies of which have been provided to Questcor. Section 2. The parties hereto acknowledge that Seller reserved the rights necessary and Purchaser agrees that it has licensed and granted Seller such rights, to sell the Product to Athena Rx Pharmacy for the Limited Access Programs, as well as to other customers, in both cases for orders that need to be filled on or prior to the date that Purchaser has received relabeled Product, and for the period of any termination phase of the Agreement with Athena Rx Pharmacy. The parties acknowledge that Seller has billed and shipped such Products under the terms and conditions that were specified in the agreement between Seller and Athena Rx Pharmacy, and to other customers in accordance with past practice. Sales of such quantities of Product have been booked by Seller and Purchaser shall not have any claim to the revenues or profits from this commercial activity. The parties also acknowledge that any future claim arising from the sales of Product by Seller made under this Section 2 shall be borne fully by Seller, consistent with the provisions of the Asset Purchase Agreement that relate to sales of the Product prior to the execution date thereof. Section 3. Seller and Purchaser acknowledge that notwithstanding anything in Sections 2.1(e), 2.3(b) and 2.5(b) the Asset Purchase Agreement to the contrary, Purchaser has the option, but not the obligation, to purchase any Remaining Inventory remaining at the termination of the Supply and License Agreement described in Section 1 hereof. Seller and Purchaser further acknowledge that the terms of the sale of such
Remaining Inventory elected to be purchased by Purchaser shall be governed by Sections 2.3(b) and 2.5(b) of the Asset Purchase Agreement. Purchaser shall notify Seller in writing of its election to purchase some or all of the Remaining Inventory at least 30 days prior to the first anniversary of the Effective Date of the Asset Purchase Agreement. Purchaser acknowledges that Seller has no responsibility to retain or maintain such Remaining Inventory after the first anniversary of the Effective Date. In all other respects, the Asset Purchase Agreement remains unamended. IN WITNESS WHEREOF, the parties have caused this First Amendment to be executed by their duly authorized representatives effective as of the date first above written. AVENTIS PHARMACEUTICALS INC. By: /s/ John R. Leone ---------------------------------------- Name: John R. Leone Title: Senior Vice President and COO, U.S. Commercial Operations QUESTCORP PHARMACEUTICALS, INC. By: /s/ Kenneth R. Greathouse ---------------------------------------- Name: Kenneth R. Greathouse Title: Vice President, Commercial Operations
EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-30558, 333-46990 and 333-81243), pertaining to the 1992 Stock Option Plan, the 1993 Non-Employee Directors' Equity Incentive Plan and the 2000 Employee Stock Purchase Plan, and in the Registration Statements on Form S-3 (Nos. 333-61866, 333-25661, 333-32159, 333-23085, 333-17501 and 333-03507) and the related Prospectuses of our report dated February 12, 2002 (Except for Note 1, paragraph 4, and Note 17, as to which the date is March 15, 2002) with respect to the consolidated financial statements and schedule of Questcor Pharmaceuticals, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2001. /s/ Ernst & Young LLP Palo Alto, California March 15, 2002