10-Q 1 b40875mce10-q.txt THE MEDICINES COMPANY INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended September 30, 2001 Commission File Number 000-31191 The Medicines Company (Exact Name of Registrant as Specified in Its Charter) Delaware 04-3324394 -------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) One Cambridge Center, Cambridge, MA 02142 ----------------------------------- ----- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (617) 225-9099 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date: As of October 31, 2001, there were 34,571,656 shares of Common Stock, $0.001 par value per share, outstanding. THE MEDICINES COMPANY TABLE OF CONTENTS PART I. FINANCIAL INFORMATION 1 ITEM 1 - UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20 PART II. OTHER INFORMATION 22 ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS 22 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 23 SIGNATURES 24 EXHIBIT INDEX 25
PART I. FINANCIAL INFORMATION ITEM 1 - UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THE MEDICINES COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 63,227,496 $ 36,802,356 Marketable securities 5,970,616 42,522,729 Accrued interest receivable 260,686 1,392,928 ------------- ------------- 69,458,798 80,718,013 ------------- ------------- Accounts receivable 3,011,355 -- Inventory 6,832,226 1,963,491 Prepaid expenses and other current assets 705,965 465,650 ------------- ------------- Total current assets 80,008,344 83,147,154 Fixed assets, net 1,219,183 965,832 Other assets 153,076 250,144 ------------- ------------- Total assets $ 81,380,603 $ 84,363,130 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,917,032 $ 5,987,213 Accrued expenses 7,932,670 9,136,934 ------------- ------------- Total current liabilities 12,849,702 15,124,147 Stockholders' equity: Common stock, $.001 par value, 75,000,000 shares authorized at September 30, 2001 and December 31, 2000, respectively; 34,566,441 and 30,320,455 issued and outstanding at September 30, 2001 and December 31, 2000, respectively 34,566 30,320 Additional paid-in capital 321,509,054 279,126,337 Deferred compensation (10,159,996) (13,355,694) Accumulated deficit (242,928,078) (196,560,034) Accumulated other comprehensive income (loss) 75,355 (1,946) ------------- ------------- Total stockholders' equity 68,530,901 69,238,983 ------------- ------------- Total liabilities and stockholders' equity $ 81,380,603 $ 84,363,130 ============= =============
See accompanying notes to condensed consolidated financial statements. Page 1 THE MEDICINES COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30, --------------------------------- --------------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Net revenue $ 3,526,234 $ -- $ 7,435,063 $ -- Operating expenses: Cost of revenue 564,835 -- 1,216,278 -- Research and development 6,325,575 6,734,799 27,229,728 23,503,579 Selling, general and administrative 8,732,412 3,562,440 27,359,289 7,339,618 ------------ ------------ ------------ ------------ Total operating expenses 15,622,822 10,297,239 55,805,295 30,843,197 Loss from operations (12,096,588) (10,297,239) (48,370,232) (30,843,197) Other income (expense): Interest income 787,659 838,606 2,852,188 1,124,331 Interest expense -- -- -- (19,390,414) Loss on sale of investments -- -- (850,000) -- ------------ ------------ ------------ ------------ Net loss (11,308,929) (9,458,633) (46,368,044) (49,109,280) Dividends and accretion to redemption value of redeemable preferred stock -- (1,624,395) -- (30,342,988) ------------ ------------ ------------ ------------ Net loss attributable to common stockholders $(11,308,929) $(11,083,028) $(46,368,044) $(79,452,268) ============ ============ ============ ============ Basic and diluted net loss attributable to common stockholders per common share $ (0.33) $ (0.67) $ (1.43) $ (13.32) ============ ============ ============ ============ Unaudited pro forma basic and diluted net loss attributable to common stockholders per common share $ (0.33) $ (0.34) $ (1.43) $ (1.28) ============ ============ ============ ============ Shares used in computing net loss attributable to common stockholders per common share: Basic and diluted 34,502,886 16,467,030 32,382,878 5,964,852 ============ ============ ============ ============ Unaudited pro forma basic and diluted 34,502,886 27,514,031 32,382,878 23,222,614 ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements. Page 2 THE MEDICINES COMPANY CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (unaudited)
REDEEMABLE CONVERTIBLE PREFERRED STOCK COMMON STOCK ADDITIONAL --------------------------- ------------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT CAPITAL ----------- ------------- ----------- ------------ ------------- Balance at December 31, 1999 22,962,350 85,277,413 833,400 834 339,144 Repurchase of common stock (22,205) (22) Employee stock purchases 227,525 226 286,068 Issuance of redeemable preferred stock 5,946,366 25,688,284 Dividends paid on preferred stock 1,751,241 4,898,537 Dividend from beneficial conversion of convertible debt 25,444,299 Issuance of warrants associated with debt financing 18,789,805 Issuance of common stock through initial public offering 6,900,000 6,900 101,343,162 Conversion of preferred stock to common stock (30,659,957) (115,864,234) 22,381,735 22,382 115,841,732 Deferred compensation expense associated with stock options 17,279,612 Adjustments to deferred compensation for terminations (197,485) Amortization of deferred stock compensation Net loss Currency translation adjustment Unrealized loss on marketable securities Comprehensive loss ----------- ------------- ----------- ------------ ------------- Balance at December 31, 2000 -- -- 30,320,455 30,320 279,126,337 Repurchase of common stock (10,859) (11) -- Employee stock purchases 256,845 257 583,742 Issuance of common stock through private placement 4,000,000 4,000 41,798,975 Adjustments to deferred compensation for terminations Amortization of deferred stock compensation Fair value of warrants outstanding 51,225,075 (51,225,075) Net loss Currency translation adjustment Unrealized loss on marketable securities Comprehensive loss ----------- ------------- ----------- ------------ ------------- Balance at September 30, 2001 -- $ -- 34,566,441 $ 34,566 $ 321,509,054 =========== ============= =========== ============ =============
