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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO
____________.
Commission file number 0-26866
SONUS PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 95-4343413
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
22026 20TH AVE. S.E., SUITE 102, BOTHELL, WASHINGTON 98021
(Address of Principal Executive Offices)
(425) 487-9500
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date.
Class Outstanding at October 31, 1997
----- -------------------------------
Common Stock, $.001 par value 8,598,827
Page 1 of 12 Pages
Exhibit is on Page 12
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SONUS PHARMACEUTICALS, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION Page Number
-----------
Item 1. Financial Statements
Balance Sheets as of September 30, 1997 (unaudited) and December 31, 1996 . . . . . . . . . . . . 3
Unaudited Statements of Operations for the three months and nine months
ended September 30, 1997 and September 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . 4
Unaudited Statements of Cash Flow for the nine months ended
September 30, 1997 and September 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Items 2,3,4 and 5 are not applicable and therefore have been omitted.
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SONUS PHARMACEUTICALS, INC.
BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents ....................................... $ 7,254,351 $ 7,236,615
Marketable securities ........................................... 18,605,097 17,894,450
Prepaid expenses and other current assets ....................... 325,718 397,733
------------ ------------
Total current assets .......................................... 26,185,166 25,528,798
Equipment, furniture and leasehold improvements, net of accumulated
depreciation of $1,568,001 and $1,144,721 ....................... 1,610,722 1,168,503
Other assets ...................................................... 40,667 64,878
------------ ------------
Total assets ...................................................... $ 27,836,555 $ 26,762,179
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit ............................................. $ 5,000,000 $ 5,000,000
Accounts payable and accrued expenses ........................... 2,959,633 2,203,806
Accrued clinical trial expenses ................................. 1,616,596 1,213,563
Deferred revenue ................................................ -- 1,000,000
Current portion of capitalized lease obligations ................ 210,624 228,049
------------ ------------
Total current liabilities ..................................... 9,786,853 9,645,418
Capitalized lease obligations, less current portion ............... 110,446 239,511
Commitments
Stockholders' equity:
Preferred stock, $.001 par value:
5,000,000 authorized; no shares issued or outstanding ........ -- --
Common stock, $.001 par value:
20,000,000 shares authorized; 8,598,827 and 8,530,911
shares issued and outstanding in 1997 and 1996, respectively . 34,665,004 34,275,015
Accumulated deficit ............................................. (16,703,444) (17,355,374)
Deferred compensation ........................................... (22,304) (42,391)
------------ ------------
Total stockholders' equity .................................... 17,939,256 16,877,250
------------ ------------
Total liabilities and stockholders' equity ........................ $ 27,836,555 $ 26,762,179
============ ============
See accompanying notes to financial statements.
3
SONUS PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
Revenues:
Collaborative agreements ...... $ 4,700,000 $ 6,400,000 $ 14,500,000 $ 11,200,000
Operating expenses:
Research and development ...... 3,921,921 2,495,893 9,415,246 9,380,292
General and administrative .... 2,162,093 923,611 4,976,441 2,659,356
------------ ------------ ------------ ------------
6,084,014 3,419,504 14,391,685 12,039,648
------------ ------------ ------------ ------------
Operating income (loss) ......... (1,384,014) 2,980,496 108,313 (839,648)
Other income (expense):
Interest income ............... 294,550 204,711 815,551 506,768
Interest expense .............. (32,712) (43,462) (94,260) (172,157)
------------ ------------ ------------ ------------
Income (loss) before income taxes (1,122,176) 3,141,745 829,604 (505,037)
Income taxes .................... -- 340,000 190,000 420,000
------------ ------------ ------------ ------------
Net income (loss) ............... $ (1,122,176) $ 2,801,745 $ 639,604 $ (925,037)
============ ============ ============ ============
Net income (loss) per share ..... $ (0.13) $ 0.31 $ 0.07 $ (0.11)
============ ============ ============ ============
Shares used in computation of net
income (loss) per share ....... 8,573,029 9,130,921 9,166,890 8,467,100
============ ============ ============ ============
See accompanying notes to financial statements.
