SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
_______________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2001, 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 No. 0-18728
INTERNEURON PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3047911
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
One Ledgemont Center, 99 Hayden Avenue 02421
Lexington, Massachusetts (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (781) 861-8444
(Former name, former address and former fiscal year, if changed since last
report): Not Applicable
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 class of
common stock, as of the latest practicable date.
Class: Outstanding at August 13 , 2001:
Common Stock $.001 par value 43,257,118 shares
1
INTERNEURON PHARMACEUTICALS, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2001
and September 30, 2000.............................................. 3
Consolidated Statements of Operations for the Three and Nine Months
ended June 30, 2001 and 2000........................................ 4
Consolidated Statements of Cash Flows for the Nine Months
ended June 30, 2001 and 2000........................................ 5
Notes to Unaudited Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 18
Item 6. Exhibits and Reports on Form 8-K............................. 20
SIGNATURES............................................................ 21
2
Item 1. Financial Statements
INTERNEURON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands except share data)
June 30, September 30,
2001 2000
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents $29,978 $24,871
Marketable securities 2,896 8,880
Insurance claim receivable 3,240 8,435
Settlement deposit receivable -- 1,757
Prepaids and other current assets 555 1,110
------- -------
Total current assets 36,669 45,053
Investment in Incara 850 1,627
Marketable securities 2,002 --
Property and equipment, net 84 146
------- -------
$39,605 $46,826
======= =======
LIABILITIES
Current liabilities:
Accounts payable $ -- $ 122
Accrued expenses 6,153 15,604
Deferred revenue 3,000 3,000
Current portion of capital
lease obligations -- 2
------ -------
Total current liabilities 9,153 18,728
Minority interest 345 332
STOCKHOLDERS' EQUITY
Preferred stock; $.001 par value,
5,000,000 shares authorized;
Series B, 239,425 shares issued
and outstanding at June 30, 2001 and
September 30, 2000 (liquidation
preference at June 30, 2001 $3,019) 3,000 3,000
Series C, 5,000 shares issued and
outstanding at June 30, 2001 and
September 30, 2000 (liquidation
preference at June 30, 2001 $500) 500 500
Common stock; $.001 par value,
80,000,000 shares authorized;
43,257,118 and 42,780,492 shares
issued and outstanding at June 30,
2001 and September 30, 2000,
respectively 43 43
Additional paid-in capital 276,448 274,011
Accumulated deficit (249,244) (249,802)
Accumulated other comprehensive
income (640) 14
-------- ---------
Total stockholders' equity 30,107 27,766
-------- ---------
$ 39,605 $ 46,826
======== =========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
INTERNEURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended June 30, 2001 and 2000
(Unaudited)
(Amounts in thousands except per share data)
Three Months Ended June 30, Nine Months Ended June 30,
----------------------------- ---------------------------
2001 2000 2001 2000
------- ------- ------- -------
Revenues:
Royalty income $ 287 $ -- $ 932 $ --
Contract and license fees -- -- -- 23,751
------- ------- ------- -------
Total revenues 287 -- 932 23,751
Costs and expenses:
Cost of revenues 70 24 200 2,075
Research and development 1,461 814 3,660 3,090
General and administrative 2,337 1,655 6,035 6,281
Product withdrawal (7,480) -- (8,098) --
------- ------- ------- -------
Total costs and expenses (3,612) 2,493 1,797 11,446
Income (loss) from operations 3,899 (2,493) (865) 12,305
Investment income, net 405 510 1,478 1,303
Gain (loss) on investment securities -- -- (43) 1,550
Minority interest (4) -- (12) --
------- ------- ------- -------
Net income (loss) $ 4,300 $(1,983) $ 558 $15,158
======= ======= ======= =======
Net income (loss) per common share:
Basic $0.10 $ (0.05) $0.01 $0.36
Diluted $0.09 $ (0.05) $0.01 $0.35
Weighted average common shares outstanding:
Basic 42,970 42,730 42,843 42,390
======= ======= ======= =======
Diluted 46,836 42,730 45,085 43,803
======= ======= ======= =======
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
INTERNEURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended June 30, 2001 and 2000
(Unaudited)
(Amounts in thousands)
Nine months ended June 30,