DEFERRED COMPREHENSIVE TOTAL STOCK ACCUMULATED INCOME STOCKHOLDERS' COMPENSATION DEFICIT (LOSS) DEFICIT ------------ ------------- ------------ ------------- Balance at December 31, 1999 (94,925,028) 27,395 (94,557,655) Repurchase of common stock (22) Employee stock purchases 286,294 Issuance of redeemable preferred stock -- Dividends paid on preferred stock (4,898,537) (4,898,537) Dividend from beneficial conversion of convertible debt (25,444,299) -- Issuance of warrants associated with debt financing 18,789,805 Issuance of common stock through initial public offering 101,350,062 Conversion of preferred stock to common stock 115,864,114 Deferred compensation expense associated with -- stock options (17,279,612) -- Adjustments to deferred compensation for terminations 197,485 -- Amortization of deferred stock compensation 3,726,433 3,726,433 Net loss (71,292,170) (71,292,170) Currency translation adjustment 5,141 5,141 Unrealized loss on marketable securities (34,482) (34,482) ------------- Comprehensive loss (71,321,511) ------------ ------------- ------------ ------------- Balance at December 31, 2000 (13,356,694) (196,560,034) (1,946) 69,238,983 Repurchase of common stock (11) Employee stock purchases 583,999 Issuance of common stock through private placement 41,802,975 Adjustments to deferred compensation for terminations -- -- Amortization of deferred stock compensation 3,195,698 3,195,698 Fair value of warrants outstanding 51,225,075 (51,225,075) Net loss (46,368,044) (46,368,044) Currency translation adjustment 32,415 32,415 Unrealized loss on marketable securities 44,886 44,886 ------------- Comprehensive loss (46,290,743) ------------ ------------- ------------ ------------- Balance at September 30, 2001 $(10,159,996) $(242,928,078) $ 75,355 $ 68,530,901 ============ ============= ============ =============
See accompanying notes to condensed consolidated financial statements Page 3 THE MEDICINES COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
NINE MONTHS ENDED SEPT. 30, ---------------------------------- 2001 2000 ------------ ------------- Cash flows from operating activities: Net loss $(46,368,044) $ (49,109,280) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 355,324 178,385 Amortization of discount on convertible notes -- 19,013,486 Amortization of deferred stock compensation 3,195,698 1,539,472 Loss on sales of fixed assets 520 9,156 Changes in operating assets and liabilities: Accrued interest receivable 1,132,242 (138,184) Accounts receivable (3,011,355) -- Inventory (4,868,735) -- Prepaid expenses and other current assets (241,064) (304,611) Other assets 96,926 (135,164) Accounts payable (1,068,655) (3,916,349) Accrued expenses (1,191,672) 3,330,229 ------------ ------------- Net cash used in operating activities (51,968,815) (29,532,860) Cash flows from investing activities: Purchases of marketable securities (7,430,886) (30,057,921) Maturities and sales of marketable securities 44,025,759 541,400 Purchase of fixed assets (614,020) (420,879) ------------ ------------- Net cash provided by (used in) investing activities 35,980,853 (29,937,400) Cash flows from financing activities: Proceeds from issuance of convertible notes and warrants -- 13,348,779 Proceeds from issuances of preferred stock, net -- 6,095,338 Proceeds from issuances of common stock, net 42,386,974 101,445,745 Repurchases of common stock (11) (30) Dividends paid in cash -- (118) ------------- Net cash provided by financing activities 42,386,963 120,889,714 Effect of exchange rate changes on cash 26,139 46,315 ------------ ------------- Increase in cash and cash equivalents 26,425,140 61,465,769 Cash and cash equivalents at beginning of period 36,802,356 6,643,266 ------------ ------------- Cash and cash equivalents at end of period $ 63,227,496 $ 68,109,035 ============ =============
See accompanying notes to condensed consolidated financial statements. Page 4 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. NATURE OF BUSINESS The Medicines Company (the Company) was incorporated in Delaware on July 31, 1996. The Company is a pharmaceutical company engaged in the acquisition, development and commercialization of late-stage development drugs. As a result of the U.S. Food and Drug Administration approval of Angiomax (R) (bivalirudin) for use as an anticoagulant in patients with unstable angina undergoing percutaneous transluminal coronary angioplasty in December 2000, and the commencement of sales of Angiomax in the first quarter of 2001, the Company is no longer considered to be a development-stage enterprise, as defined in Statement of Financial Accounting Standards No. 7, "Accounting and Reporting by Development Stage Enterprises". 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the accompanying financial statements include all adjustments, including normal recurring accruals, considered necessary for a fair presentation of the Company's financial position, results of operations, and cash flows for the periods presented. The results of operations for the three and nine month periods ended September 30, 2001 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2001. These condensed consolidated financial statements should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000, filed with the Securities and Exchange Commission. Cash, Cash Equivalents and Marketable Securities The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents consist of investments in money market funds, corporate bonds and taxable auction securities. These investments are carried at cost, which approximates fair value. Marketable securities consist of securities with original maturities of greater than three months. The Company classifies its marketable securities as available-for-sale. Securities under this classification are recorded at fair market value and unrealized gains and losses are included in the accumulated other comprehensive income and loss component of stockholders' equity. Page 5 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited) Revenue Recognition The Company recognizes revenue from product sales when there is pervasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable, and collectibility is reasonably assured. Revenue is recorded net of applicable allowances, including estimated allowances for returns, rebates and other discounts. 3. NET LOSS AND UNAUDITED PRO FORMA NET LOSS PER SHARE The following table sets forth the computation of basic and diluted, and unaudited pro forma basic and diluted, net loss per share for the three and nine months ended September 30, 2001 and 2000. The unaudited pro forma basic and diluted net loss per share for the three and nine months ended September 30, 2000 gives effect to the conversion of redeemable convertible preferred stock and accrued dividends and convertible notes and accrued interest as if converted at the date of original issuance. All redeemable convertible preferred stock and convertible notes were converted during 2000. Accordingly, the basic and diluted net loss per share and unaudited pro forma basic and diluted net loss per share for the three and nine months ended September 30, 2001 are the same.