4
SONUS PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1997 1996
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OPERATING ACTIVITIES:
Net income (loss) ................................................. $ 639,604 $ (925,037)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization ................................... 443,367 347,451
Amortization of premium (discount) on marketable securities ..... (35,058) 32,541
Realized loss on marketable securities .......................... 28,154 --
Changes in operating assets and liabilities:
Prepaid expenses and other assets ............................. 96,226 (105,743)
Accounts payable and accrued expenses ......................... 755,828 849,557
Accrued clinical trial expenses ............................... 403,033 (62,639)
Deferred revenue .............................................. (1,000,000) --
------------ ------------
Net cash provided by operating activities ......................... 1,331,154 136,130
INVESTING ACTIVITIES:
Purchases of equipment, furniture and leasehold improvements ...... (865,499) (259,190)
Purchases of marketable securities ................................ (27,731,702) (56,969,288)
Proceeds from sale of marketable securities ....................... 15,797,079 50,484,820
Proceeds from maturities of marketable securities ................. 11,243,205 2,895,942
------------ ------------
Net cash used in investing activities ............................. (1,556,917) (3,847,716)
FINANCING ACTIVITIES:
Proceeds from line of credit ...................................... 15,000,000 16,400,000
Repayment of line of credit ....................................... (15,000,000) (16,400,000)
Repayment of capitalized lease obligations ........................ (146,490) (162,057)
Proceeds from issuance of common stock and warrants ............... 389,989 4,143,173
------------ ------------
Net cash provided by financing activities ......................... 243,499 3,981,116
------------ ------------
Change in cash and cash equivalents for the period ................ 17,736 269,530
Cash and cash equivalents at beginning of period .................. 7,236,615 5,656,621
------------ ------------
Cash and cash equivalents at end of period ........................ $ 7,254,351 $ 5,926,151
============ ============
Supplemental cash flow information:
Interest paid ..................................................... $ 87,928 $ 178,106
Income taxes paid ................................................. $ 105,272 $ 420,000
See accompanying notes to financial statements.
5
SONUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q. Accordingly, they do not include all
of the information and footnotes required to be presented for complete
financial statements. The accompanying financial statements reflect all
adjustments (consisting only of normal recurring items) which are, in the
opinion of management, necessary for a fair presentation of the results for the
interim periods presented.
The financial statements and related disclosures have been prepared
with the assumption that users of the interim financial information have read
or have access to the audited financial statements for the preceding fiscal
year. Accordingly, these financial statements should be read in conjunction
with the audited financial statements and the related notes thereto included in
the Form 10-K for the year ended December 31, 1996.
2. RECENT PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. The new rule will require specific disclosure of both
diluted earnings per share and earnings per share calculated without the
dilutive impact of stock options or convertible securities. When adopted the
Company believes there will be no material difference between reported earnings
per share and diluted earnings per share for any period presented.
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130, Reporting Comprehensive Income, which is required to be
adopted on December 31, 1998. The new rule will require the presentation of
comprehensive income and the components of comprehensive income on the
Statement of Operations. When adopted the Company believes there will be no
material difference between reported net income and comprehensive income for
any period presented.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is primarily engaged in the research and development of
proprietary contrast agents for use in ultrasound imaging. The Company has
financed its research and development and clinical trials through payments
received under agreements with its collaborative partners, private equity and
debt financings, and an initial public offering completed in October 1995.
Clinical trials of the Company's principal product under development,
EchoGen(R) Emulsion, began in January 1994. The Company has completed various
Phase 1, 2 and Phase 3 clinical trials of EchoGen since 1994 and, in August
1996, submitted a New Drug Application ("NDA") with the United States Food and
Drug Administration ("FDA"). In November 1996, the Company submitted a
Marketing Authorization Application ("MAA") for EchoGen with the European
Medicines Evaluation Agency ("EMEA").
On April 21, 1997, the United States District Court for the District
of Columbia issued an order of preliminary injunction against the FDA from
continuing any approval or review procedures with respect to EchoGen and three
other ultrasound contrast agents until the FDA resolved the merits of various
Citizen Petitions that were filed with the FDA. The Citizen Petition filed by
SONUS asked that all ultrasound contrast agents be regulated through the Center
for Drug Evaluation and Research ("CDER") rather than through the Center for
Devices and Radiological Health ("CDRH"). Two other Citizen Petitions were
filed with the FDA on the same issue. On July 29, 1997, the FDA released a
consolidated response to the Citizen Petitions with a determination that all
ultrasound contrast agents will be regulated as drugs rather than as devices
and on August 5, 1997, the court lifted the injunction on the FDA, allowing
resumption of approval and review procedures with respect to the EchoGen NDA.
The Company will not be able to commence sales of EchoGen in the
United States or various international markets unless and until it receives the
appropriate regulatory approvals in the United States and international
markets, respectively. To date, all of the Company's revenues have been
derived from agreements with third parties for the collaborative development of
EchoGen worldwide.
In May 1996, the Company formed a strategic alliance with Abbott
Laboratories ("Abbott") for marketing and selling EchoGen in the United States.