--------------------------
2001 2000
------- --------
Cash flows from operating activities:
Net income $ 558 $ 15,158
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 80 168
Minority interest in net income of consolidated subsidiary 13 --
Gain on sales of property and equipment -- (35)
Gain (loss) on investment securities 43 (1,550)
Noncash compensation 1,765 1,255
Change in assets and liabilities:
Accounts receivable -- 517
Insurance claim receivable 5,195 (5,111)
Settlement deposit receivable 1,757 --
Prepaid and other assets 555 1,550
Accounts payable (122) (153)
Deferred revenue -- 3,000
Accrued expenses and other liabilities (9,368) (6,753)
------- --------
Net cash provided by operating activities 476 8,046
------- --------
Cash flows from investing activities:
Capital expenditures (18) (8)
Proceeds from sales of property and equipment -- 40
Purchases of marketable securities (5,983) (12,378)
Proceeds from maturities and sales of marketable securities 9,971 7,371
Proceeds from sales of investment securities -- 1,756
------- --------
Net cash provided by (used in) investing activities 3,970 (3,219)
------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock 663 478
Principal payments of capital lease obligations (2) (61)
------- --------
Net cash provided by financing activities 661 417
------- --------
Net change in cash and cash equivalents 5,107 5,244
Cash and cash equivalents at beginning of period 24,871 19,354
------- --------
Cash and cash equivalents at end of period $29,978 $ 24,598
======= ========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
5
INTERNEURON PHARMACEUTICALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation
---------------------
The consolidated financial statements included herein have been prepared by
Interneuron Pharmaceuticals, Inc. ("Interneuron" or the "Company") without
audit, pursuant to the rules and regulations of the U.S. Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying unaudited
consolidated financial statements include all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the consolidated
financial position, results of operations and cash flows of the Company. The
unaudited consolidated financial statements included herein should be read in
conjunction with the audited consolidated financial statements and the notes
thereto included in the Company's Form 10-K for the fiscal year ended September
30, 2000.
Interneuron is a biopharmaceutical company engaged in the development and
commercialization of a diversified portfolio of product candidates, including
multiple compounds in late-stage clinical development.
B. Withdrawal of Redux(R), Legal Proceedings, and Related Contingencies
---------------------------------------------------------------------
On May 30, 2001, the Company entered into an Indemnity and Release Agreement
(the "AHP Agreement") with American Home Products Corporation ("AHP") which
provides for AHP's indemnification of the Company with respect to certain
classes of product liability claims filed against the Company related to the
prescription drug Redux, which was withdrawn from the market in September 1997.
Pursuant to the AHP Agreement, AHP has agreed to indemnify and hold harmless
the Company and its officers, directors and certain employees (collectively,
"Interneuron Indemnified Parties") against all losses after the date of the AHP
Agreement (including, damages, settlements and judgments) arising from Redux-
related claims by (i) persons who have already opted out of AHP's National Class
Action Settlement Agreement in Brown v. AHP, No. 99-20593 (E.D. Pa.) (the "Brown
Settlement") and (ii) any Brown class member alleging Primary Pulmonary
Hypertension (PPH) as a result of the use of Redux. AHP further agreed to
assume the Company's defense in all litigation arising out of such indemnified
claims.
In addition, AHP agreed to assume the defense of, and fund all future legal
expenses in connection with, Redux-related product liability litigation brought
by claimants other than those described above. AHP further agreed to provide
additional insurance coverage to fund losses resulting from any settlements or
judgments in current or future Redux-related product liability claims that are
not covered by AHP's indemnification obligations under the AHP Agreement.
The Company believes that AHP's indemnification of certain claims, the
insurance provided by AHP for other claims, and AHP's funding of legal expenses,
6
as described above, along with the Company's existing insurance, will be
sufficient to address the Company's potential Redux product liability exposure.