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30, -------------------------------- --------------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ BASIC AND DILUTED Net loss $(11,308,929) $ (9,458,633) $(46,368,044) $(49,109,280) Dividends and accretion to redemption value of redeemable preferred stock -- (1,624,395) -- (30,342,988) ------------ ------------ ------------ ------------ Net loss attributable to common stockholders $(11,308,929) $(11,083,028) $(46,368,044) $(79,452,268) ============ ============ ============ ============ Weighted average common shares outstanding 34,542,242 16,644,520 32,449,717 6,156,622 Less: unvested restricted common shares outstanding (39,356) (177,490) (66,839) (191,770) ------------ ------------ ------------ ------------ Weighted average common shares used to compute net loss per share 34,502,886 16,467,030 32,382,878 5,964,852 ============ ============ ============ ============ Basic and diluted net loss per share $ (0.33) $ (0.67) $ (1.43) $ (13.32) ============ ============ ============ ============
Page 6 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30, ------------------------------- ------------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ UNAUDITED PRO FORMA BASIC AND DILUTED Net loss $(11,308,929) $ (9,458,633) $(46,368,044) $(49,109,280) Interest expense on convertible notes -- -- -- 19,390,414 Dividends and accretion to redemption value of redeemable preferred stock -- -- -- -- ------------ ------------ ------------ ------------ Net loss to compute pro forma net loss per share $(11,308,929) $ (9,458,633) $(46,368,044) $(29,718,866) ============ ============ ============ ============ Weighted average common shares used to compute pro forma net loss per share 34,502,886 16,467,030 32,382,878 5,964,852 Weighted average number of common shares assuming the conversion of all redeemable convertible preferred stock and accrued dividends and convertible notes and accrued interest at the date of original issuance -- 11,047,001 -- 17,257,762 ------------ ------------ ------------ ------------ Weighted average common shares used to compute pro forma net loss per share 34,502,886 27,514,031 32,382,878 23,222,614 ============ ============ ============ ============ Unaudited pro forma basic and diluted pro forma net loss per share $ (0.33) $ (0.34) $ (1.43) $ (1.28) ============ ============ ============ ============
Options to purchase 4,161,465 and 2,521,316 shares of common stock as of September 30, 2001 and 2000, respectively, have not been included in the computation of diluted net loss per share, as their effect would have been antidilutive. Outstanding warrants to purchase 3,156,073 shares of common stock as of September 30, 2001 were also excluded from the computation of diluted net loss per share as their effect would have been antidilutive. During the three and nine months ended September 30, 2000, the Company issued options to purchase 636,286 and 2,247,615 shares of common stock, respectively, at exercise prices below the estimated fair value of the Company's common stock as of the date of grant of such options, based on the estimated price (as of the date of grant) of the Company's common stock in the Company's initial public offering. The total deferred compensation associated with options granted during the three and nine months ended September 30, 2000 was approximately $4.6 million and $17.3 million, respectively. The Company amortizes deferred stock compensation over the respective vesting periods of the individual stock options. The Company recorded amortization expense for deferred compensation of approximately $977,000 and $3.2 million for the three and nine months ended September 30, 2001, respectively, and $932,000 and $1.5 million for the three and nine months ended September 30, 2000, respectively. Page 7 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited) 4. COMPREHENSIVE INCOME (LOSS) Comprehensive losses for the three and nine months ended September 30, 2001 were $11.4 million and $46.3 million, respectively, and for the three and nine months ended September 30, 2000 were $9.5 million and $49.2 million, respectively. Comprehensive losses are primarily comprised of net losses, unrealized losses on marketable securities and currency translation adjustments. 5. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The effective date of this statement was deferred to fiscal years beginning after June 15, 2000 by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of SFAS No. 133." The Company adopted this new standard and it did not have a material impact on the Company's financial condition or results of operations. In September 2000, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board reached a consensus on Issue 00-19, "Determination of Whether Share Settlement is Within the Control of the Issuer for Purposes of Applying Issue No. 96-13, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock." The consensus provides specific guidance regarding when a contract indexed to a company's own stock must be classified in stockholders' equity versus classified as an asset or liability. Any new contracts entered into after the date of consensus must comply with the consensus, and any contracts outstanding as of the September 2000 consensus date are grand fathered until June 2001 before compliance is required. Management anticipates that compliance with the consensus will not have a material impact on the Company's consolidated financial statements. 6. SHARE ISSUANCE In May 2001, the Company received net proceeds of $41.8 million from the private placement of 4.0 million shares of newly issued common stock to both new and existing stockholders at a price of $11.00 per share. Page 8 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL We acquire, develop and commercialize biopharmaceutical products that are in late stages of development or have been approved for marketing. In December 2000, we received marketing approval from U.S. Food and Drug Administration (the "FDA") for Angiomax (bivalirudin), our lead product, for use as an anticoagulant in combination with aspirin in patients with unstable angina undergoing coronary balloon angioplasty. Coronary angioplasty is a procedure used to restore normal blood flow in an obstructed artery in the heart. In August and September 2000, we consummated our initial public offering (the "IPO") resulting in $101.4 million in net proceeds. In May 2001, we completed a private placement of 4.0 million shares of common stock resulting in net proceeds of $41.8 million. We began selling Angiomax in the United States in January 2001. Until October 1, 2001, we marketed Angiomax in the United States using a sales force contracted from Innovex, Inc., which we managed. On October 1, 2001, members of the sales force became our full-time employees rather than employees of Innovex. In addition, during September 2001 we hired additional members of the sales force, which resulted in an increase of approximately 30%. Since our inception, we have incurred significant losses. Most of our expenditures to date have been for research and development activities and selling, general and administrative expenses. Research and development expenses represent costs incurred for product acquisition, clinical trials, activities relating to regulatory filings and manufacturing development efforts. We generally outsource our clinical trials and manufacturing development activities to independent organizations to maximize efficiency and minimize our internal overhead. We expense our research and development costs as they are incurred. Selling, general and administrative expenses consist primarily of salaries and related expenses, general corporate activities and costs associated with product marketing activities. Interest expense consists of costs associated with convertible notes that were issued in 2000 and 1999 to fund our business activities. These convertible notes were converted into equity in 2000. We expect to continue to incur operating losses during the balance of 2001 and for the foreseeable future as a result of research and development activities attributable to new and existing products and costs associated with the sales and marketing of our products. We