Under the agreement, Abbott has agreed to pay the Company an aggregate of $31.0
million in up-front, clinical support and milestone payments, of which $20.0
million has been paid as of September 30, 1997. In addition, Abbott purchased
in May 1996, for $4.0 million, warrants to acquire 500,000 shares of common
stock of the Company, equal to approximately six percent (6%) of the Company's
outstanding common stock. The warrants are exercisable over five years at
$16.00 per share. In October 1996, the Company and Abbott entered into an
agreement expanding Abbott's territory to include Europe, Latin America,
Canada, Middle East, Africa and certain Asia/Pacific countries. Under the
October 1996 agreement, Abbott has agreed to pay the Company $34.6 million in
license and milestone payments, a portion of which will be credited against
future royalties once EchoGen is approved for commercial sale. As of September
30, 1997, $7.1 million has been paid to the Company by Abbott under the October
1996 agreement of which $2.1 million are creditable against future royalties.
The Company has granted Daiichi Pharmaceutical Co. Ltd. ("Daiichi"),
exclusive marketing and distribution rights to EchoGen in certain countries in
the Pacific Rim. As of September 30, 1997, Daiichi has paid the Company
option, license and milestone fees totaling $12.8 million and has agreed to pay
an additional $19.2 million in the form of milestone payments conditioned on
the achievement of certain clinical development, regulatory and
commercialization milestones in Japan.
The Company's results of operations have varied and will continue to
vary significantly from quarter to quarter and depend on, among other factors,
the timing of fees and milestone payments made by collaborative partners, the
entering into product license agreements by the Company and the timing and
costs of the clinical trials conducted by the Company. The Company's current
collaborative partners can terminate their agreements at any time, and there
can be no assurance that the Company will receive any additional funding or
milestone payments.
7
RESULTS OF OPERATIONS
Revenue from collaborative agreements was $4.7 million for the three
months ended September 30, 1997 compared with $6.4 million for the three months
ended September 30, 1996. The revenue in the current period represents a
regular quarterly payment from Abbott of $1.0 million, as well as milestone
payments from Abbott of $3.7 million including a $2.0 million payment from
Abbott resulting from the Food and Drug Administration's ("FDA") notification
that a Medical Imaging Drug Advisory Committee meeting is not necessary to
complete the review of the EchoGen NDA. The revenue in the prior period
represents $3.0 million and $3.4 million of payments under the license
agreements with Abbott and Daiichi, respectively. For the first nine months of
1997, revenue from collaborative agreements increased to $14.5 million for the
nine months ended September 30, 1997 as compared to $11.2 million for the nine
months ended September 30, 1996.
Research and development expenses increased to $3.9 million for the
three months ended September 30, 1997 compared with $2.5 million for the three
months ended September 30, 1996, primarily due to ongoing and new clinical
trials investigating additional indications for EchoGen, and an expansion in
research activities. For the first nine months of 1997, research and
development expenses were $9.4 million, approximately the same as the prior
year period.
General and administrative expenses were $2.2 million for the three
months ended September 30, 1997 compared with $0.9 million for the three months
ended September 30, 1996. For the first nine months of 1997, general and
administrative expenses were $5.0 million as compared to $2.7 million for the
nine months ended September 30, 1996. The increase in 1997 reflects an
increase in the costs of filing, prosecuting and protecting patents and patent
applications, the implementation of marketing programs in anticipation of FDA
approval of the EchoGen NDA and planned product launch of EchoGen, and growth
in support personnel.
The Company anticipates total operating expenses will increase in
future quarters due to on-going and planned clinical trials to study additional
indications for EchoGen and due to higher marketing and administrative expenses
as the Company continues to prepare for commercialization of EchoGen. The
Company may also incur significant expenses relating to legal matters -
see "Legal Proceedings". In addition, revenues in future quarters are
partially dependent upon the timing of certain regulatory milestones.
Interest income increased to $295,000 and $816,000 for the three and
nine months ended September 30, 1997 as compared to $205,000 and $507,000 for
the three and nine months ended September 30, 1996, respectively, primarily
reflecting a larger average invested cash balance as a result of payments from
the Abbott and Daiichi strategic alliances.
Income tax expense was $0 and $340,000 for the three months ended
September 30, 1997 and 1996 and was $190,000 and $420,000 for the nine months
ended September 30, 1997 and 1996, respectively. Income tax expense primarily
represents withholding taxes relating to the collaborative payments received
from Daiichi.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations with payments from
collaborative partners, proceeds from an initial public offering, proceeds from
the issuance of stock and warrants, and a $5.0 million line of credit. At
September 30, 1997, the Company had cash, cash equivalents and marketable
securities of $25.9 million, compared to $25.1 million at December 31, 1996.