However, there can be no assurance that uninsured or insufficiently insured
Redux-related claims that may arise in the future will not have a material
adverse effect on the Company's future business, results of operations or
financial condition or that the potential of any such claims would not adversely
affect the Company's ability to obtain sufficient financing to fund operations.
The AHP Agreement does not provide indemnification or defense by AHP of the
Interneuron Indemnified Parties for losses and litigation expenses (i) incurred
by Interneuron Indemnified Parties prior to the date of the Agreement, (ii)
arising out of claims asserted against Interneuron Indemnified Parties for
breaches or violations of any state or federal securities laws or (iii) any
costs related to regulatory or government actions. Up to the date of the AHP
Agreement, the Company's defense costs had been and are being paid by its
insurers. Further, there have been no Redux-related product liability
settlements or judgments paid by the Company or its insurers. Regarding
securities litigation related to Redux, in 2000 several lawsuits naming certain
directors and officers of the Company and claiming violation of federal
securities laws were settled; the settlement amount was funded entirely by
insurance proceeds. Also, the Company has not been involved in any regulatory or
government actions relating to Redux.
Pursuant to the AHP Agreement, AHP and the Company agreed also to release
each other from Redux-related claims. In addition, the Company agreed (i) to
dismiss with prejudice its lawsuit, Interneuron v. AHP, No. 00-294 (Mass.
Superior Court, Middlesex County), which the Company filed in January, 2000 (the
"AHP Litigation"), (ii) to withdraw its appeal to the United States Third
Circuit Court of Appeals from the order approving the Brown Settlement, and
(iii) to dismiss its cross claims against AHP in all pending Redux-related
product liability litigation.
As a result of the AHP Agreement, the Company believes that it is no longer
probable that it will have to pay approximately $8,000,000 for estimated
liabilities that had been established at the time Redux was withdrawn.
Accordingly, the Company has reversed these accruals in the three month period
ended June 30, 2001 and has reflected the reversal as a credit in product
withdrawal in the Company's statements of operations. This credit is offset by a
noncash charge of $561,000 for the fair value of stock options granted to
attorneys involved in the AHP Litigation, resulting in a net credit of
$7,480,000 in product withdrawal for the three month period ended June 30, 2001.
Product withdrawal for the nine month period ended June 30, 2001 was a credit of
$8,098,000 and additionally includes insurance reimbursements for other Redux-
related expenses.
In fiscal 1999, the Company's three product liability insurers filed
actions against Les Laboratoires Servier ("Servier") and the Company in the
District Court for the Eastern District of Pennsylvania (the "District Court")
pursuant to the federal interpleader statute. The aggregate limit of the three
commercial excess insurance policies issued by the insurers to the Company is
$40,000,000. The insurers alleged that the Company asserted claims against these
policies and Servier, as an additional insured under these policies, asserted
its right to claim against these policies. The insurers deposited the available
proceeds up to the limits of their policies (the "Deposited Funds"), which are
subject to ongoing claims by the Company and Servier, into the registry of the
District Court. In October 2000, the District Court dismissed the interpleader
actions and the Deposited Funds were subsequently returned to the insurance
companies.
In January 2001, the Company was reimbursed $8,419,000 for litigation
expenses previously paid by the Company and for other Redux-related costs. Of
this amount, $618,000 of other Redux-related costs are included as a credit in
the Company's Statement of Operations for the nine month period ended June 30,
2001 under product withdrawal. Reflected in insurance claim receivable at June
30, 2001 of $3,240,000 is $2,552,000 which the Company paid through June 30,
2001 to the group of law firms defending the Company in the Redux-related
product liability litigation and an additional $688,000 which the Company has
7
estimated and accrued for services rendered by such law firms through May 30,
2001. The Company currently intends to finalize payments for such fees and to
file claims for reimbursement from the insurance companies. The insurance
company from whom the Company is currently seeking reimbursement for its
outstanding claims has notified the Company that it is in rehabilitation.