will need to generate significant revenues to achieve and maintain profitability. During the three and nine months ended September 30, 2000, we recorded deferred stock compensation on the grant of stock options of approximately $4.6 million and $17.3 million, respectively, representing the difference between the exercise price of such options and the fair market value of our common stock at the date of grant of such options. The exercise prices of these options were below the estimated fair market value of our common stock as of the date of grant based on the estimated price of our common stock in our initial public offering. We amortize deferred stock compensation over the respective vesting periods of the individual stock options. We recorded amortization expense for deferred compensation of approximately Page 9 $977,000 and $3.2 million for the three and nine months ended September 30, 2001, respectively, and $932,000 and $1.5 million for the three and nine months ended September 30, 2000, respectively. We expect to record amortization expense for the deferred compensation as follows: approximately $1.0 million for the remainder of 2001, approximately $3.8 million in 2002, approximately $3.8 million in 2003 and approximately $1.3 million in 2004. We have not generated taxable income to date. At December 31, 2000, net operating losses available to offset future taxable income for federal income tax purposes were approximately $122.2 million. If not utilized, federal net operating loss carryforwards will expire at various dates beginning in 2011 and ending 2020. We have not recognized the potential tax benefit of our net operating losses in our statements of operations. The future utilization of our net operating loss carryforwards may be limited pursuant to regulations promulgated under the Internal Revenue Code of 1986, as amended. RESULTS OF OPERATIONS Three Months Ended September 30, 2001 and 2000 Product Revenue. We had product revenue of $3.5 million for the three months ended September 30, 2001 from sales of Angiomax, which was commercially launched during the first quarter of 2001. We had no product revenue during the three months ended September 30, 2000. Cost of Revenue. Cost of revenue for the three months ended September 30, 2001 was $565,000, or 16% of product revenue. Cost of revenue includes the cost of manufacturing Angiomax, logistical costs associated with distributing Angiomax and accrued royalties. The cost of manufacturing as a percentage of product revenue was approximately 2% in the third quarter of 2001 and is expected to continue to be at, or near, this level into December 2001 as we continue to sell Angiomax that was manufactured prior to the date of FDA approval of Angiomax in December 2000 because the cost associated with the manufacture of Angiomax incurred by us prior to the date of FDA approval of Angiomax was expensed as research and development. Research and Development Expenses. Research and development expenses decreased 6% to $6.3 million for the three months ended September 30, 2001, from $6.7 million for the three months ended September 30, 2000. The decrease in research and development expenses of $409,000 was primarily due to a decrease in expenses associated with the completion of our Phase 3 trial in acute myocardial infarction, called HERO-2. The decrease in research and development expenses was partly offset by increased expenses in connection with our REPLACE trial program and expenses associated with the manufacture of Angiomax bulk product using a second-generation production process, the Chemilog process, which we will continue to expense as research and development until the FDA approves the process. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 145% to $8.7 million for the three months ended September 30, 2001, from $3.6 million for the three months ended September 30, 2000. The increase in selling, general and administrative expenses of $5.2 million was primarily due to an increase in marketing and selling expenses and corporate infrastructure costs relating to the sales and marketing of Angiomax. Our selling, general and administrative expenses also increased due to the hiring that we began in Page 10 September 2001 of additional sales personnel in connection with the formation of our own sales force to market Angiomax. Other Income and Expense. Interest income decreased 6% to $788,000 for the three months ended September 30, 2001, from $839,000 for the three months ended September 30, 2000. The decrease in interest income of $51,000 was primarily due to lower cash and marketable securities balances due to operating expenses and working capital requirements and to lower available interest rates on securities. The primary source of interest income is interest income from the investment of the proceeds from our IPO in August and September 2000 and our private placement of common stock in May 2001. We had no interest expense during the three months ended September 30, 2001 and September 30, 2000. Nine Months Ended September 30, 2001 and 2000 Product Revenue. We had product revenue of $7.4 million for the nine months ended September 30, 2001 from sales of Angiomax. We had no product revenue during the nine months ended September 30, 2000. Cost of Revenue. Cost of revenue for the nine months ended September 30, 2001 was $1.2 million, or 16% of product revenue. The cost of manufacturing as a percentage of product revenue was approximately 2% for the first nine months of 2001 and is expected to continue to be at, or near, this level into December 2001 as we continue to sell Angiomax that was manufactured prior to the date of FDA approval of Angiomax in December 2000 because the cost associated with the manufacture of Angiomax incurred by us prior to date of FDA approval of Angiomax was expensed as research and development. Research and Development Expenses. Research and development expenses increased 16% to $27.2 million for the nine months ended September 30, 2001, from $23.5 million for the nine months ended September 30, 2000. The increase in research and development expenses of $3.7 million was primarily due to increased expenses associated with our REPLACE trial program, which was initiated in the fourth quarter of 2000. The increase in research and development expenses was partly offset by a decrease in expenses associated with the completion of the HERO-2 trial program. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 273% to $27.4 million for the nine months ended September 30, 2001, from $7.3 million for the nine months ended September 30, 2000. The increase in selling, general and administrative expenses of $20.0 million was primarily due to an increase in marketing and selling expenses and corporate infrastructure costs arising from an increase in activity relating to the commercial launch of Angiomax in 2001. Other Income and Expense. Interest income increased 154% to $2.8 million for the nine months ended September 30, 2001, from $1.1 million for the nine months ended September 30, 2000. The increase in interest income of $1.7 million was primarily due to interest income arising from Page 11 the investment of the proceeds from our IPO in August and September 2000 and from the sale of 4.0 million shares of our common stock in a private placement in May 2001. We had no interest expense for the nine months ended September 30, 2001. Interest expense of $19.4 million for the nine months ended September 30, 2000 was related to interest charges and amortization of discount on our convertible notes issued in October 1999 and March 2000. During the second quarter of 2001, we liquidated our $3.0 million principal investment in Southern California Edison 5 7/8% bonds, recognizing a loss of $850,000 on the sale. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2001, we had $69.2 million in cash, cash equivalents and marketable securities, as compared to $79.3 million as of December 31, 2000. In August and September 2000, we received $101.4 million in net proceeds from the sale of common stock in our IPO and received an additional $41.8 million in net proceeds in May 2001 from the sale of 4.0 million shares of our common stock in a private placement. Prior to the IPO, we had received net proceeds of $79.4 million from the private placement of equity securities, primarily redeemable convertible preferred stock, and $19.4 million from the issuance of convertible notes and warrants. During the nine months ended September 30, 2001, we used net cash of $52.0 million in operating activities. This consisted of a net loss of $46.4 million, combined with increases in total receivables of $1.9 million, inventory of $4.9 million, and decreases in accrued expenses of $1.2 million and accounts payable of $1.1 million, partly offset by non-cash amortization of deferred compensation of $3.2 million and depreciation of $355,000. The increase in inventory of $4.9 million was primarily attributed to the scheduled receipt of bulk Angiomax from our supplier, UCB Bioproducts S.A. During the nine months ended September 30, 2001, we generated approximately $36.0 million of cash from net investing activities, which consisted principally of the maturity or sale of marketable securities, partly offset by the purchase of fixed assets of $614,000, which is primarily computer related equipment. During the nine months ended September 30, 2001, we received $42.4 million from financing activities primarily from proceeds from the sale of shares of our common stock in a private placement and from employees purchasing stock under our stock plans. We expect to devote substantial resources to our research and development efforts and to our sales, marketing and manufacturing programs associated with the commercialization of our products. Our funding requirements will depend on numerous factors, including whether Angiomax is commercially successful, the progress, level and timing of our research and development activities, the cost and outcomes of regulatory reviews, the continuation or termination of third party manufacturing or sales and marketing arrangements, the cost and effectiveness of our sales and marketing programs, the status of competitive products, our ability to defend and enforce our intellectual property rights and the establishment of additional strategic or licensing arrangements with other companies or acquisitions. Page 12 We believe, based on our current operating plan, including anticipated sales of Angiomax, that our current cash, cash equivalents and marketable securities will be sufficient to fund our operations for approximately 18 months. If our existing resources are insufficient to satisfy our liquidity requirements due to slower than anticipated sales of Angiomax or otherwise, or if we acquire additional product candidates, we may need to sell additional equity or debt securities. The sale of additional equity and debt securities may result in additional dilution to our stockholders, and we cannot be certain that additional financing will be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain this additional financing, we may be required to reduce the scope of our planned research, development and commercialization activities, which could harm our financial condition and operating results. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS This quarterly report on Form 10-Q includes 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. All statements, other than statements of historical facts, included in this report regarding our strategy, future operations, financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in our forward-looking statements. There are a number of important factors that cause actual results or events to differ materially from those disclosed in the forward-looking statements we make. These important factors include the risk factors set forth below. Although we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our estimates change, and readers should not rely on those forward-looking statements as representing our views as of any date subsequent to the date of filing this Quarterly Report. Risks Related to Our Business WE HAVE A HISTORY OF NET LOSSES, AND WE EXPECT TO CONTINUE TO INCUR NET LOSSES AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY We have incurred net losses since our inception, including net losses of approximately $46.4 million for the nine months ended September 30, 2001. As of September 30, 2001, we had an accumulated deficit of approximately $242.9 million. We expect to make substantial expenditures to further develop and commercialize our products, including costs and expenses associated with clinical trials, regulatory approval and commercialization of products. As a result, we are unsure when we will become profitable, if at all. OUR BUSINESS IS VERY DEPENDENT ON THE COMMERCIAL SUCCESS OF ANGIOMAX Other than Angiomax, our products are in clinical phases of development and, even if approved by the FDA, are a number of years away from entering the market. As a result, Angiomax will account for almost all of our revenues for the foreseeable future. The commercial success of Angiomax will depend upon its acceptance by physicians, patients and other key decision-makers as a therapeutic and cost-effective alternative to heparin and other products used in Page 13 current practice. If Angiomax is not commercially successful, we will have to find additional sources of revenues or curtail or cease operations. FAILURE TO RAISE ADDITIONAL FUNDS IN THE FUTURE MAY AFFECT THE DEVELOPMENT, MANUFACTURE AND SALE OF OUR PRODUCTS Our operations to date have generated substantial and increasing needs for cash. Our negative cash flow from operations is expected to continue into the foreseeable future. The clinical development of Angiomax for additional indications, the development of our other product candidates and the acquisition and development of additional product candidates by us will require a commitment of substantial funds. Our future capital requirements are dependent upon many factors and may be significantly greater than we expect. We believe, based on our current operating plan, including anticipated sales of Angiomax, that our current cash, cash equivalents and marketable securities will be sufficient to fund our operations for at least 18 months. If our existing resources are insufficient to satisfy our liquidity requirements due to slower than anticipated sales of Angiomax or otherwise, or if we acquire additional product candidates, we may need to sell additional equity or debt securities. The sale of additional equity and debt securities may result in additional dilution to our stockholders, and we cannot be certain that additional financing will be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain this additional financing, we may be required to reduce the scope of our planned research, development and commercialization activities, which could harm our financial condition and operating results. WE CANNOT EXPAND THE INDICATIONS FOR ANGIOMAX UNLESS WE RECEIVE FDA APPROVAL FOR EACH ADDITIONAL INDICATION. FAILURE TO EXPAND THESE INDICATIONS WILL LIMIT THE SIZE OF THE COMMERCIAL MARKET FOR ANGIOMAX We received in December 2000 approval from the FDA for the use of Angiomax as an anticoagulant in combination with aspirin in patients with unstable angina undergoing coronary balloon angioplasty. One of our key objectives is to expand the indications for which the FDA will approve Angiomax. In order to do this, we will need to conduct additional clinical trials and obtain FDA approval for each proposed indication. If we are unsuccessful in expanding the approved indications for the use of Angiomax, the size of the commercial market for Angiomax will be limited. FAILURE TO OBTAIN REGULATORY APPROVAL IN FOREIGN JURISDICTIONS WILL PREVENT US FROM MARKETING ANGIOMAX ABROAD We intend to market our products in international markets, including Europe. In order to market our products in the European Union and many other foreign jurisdictions, we must obtain separate regulatory approvals. In February 1998, we submitted a Marketing Authorization Application to the European Agency for the Evaluations of Medicinal Products, or the EMEA, for use of Angiomax in unstable angina patients undergoing angioplasty. Following extended interaction with European regulatory authorities, the Committee of Proprietary Medicinal Products of the EMEA voted in October 1999 not to recommend Angiomax for approval in angioplasty. The United Kingdom