Cash provided by operations for the nine months ended September 30, 1997 was
$1.3 million as compared to $136,000 for the nine months ended September 30,
1996. Cash used in operations for the three months ended September 30, 1997
was $645,000 as compared to cash provided by operations of $3.0 million for the
three months ended September 30, 1996.
In August 1997, the Company renewed a loan agreement with Silicon
Valley Bank which provides for a $5.0 million revolving line of credit
facility, which is secured by the tangible assets of the Company. At September
30, 1997 there was $5.0 million outstanding under the line of credit. The line
of credit expires in August 1998 and bears interest at the prime rate plus 1.0%
per annum and the Company is required to maintain certain minimum balances of
cash, cash equivalents and marketable securities.
8
The Company expects that its cash needs will increase in future
periods due to ongoing and planned clinical trials of EchoGen, the initiation
of clinical trials for additional applications of the Company's technology and
expenses to be incurred in connection with the commercialization of EchoGen and
litigation. The Company estimates that existing cash, cash equivalents
and marketable securities will be sufficient to meet the Company's capital
requirements for at least the next 12 months. The Company's future capital
requirements will, however, depend on many factors, including the progress of
the Company's research and development programs, clinical trials, the time and
costs required to gain regulatory approvals, the ability of the Company to
obtain and retain continued funding from third parties under collaborative
agreements, the costs of filing, prosecuting and enforcing patents, patent
applications, patent claims and trademarks, the costs of marketing and
distribution, the status of competing products and the market acceptance of the
Company's products, if and when approved. The Company may have to raise
substantial additional funds to complete development of any product or to
commercialize any products if and when approved by the FDA. There can be no
assurance that additional financing will be available on acceptable terms, if
at all.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, and the Company intends
that such forward-looking statements be subject to the safe harbors created
thereby. Examples of these forward-looking statements include, but are not
limited to, (i) the progress and results of clinical trials, (ii) future
regulatory and marketing approvals, (iii) the anticipated outcome or financial
impact of litigation, (iv) market acceptance of the Company's products and
future product revenues, and (v) the future uses of capital and financial needs
of the Company. While these statements are made by the Company based on
management's current beliefs and judgment, they are subject to risks and
uncertainties that could cause actual results to vary.
In evaluating such statements, stockholders and investors should
specifically consider a number of factors and assumptions, including those
discussed in the text and the financial statements and their accompanying
footnotes in this Report and the risk factors detailed from time to time in the
Company's filings with the Securities and Exchange Commission. As discussed in
the Company's annual report on Form 10-K for the year ended December 31, 1996,
actual results could differ materially from those projected in the
forward-looking statements as a result of the following factors, among others:
uncertainty of governmental regulatory requirements in the United States and
foreign countries; lengthy regulatory approval process; uncertainty of safety
and efficacy; uncertainty of clinical trials; uncertainty of market acceptance;
competitive products; future capital requirements and uncertainty of additional
funding and dependence on third parties for manufacturing, marketing and sales.
9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 1, 1997, the Company was notified of a lawsuit filed in the
U.S. District Court for the District of Columbia by Molecular Biosystems, Inc.
(MBI) and Mallinckrodt, Inc. against SONUS, Nycomed Imaging A.S. (Nycomed),
ImaRx Pharmaceutical Corp., DuPont Merck and Bracco International BV. The suit
alleges that certain of the companies' ultrasound contrast agent patents are
invalid and that SONUS has made false public statements and engaged in other
actions intended to damage MBI and a proposed MBI product, Optison(TM). On
September 3, 1997, the Company was notified that Nycomed filed a claim against
SONUS in this action alleging that a Nycomed patent is entitled to priority
over one of SONUS' patents and that the SONUS patent is invalid. No discovery
proceedings have been undertaken in connection with this action. However,
based on the extensive patent investigations that have been undertaken by the
Company and other information presently available to the Company, the Company
believes this suit is without merit and will vigorously defend and assert its
rights under its eight U.S. patents to fluorocarbon-based ultrasound contrast
agents. The Company believes the lawsuit will not affect the EchoGen New Drug
Application review nor will it have any adverse impact on the marketing of
EchoGen following approval, if obtained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Number Description
______ ___________
11.1 Computation of net income (loss) per share
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the
quarter ended September 30, 1997.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
10
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SONUS PHARMACEUTICALS, INC.
Date: November 4, 1997 By: /s/ Gregory Sessler
-----------------------------------
Gregory Sessler
Chief Financial Officer and
Assistant Secretary
11