Rehabilitation, in Pennsylvania, is a court-ordered action authorized under the
state's insurance laws that places the state's Insurance Commissioner as the
"Rehabilitator" in control over an insurance company whereby the Rehabilitator
conducts an analysis of the insurance company's financial position and
determines what steps are feasible and necessary to correct the insurance
company's problems while giving priority to protecting the policyholders. The
insurance company has indicated to the Company that the Company's claims on its
policy will be paid although there can be no assurance the Company will receive
such reimbursements. The Company expects to be reimbursed for Redux-related
product liability insurance claims until the aggregate limits of its other
commercial excess insurance policies are paid.
In October 2000, the District Court returned $1,757,000 to the Company from
the initial payment the Company made to the District Court pursuant to a
proposed settlement which was rejected by the District Court. The Company
reflected this amount at September 30, 2000 as a receivable.
On August 7, 2001, Columbia Casualty Company, one of the Company's insurers
for the period May 1997 through May 1998, filed an action in the United States
District Court for the District of Columbia against the Company. The lawsuit is
based upon a claim for breach of contract and declaratory judgment, seeking
damages against the Company in excess of $20,000,000, the amount that the
plaintiff has paid to the Company under its insurance policy. The plaintiff
alleges that under the policy it was subrogated to any claim for indemnification
that Interneuron may have had against AHP related to Redux and that such claim
was compromised without its consent when the Company entered into the AHP
Agreement. The Company is evaluating the lawsuit and plans to vigorously defend
this litigation.
C. Basic and Diluted Income (Loss) Per Share
-----------------------------------------
The following table sets forth the computation of basic and diluted income
(loss) per common share:
Three Months Ended June 30, Nine Months Ended June 30,
---------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ---------- -----------
Numerator for basic and diluted
income (loss) per share:
Net income (loss) $ 4,300,000 $(1,983,000) $ 558,000 $15,158,000
=========== =========== =========== ===========
Denominator for basic income (loss)
per share:
Weighted average shares outstanding 42,970,000 42,730,000 42,843,000 42,390,000
=========== =========== =========== ===========
Denominator for diluted income (loss)
per share:
Weighted average shares outstanding 42,970,000 42,730,000 42,843,000 42,390,000
Dilutive effect of:
Shares issuable in connection with
stock option plans 2,904,000 -- 1,206,000 34,000
Shares issued or issuable in connection
with restricted stock awards 340,000 -- 414,000 757,000
Shares issuable in connection with
convertible preferred stock 622,000 -- 622,000 622,000
----------- ----------- ----------- -----------
Weighted average shares outstanding -
diluted 46,836,000 42,730,000 45,085,000 43,803,000
=========== =========== =========== ===========
Net income (loss) per common share -
Basic $ 0.10 $ (0.05) $ 0.01 $ 0.36
=========== =========== =========== ===========
Diluted $ 0.09 $ (0.05) $ 0.01 $ 0.35
=========== =========== =========== ===========
8
During the three month period ended June 30, 2001, securities not included in
the computation of diluted earnings per share, because their exercise price
exceeded the average market price during the period were as follows: (i) options
to purchase 2,953,041 shares of Common Stock at prices ranging from $6.00 to
$20.13 with expiration dates ranging up to April 5, 2010; and (ii) warrants to
purchase 660,000 shares of Common Stock with exercise prices ranging from $6.19
to $12.77 and with expiration dates ranging up to July 17, 2006.
During the three month period ended June 30, 2000, securities not included in
the computation of diluted earnings per share, because their exercise price
exceeded the average market price during the period were as follows: (i) options
to purchase 9,535,150 shares of Common Stock at prices ranging from $2.38 to
$20.13 with expiration dates ranging up to April 5, 2010; and (ii) warrants to
purchase 812,500 shares of Common Stock with exercise prices ranging from $5.00
to $12.77 and with expiration dates ranging up to July 17, 2006. Additionally,
during the three month period ended June 30, 2000, securities not included in
the computation of diluted earnings per share, because they would have an
antidilutive effect due to the net loss for the period, were as follows: (i)
options to purchase 187,801 shares of Common Stock at prices ranging from $1.53
to $1.88 with expiration dates ranging up to June 6, 2007; (ii) Series B and C
preferred stock convertible into 622,222 shares of Common Stock; and (iii)
unvested Restricted Stock Awards of 450,000 shares of Common Stock granted
pursuant to the Company's 1997 Equity Incentive Plan.