and Ireland dissented from this decision. We have withdrawn our application to the EMEA and are in active dialog with European regulators to determine our course of action including seeking approval of Angiomax in Europe on a country-by-country basis. We may not be able to obtain approval from any or all of the jurisdictions in which we seek approval to market Angiomax. Obtaining foreign approvals may require additional trials and additional expense. Page 14 THE DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCTS MAY BE TERMINATED OR DELAYED, AND THE COSTS OF DEVELOPMENT AND COMMERCIALIZATION MAY INCREASE, IF THIRD PARTIES WHO WE RELY ON TO MANUFACTURE AND SUPPORT THE DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCTS DO NOT FULFILL THEIR OBLIGATIONS Our development and commercialization strategy entails entering into arrangements with corporate and academic collaborators, contract research organizations, distributors, third-party manufacturers, licensors, licensees and others to conduct development work, manage our clinical trials and manufacture, market and sell our products. Although we manage these services, we do not have the expertise or the resources to conduct such activities on our own and, as a result, are particularly dependent on third parties in most areas. We may not be able to maintain our existing arrangements with respect to the commercialization of Angiomax or establish and maintain arrangements to develop and commercialize any additional products on terms that are acceptable to us. Any current or future arrangements for the development and commercialization of our products may not be successful. If we are not able to establish or maintain our agreements relating to Angiomax or any additional products on terms which we deem favorable, our financial condition would be materially adversely affected. Third parties may not perform their obligations as expected. The amount and timing of resources that third parties devote to developing, manufacturing and commercializing our products may not be within our control. Furthermore, our interests may differ from those of third parties that manufacture or commercialize our products. Disagreements that may arise with these third parties could delay or lead to the termination of the development or commercialization of our product candidates, or result in litigation or arbitration, which would be time consuming and expensive. If any third party that manufactures or supports the development or commercialization of our products breaches or terminates its agreement with us, or fails to conduct its activities in a timely manner, such breach, termination or failure could: - delay or otherwise adversely impact the development or commercialization of Angiomax, our other product candidates or any additional product candidates that we may acquire or develop; - require us to undertake unforeseen additional responsibilities or devote unforeseen additional resources to the development or commercialization of our products; or - result in the termination of the development or commercialization of our products. WE ARE CURRENTLY DEPENDENT ON A SINGLE SUPPLIER FOR THE PRODUCTION OF ANGIOMAX BULK DRUG SUBSTANCE AND A DIFFERENT SINGLE SUPPLIER TO CARRY OUT ALL FILL-FINISH ACTIVITIES FOR ANGIOMAX Currently, we obtain all of our Angiomax bulk drug substance from one manufacturer, UCB Bioproducts S.A., and rely on another manufacturer, Ben Venue Laboratories, Inc., to carry out all fill-finish activities for Angiomax, which includes final formulation and transfer of the drug into vials where it is then freeze-dried and sealed. The FDA requires that all manufacturers of pharmaceuticals for sale in or from the United States achieve and maintain compliance with the FDA's current Good Manufacturing Practice, or cGMP, regulations and guidelines. There are a limited number of manufacturers that operate under cGMP regulations capable of manufacturing Angiomax. The FDA has inspected Ben Venue Laboratories for cGMP compliance for the manufacture of Angiomax and UCB Bioproducts for cGMP compliance in the manufacture of Page 15 pharmaceutical ingredients generally. Ben Venue Laboratories and UCB Bioproducts have informed us that they have no material deficiencies in cGMP compliance. We do not currently have alternative sources for production of Angiomax bulk drug substance or to carry out fill-finish activities. In the event that either of our current manufacturers is unable to carry out its respective manufacturing obligations to our satisfaction, we may be unable to obtain alternative manufacturing, or obtain such manufacturing on commercially reasonable terms or on a timely basis. Any delays in the manufacturing process may adversely impact our ability to meet commercial demands for Angiomax on a timely basis and supply product for clinical trials of Angiomax. IF WE DO NOT SUCCEED IN DEVELOPING A SECOND-GENERATION PROCESS FOR THE PRODUCTION OF BULK ANGIOMAX DRUG SUBSTANCE, OUR GROSS MARGINS MAY BE BELOW INDUSTRY AVERAGES We are currently developing with UCB Bioproducts a second-generation process for the production of bulk Angiomax drug substance. This process involves limited changes to the early manufacturing steps of our current process in order to improve our gross margins on the future sales of Angiomax. If we cannot develop the process successfully or regulatory approval of the process is not obtained or is delayed, then our ability to improve our gross margins on future sales of Angiomax may be limited. CLINICAL TRIALS OF OUR PRODUCT CANDIDATES ARE EXPENSIVE AND TIME CONSUMING, AND THE RESULTS OF THESE TRIALS ARE UNCERTAIN Before we can obtain regulatory approvals for the commercial sale of any product that we wish to develop, we will be required to complete pre-clinical studies and extensive clinical trials in humans to demonstrate the safety and efficacy of such product. We are currently conducting clinical trials of Angiomax for use in the treatment of ischemic heart disease. There are numerous factors that could delay our clinical trials or prevent us from completing these trials successfully. We, or the FDA, may suspend a clinical trial at any time on various grounds, including a finding that patients are being exposed to unacceptable health risks. The rate of completion of clinical trials depends in part upon the rate of enrollment of patients. Patient enrollment is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the existence of competing clinical trials and the availability of alternative or new treatments. In particular, the patient population targeted by some of our clinical trials may be small. Delays in future planned patient enrollment may result in increased costs and program delays. In addition, clinical trials, if completed, may not show any potential product to be safe or effective. Results obtained in pre-clinical studies or early clinical trials are not always indicative of results that will be obtained in later clinical trials. Moreover, data obtained from pre-clinical studies and clinical trials may be subject to varying interpretations. As a result, the FDA or other applicable regulatory authorities may not approve a product in a timely fashion, or at all. OUR FAILURE TO ACQUIRE AND DEVELOP ADDITIONAL PRODUCT CANDIDATES OR APPROVED PRODUCTS WILL IMPAIR OUR ABILITY TO GROW As part of our growth strategy, we intend to acquire and develop additional pharmaceutical product candidates or approved products. The success of this strategy depends upon our ability Page 16 to identify, select and acquire pharmaceutical products in late-stage development or that have been approved that meet the criteria we have established. Because we neither have, nor intend to establish, internal scientific research capabilities, we are dependent upon pharmaceutical and biotechnology companies and other researchers to sell or license product candidates to us. Identifying suitable product candidates and approved products and proposing, negotiating and implementing an economically viable acquisition is a lengthy and complex process. In addition, other companies, including those with substantially greater financial, marketing and sales resources, may compete with us for the acquisition of product candidates and approved products. We