During the nine month period ended June 30, 2001, securities not included in
the computation of diluted earnings per share, because their exercise price
exceeded the average market price during the period were as follows: (i) options
to purchase 5,972,042 shares of Common Stock at prices ranging from $3.56 to
$20.13 with expiration dates ranging up to March 8, 2011; and (ii) warrants to
purchase 660,000 shares of Common Stock with exercise prices ranging from $6.19
to $12.77 and with expiration dates ranging up to July 17, 2006.
During the nine month period ended June 30, 2000, securities not included in
the computation of diluted earnings per share, because their exercise price
exceeded the average market price during the period were as follows: (i) options
to purchase 6,326,979 shares of Common Stock at prices ranging from $3.56 to
$20.13 with expiration dates ranging up to March 9, 2010; (ii) warrants to
purchase 812,500 shares of Common Stock with exercise prices ranging from $5.00
to $12.77 and with expiration dates ranging up to July 17, 2006; and (iii) call
options sold by the Company for 2,000,000 shares of Common Stock with an
exercise price of $36.00 and expiration dates ranging up to December 31, 1999.
D. Comprehensive Income (Loss)
---------------------------
Comprehensive income (loss) for the three and nine month periods ended June
30, 2001 and 2000, respectively, is as follows:
Three Months Ended June 30, Nine Months Ended June 30,
---------------------------- -----------------------------
2001 2000 2001 2000
---------- ----------- --------- -----------
Net income (loss) $4,300,000 $(1,983,000) $ 558,000 $15,158,000
Change in unrealized net
gain or loss on investments 7,000 (1,514,000) (654,000) (361,000)
---------- ----------- --------- -----------
Comprehensive income (loss) $4,307,000 $(3,497,000) $ (96,000) $14,797,000
========== =========== ========= ===========
9
E. Other Agreements
----------------
In January 2001, the Company exercised its option and entered into an
agreement to license IP 501, an orally-administered anti-fibrotic purified
phospholipid compound in Phase III development for the treatment and prevention
of liver diseases, including alcohol and Hepatitis C-induced cirrhosis. In
exchange for potential future milestone payments and royalties on potential net
sales, the license agreement gives the Company rights to develop and
commercialize IP 501 in the United States, Canada, Japan, Korea, and, under
certain circumstances, Europe and other markets. The Company is responsible for
all remaining clinical and regulatory development, manufacturing, and marketing
of the compound in the licensed territory.
F. Recent Accounting Pronouncements
--------------------------------
In June 2001, the Financial Accounting Standards Board ("the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" ("SFAS No. 141") and SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"). SFAS No. 141 requires that all business combinations
be accounted for under the purchase method only and that certain acquired
intangible assets in a business combination be recognized as assets apart from
goodwill. SFAS No. 142 requires that ratable amortization of goodwill be
replaced with periodic tests of the goodwill's impairment and that intangible
assets other than goodwill be amortized over their useful lives. SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001 and for
all business combinations accounted for by the purchase method for which the
date of acquisition is after June 30, 2001. The provisions of SFAS No. 142 will
be effective for fiscal years beginning after December 15, 2001, and will thus
be adopted by the Company, as required, in fiscal year 2003. The impact of SFAS
No. 141 and SFAS No. 142 on the Company's financial statements has not yet been
determined.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"), which clarifies the SEC's
views related to revenue recognition and disclosure. In June 2000, the SEC
issued SAB 101B which delayed the implementation date of SAB 101. The Company
will adopt SAB 101 in the fourth quarter of fiscal 2001. The Company is
currently assessing the impact of SAB 101, the adoption of which could have a
significant noncash effect on the Company's results of operations for fiscal
2001. To the extent the adoption of SAB 101 results in the deferral of revenue
recognized prior to fiscal 2001 in connection with the Company's collaboration
with Takeda Chemical Industries, Ltd. ("Takeda"), such deferral would be
reflected as a cumulative effect of a change in accounting principle in the
Company's statement of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. SFAS No. 133 requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. In June 1999, the FASB issued SFAS No. 137 which deferred the
effective date of adoption of SFAS No. 133 to fiscal years beginning after June
15, 2000. The Company adopted SFAS No. 133 in the fiscal quarter ended December
31, 2000 and the adoption did not have an impact on the Company's financial
statements.
10
Item 2. Management's Discussion and Analysis of Financial Conditions
------------------------------------------------------------
and Results of Operations:
-------------------------
Statements in this Form 10-Q that are not statements or descriptions of
historical facts are "forward-looking" statements under Section 21E of the
Securities Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995 and are subject to numerous risks and
uncertainties. These forward-looking statements and other forward-looking
statements made by the Company or its representatives include, without
limitation, statements regarding the Redux-related litigation, the Company's
ability to successfully develop, obtain regulatory approval for and
commercialize any products, to enter into corporate collaborations or obtain
sufficient additional capital to fund operations, and are based on a number of
assumptions. The words "believe," "expect," "anticipate," "intend," "plan,"
"estimate" or other expressions which are predictions of or indicate future
events and trends and do not relate to historical matters identify forward-
looking statements. Readers are cautioned not to place undue reliance on these
forward-looking statements as they involve risks and uncertainties, and actual
results could differ materially from those currently anticipated due to a number
of factors, including those set forth under "Risk Factors" and elsewhere in, or
incorporated by reference into, the Company's Form 10-K for its fiscal year
ended September 30, 2000. These factors include, but are not limited to:
uncertainties relating to clinical trials, regulatory approvals and
commercialization of the Company's products; need for additional funds and
corporate partners; history of operating losses and expectation of future
losses; risks relating to the Redux-related litigation; product liability;
dependence on third parties for manufacturing and marketing; the early stage of
products under development; government regulation; risks associated with
contractual agreements; dependence upon key personnel; uncertainty regarding
pharmaceutical pricing and reimbursement; limited patent protection and
proprietary rights and competition and other risks. The forward-looking
statements represent the Company's judgment and expectations as of the date of
this Report. The Company assumes no obligation to update any such forward-
looking statements.
The following discussion should be read in conjunction with the Company's
unaudited consolidated financial statements and notes thereto appearing
elsewhere in this report and audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 2000. Unless the context indicates otherwise, "Interneuron"
or the "Company" refer to Interneuron Pharmaceuticals, Inc.
General
-------
Description of Company
Interneuron is a biopharmaceutical company engaged in the development and
commercialization of a diversified portfolio of product candidates, including
multiple compounds in late-stage clinical development. The Company is currently
developing or has certain rights to five compounds in clinical development:
pagoclone for panic and generalized anxiety disorders, trospium for overactive
bladder, IP 501 for liver diseases, citicoline for ischemic stroke, and PRO 2000
for the prevention of infection by the human immunodeficiency virus ("HIV") and
for the prevention of sexually transmitted diseases. In addition, the Company
has other compounds in earlier stages of development, including PACAP (pituitary
adenylate cyclase activating polypeptide) for respiratory disease, diabetes,
stroke and other neurodegenerative diseases.
Redux
On May 30, 2001, the Company entered into an Indemnity and Release Agreement
(the "AHP Agreement") with American Home Products Corporation ("AHP") which
provides for AHP's indemnification of the Company with respect to certain
classes of product liability claims filed against the Company related to the
prescription drug Redux, which was withdrawn from the market in September 1997.
11
Pursuant to the AHP Agreement, AHP has agreed to indemnify and hold harmless
the Company and its officers, directors and certain employees (collectively,
"Interneuron Indemnified Parties") against all losses after the date of the AHP
Agreement (including damages, settlements and judgments) arising from Redux-
related claims by (i) persons who have already opted out of AHP's National Class
Action Settlement Agreement in Brown v. AHP, No. 99-20593 (E.D. Pa.) (the "Brown
Settlement") and (ii) any Brown class member alleging Primary Pulmonary
Hypertension (PPH) as a result of the use of Redux. AHP further agreed to
assume the Company's defense in all litigation arising out of such indemnified
claims.