may not be able to acquire the rights to additional product candidates and approved products on terms that we find acceptable, or at all. IF WE BREACH ANY OF THE AGREEMENTS UNDER WHICH WE LICENSE COMMERCIALIZATION RIGHTS TO PRODUCTS OR TECHNOLOGY FROM OTHERS, WE COULD LOSE LICENSE RIGHTS THAT ARE IMPORTANT TO OUR BUSINESS We license commercialization rights to products and technology that are important to our business, and we expect to enter into additional licenses in the future. For instance, we acquired our first three products through exclusive licensing arrangements. Under these licenses we are subject to commercialization and development, sublicensing, royalty, insurance and other obligations. If we fail to comply with any of these requirements, or otherwise breach these license agreements, the licensor may have the right to terminate the license in whole or to terminate the exclusive nature of the license. In addition, upon the termination of the license we may be required to license to the licensor the intellectual property that we developed. OUR ABILITY TO MANAGE OUR BUSINESS EFFECTIVELY COULD BE HAMPERED IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL AND CONSULTANTS The biopharmaceutical industry has experienced a high rate of turnover of management personnel in recent years. We are highly dependent on our ability to attract and retain qualified personnel for the acquisition, development and commercialization activities we conduct or sponsor. If we lose one or more of the members of our senior management, including our executive chairman, Dr. Clive A. Meanwell, or our chief executive officer, David M. Stack, or other key employees or consultants, our business and operating results could be seriously harmed. Our ability to replace these key employees may be difficult and may take an extended period of time because of the limited number of individuals in the biotechnology industry with the breadth of skills and experience required to develop and commercialize products successfully. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate such additional personnel. WE FACE SUBSTANTIAL COMPETITION, WHICH MAY RESULT IN OTHERS DISCOVERING, DEVELOPING OR COMMERCIALIZING COMPETING PRODUCTS BEFORE OR MORE SUCCESSFULLY THAN WE DO The biopharmaceutical industry is highly competitive. Our success will depend on our ability to acquire and develop products and apply technology and our ability to establish and maintain a market for our products. Potential competitors in the United States and other countries include major pharmaceutical and chemical companies, specialized biotechnology firms, universities and other research institutions. Many of our competitors have substantially greater research and development capabilities and experience, and greater manufacturing, marketing and financial resources than we do. Accordingly, our competitors may develop products or other novel technologies that are more effective, safer or less costly than existing products or technologies or Page 17 products or technologies that are being developed by us or may obtain FDA approval for products more rapidly than we are able. Technological development by others may render our products or product candidates noncompetitive. We may not be successful in establishing or maintaining technological competitiveness. BECAUSE THE MARKET FOR THROMBIN INHIBITORS IS COMPETITIVE, OUR PRODUCT MAY NOT OBTAIN WIDESPREAD USE We have positioned Angiomax as a replacement for heparin, which is widely used and inexpensive, for use in patients with ischemic heart disease. Because heparin is inexpensive and has been widely used for many years, medical decision-makers may be hesitant to adopt our alternative treatment. In addition, due to the high incidence and severity of cardiovascular diseases, the market for thrombin inhibitors is large and competition is intense and growing. There are a number of thrombin inhibitors currently on the market, awaiting regulatory approval and in development, including orally administered agents. THE LIMITED RESOURCES OF THIRD-PARTY PAYERS MAY LIMIT THE USE OF OUR PRODUCTS In general, anticoagulant drugs may be classified in three groups: drugs that directly or indirectly target and inhibit thrombin, drugs that target and inhibit platelets and drugs that break down fibrin. Because each group of anticoagulants acts on different components of the clotting process, we believe that there will be continued clinical work to determine the best combination of drugs for clinical use. We expect Angiomax to be used with aspirin alone or in conjunction with other therapies. Although we are not positioning Angiomax as a direct competitor to platelet inhibitors or fibrinolytic drugs, platelet inhibitors and fibrinolytic drugs may compete with Angiomax for the use of hospital financial resources. Many U.S. hospitals receive a fixed reimbursement amount per procedure for the angioplasties and other treatment therapies they perform. Because this amount is not based on the actual expenses the hospital incurs, U.S. hospitals may have to choose among Angiomax, platelet inhibitors and fibrinolytic drugs. FLUCTUATIONS IN OUR OPERATING RESULTS COULD AFFECT THE PRICE OF OUR COMMON STOCK Our operating results may vary from period to period based on the amount and timing of sales of Angiomax to customers in the United States, the availability and timely delivery of a sufficient supply of Angiomax, the timing and expenses of clinical trials, the availability and timing of third-party reimbursement and the timing of approval for our product candidates. If our operating results do not match the expectations of securities analysts and investors as a result of these and other factors, the trading price of our common stock may fluctuate. Risks Related to Our Industry IF WE DO NOT OBTAIN FDA APPROVALS FOR OUR PRODUCTS OR COMPLY WITH GOVERNMENT REGULATIONS, WE MAY NOT BE ABLE TO MARKET OUR PRODUCTS AND MAY BE SUBJECT TO STRINGENT PENALTIES Except for Angiomax, which has been approved for sale in the United States and New Zealand, we do not have a product approved for sale in the United States or any foreign market. We must obtain approval from the FDA in order to sell our product candidates in the United States and from foreign regulatory authorities in order to sell our product candidates in other countries. We must successfully complete our clinical trials and demonstrate manufacturing capability before we can file with the FDA for approval to sell our products. The FDA could require us to repeat clinical trials as part of the regulatory review process. Delays in obtaining or failure to obtain regulatory approvals may: Page 18 - delay or prevent the successful commercialization of any of our product candidates; - diminish our competitive advantage; and - defer or decrease our receipt of revenues or royalties. The regulatory review and approval process is lengthy, expensive and uncertain. Extensive pre-clinical data, clinical data and supporting information must be submitted to the FDA for each additional indication to obtain such approvals, and we cannot be certain when we will receive these regulatory approvals, if ever. In addition to initial regulatory approval, our products and product candidates will be subject to extensive and rigorous ongoing domestic and foreign government regulation. Any approvals, once obtained, may be withdrawn if compliance with regulatory requirements is not maintained or safety problems are identified. Failure to comply with these requirements may also subject us to stringent penalties. WE MAY NOT BE ABLE TO OBTAIN OR MAINTAIN PATENT PROTECTION FOR OUR PRODUCTS, AND WE MAY INFRINGE THE PATENT RIGHTS OF OTHERS The patent positions of pharmaceutical and biotechnology companies like us are generally uncertain and involve complex legal, scientific and factual issues. Our success depends significantly on our ability to: - obtain patents; - protect trade secrets; - operate without infringing the proprietary rights of others; and - prevent others from infringing our proprietary rights. We may not have any patents issued from any patent applications that we own or license. If patents are granted, the claims allowed may not be sufficiently broad to protect our technology. In addition, issued patents that we own or license may be challenged, invalidated or circumvented. Our patents also may not afford us protection against competitors with similar technology. Because patent applications in the United States are maintained in secrecy until patents issue, others may have filed or maintained patent applications for technology used by us or covered by our pending patent applications without our being aware of these applications. In all, we exclusively license 10 issued U.S. patents and a broadly filed portfolio of corresponding foreign patents and patent applications. We have not yet filed any independent patent applications. We may not hold proprietary rights to some patents related to our product candidates. In some cases, others may own or control these patents. As a result, we may be required to obtain licenses under third-party patents to market some of our product candidates. If licenses are not available to us on acceptable terms, we will not be able to market these products. Page 19 We may become a party to patent litigation or other proceedings regarding intellectual property rights. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. If any patent litigation or other intellectual property proceeding in which we are involved is resolved unfavorably to us, we may be enjoined from manufacturing or selling our products without a license from the other party, and we may be held liable for significant damages. We may not be able to obtain any required license on commercially acceptable terms, or at all. IF WE ARE NOT ABLE TO KEEP OUR TRADE SECRETS CONFIDENTIAL, OUR TECHNOLOGY AND INFORMATION MAY BE USED BY OTHERS TO COMPETE AGAINST US We rely significantly upon unpatented proprietary technology, information, processes and know-how. We seek to protect this information by confidentiality agreements with our employees, consultants and other third-party contractors, as well as through other security measures. We may not have adequate remedies for any breach by a party to these confidentiality agreements. In addition, our competitors may learn or independently develop our trade secrets. WE COULD BE EXPOSED TO SIGNIFICANT LIABILITY CLAIMS IF WE ARE UNABLE TO OBTAIN INSURANCE AT ACCEPTABLE COSTS AND ADEQUATE LEVELS OR OTHERWISE PROTECT OURSELVES AGAINST POTENTIAL PRODUCT LIABILITY CLAIMS Our business exposes us to potential product liability risks, which are inherent in the testing, manufacturing, marketing and sale of human healthcare products. Product liability claims might be made by consumers, health care providers or pharmaceutical companies or others that sell our products. These claims may be made even with respect to those products that are manufactured in licensed and regulated facilities or otherwise possess regulatory approval for commercial sale. These claims could expose us to significant liabilities that could prevent or interfere with the development or commercialization of our products. Product liability claims could require us to spend significant time and money in litigation or pay significant damages. We are currently covered, with respect to our commercial sales in the United States and New Zealand and our clinical trials, by primary product liability insurance in the amount of $20.0 million per occurrence and $20.0 million annually in the aggregate on a claims-made basis. This coverage may not be adequate to cover any product liability claims. As we commercialize our products, we may wish to increase our product liability insurance. Product liability coverage is expensive. In the future, we may not be able to maintain or obtain such product liability insurance on reasonable terms, at a reasonable cost or in sufficient amounts to protect us against losses due to product liability claims. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to market risk is confined to our cash, cash equivalents and marketable securities. We place our investments in high-quality financial instruments, primarily money market funds and corporate debt securities with maturities or auction dates of less than one year, which we believe are subject to limited credit risk. We currently do not hedge interest rate exposure. At September 30, 2001, we held $69.2 million in cash, cash equivalents, and marketable securities, all due within one year, which had an average interest rate of approximately 4.0%. We do not believe that a 10% increase or decrease in interest rates in effect at September 30, 2001 would have a material impact on our results of operations or cash flows. Page 20 Most of our transactions are conducted in U.S. dollars. We do have certain development and commercialization agreements with vendors located outside the United States. Transactions under certain of these agreements are conducted in U.S. dollars, subject to adjustment based on significant fluctuations in currency exchange rates. Transactions under certain other of these agreements are conducted in the local foreign currency. We do not believe that a 10% increase or decrease in foreign currency exchange rates would have a material impact on our results of operations or cash flows. Page 21 PART II. OTHER INFORMATION ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS In our IPO, we sold 6.9 million shares of common stock (including an over-allotment option of 900,000 shares) pursuant to a Registration Statement on Form S-1 (File No. 333-37404) that was declared effective by the Securities and Exchange Commission on August 7, 2000. Of the aggregate net proceeds of approximately $101.4 million from the IPO, from August 7, 2000 through September 30, 2001, we used approximately $79.0 million for general corporate purposes, including operations, working capital and capital expenditures, with the remaining $22.4 million in proceeds invested in cash, cash equivalents and marketable securities. Of the approximately $79.0 million, we have paid approximately $332,000 to Stack Pharmaceuticals, Inc., and approximately $6.3 million to Innovex, Inc. Prior to becoming our President and Chief Executive Officer, David M. Stack was the President and General Partner of Stack Pharmaceuticals and a Senior Advisor to the Chief Executive Officer of Innovex. Other than these payments, none of the net proceeds of the IPO has been paid by us, directly or indirectly, to any director, officer or general partner of us, or any of their associates, or to any person owning ten percent or more of any class of our equity securities, or any of our affiliates. Page 22 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed as part of this Quarterly Report, which Exhibit Index is incorporated herein by this reference. (b) Reports on Form 8-K On July 26, 2001, the Company filed a Current Report on Form 8-K with the SEC in connection with its announcement of financial results for the quarter and six-month periods ended June 30, 2001. On September 4, 2001, the Company filed a Current Report on Form 8-K with the SEC in connection with its announcement of the results of the Hirulog Early Reperfusion/Occlusion-2, or HERO-2, clinical trial program. On September 27, 2001, the Company filed a Current Report on Form 8-K with the SEC in connection with its announcement of the election of Clive A. Meanwell to the position of Executive Chairman and promotion of David M. Stack to President and Chief Executive Officer. Page 23 SIGNATURES Pursuant to the requirements 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. THE MEDICINES COMPANY Date: November 14, 2001 By: /s/ Peyton J. Marshall ------------------------------ Peyton J. Marshall Chief Financial Officer Page 24 EXHIBIT INDEX
Exhibit Number Description -------------- ----------- 10.1 Assignment and Assumption of Lease, dated October 18, 2001, by and between the Registrant and Stack Pharmaceuticals, Inc. 10.2 Termination Agreement, dated November 1, 2001, by and between the Registrant and Stack Pharmaceuticals, Inc. relating to the Services Agreement dated April 1, 2000, as amended. 10.3 Amendment to Employment Agreement, dated July 10, 2001, by and between the Registrant and David M. Stack. 10.4 Amended and Restated Employment Agreement, dated November 1, 2001, by and between the Registrant and David M. Stack.
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