In addition, AHP agreed to assume the defense of, and fund all future legal
expenses in connection with, Redux-related product liability litigation brought
by claimants other than those described above. AHP further agreed to provide
additional insurance coverage to fund losses resulting from any settlements or
judgments in current or future Redux-related product liability claims that are
not covered by AHP's indemnification obligations under the AHP Agreement.
The Company believes that AHP's indemnification of certain claims, the
insurance provided by AHP for other claims, and AHP's funding of legal expenses,
as described above, along with the Company's existing insurance, will be
sufficient to address the Company's potential Redux product liability exposure.
However, there can be no assurance that uninsured or insufficiently insured
Redux-related claims that may arise in the future will not have a material
adverse effect on the Company's future business, results of operations or
financial condition or that the potential of any such claims would not adversely
affect the Company's ability to obtain sufficient financing to fund operations.
The AHP Agreement does not provide indemnification or defense by AHP of the
Interneuron Indemnified Parties for losses and litigation expenses (i) incurred
by Interneuron Indemnified Parties prior to the date of the Agreement, (ii)
arising out of claims asserted against Interneuron Indemnified Parties for
breaches or violations of any state or federal securities laws or (iii) any
costs related to regulatory or government actions. Up to the date of the AHP
Agreement, the Company's defense costs had been and are being paid by its
insurers. Further, there have been no Redux-related product liability
settlements or judgments paid by the Company or its insurers. Regarding
securities litigation related to Redux, in 2000 several lawsuits naming certain
directors and officers of the Company and claiming violation of federal
securities laws were settled; the settlement amount was funded entirely by
insurance proceeds. Also, the Company has not been involved in any regulatory or
government actions relating to Redux.
Pursuant to the AHP Agreement, AHP and the Company agreed also to release
each other from Redux-related claims. In addition, the Company agreed (i) to
dismiss with prejudice its lawsuit, Interneuron v. AHP, No. 00-294 (Mass.
Superior Court, Middlesex County), which the Company filed in January, 2000 (the
"AHP Litigation"), (ii) to withdraw its appeal to the United States Third
Circuit Court of Appeals from the order approving the Brown Settlement, and
(iii) to dismiss its cross claims against AHP in all pending Redux-related
product liability litigation.
As a result of the AHP Agreement, the Company believes that it is no longer
probable that it will have to pay approximately $8,000,000 for estimated
liabilities that had been established at the time Redux was withdrawn.
Accordingly, the Company has reversed these accruals in the three month period
ended June 30, 2001 and has reflected the reversal as a credit in product
withdrawal in the Company's statements of operations. This credit is offset by a
noncash charge of $561,000 for the fair value of stock options granted to
attorneys involved in the AHP Litigation, resulting in a net credit of
$7,480,000 in product withdrawal for the three month period ended June 30, 2001.
Product withdrawal for the nine month period ended June 30, 2001 was a credit of
$8,098,000 and additionally includes insurance reimbursements for other Redux-
related expenses.
12
In fiscal 1999, the Company's three product liability insurers filed
actions against Les Laboratoires Servier ("Servier") and the Company in the
District Court for the Eastern District of Pennsylvania (the "District Court")
pursuant to the federal interpleader statute. The aggregate limit of the three
commercial excess insurance policies issued by the insurers to the Company is
$40,000,000. The insurers alleged that the Company asserted claims against these
policies and Servier, as an additional insured under these policies, asserted
its right to claim against these policies. The insurers deposited the available
proceeds up to the limits of their policies (the "Deposited Funds"), which are
subject to ongoing claims by the Company and Servier, into the registry of the
District Court. In October 2000, the District Court dismissed the interpleader
actions and the Deposited Funds were subsequently returned to the insurance
companies.
In January 2001, the Company was reimbursed $8,419,000 for litigation
expenses previously paid by the Company and for other Redux-related costs. Of
this amount, $618,000 of other Redux-related costs are included as a credit in
the Company's Statement of Operations for the nine month period ended June 30,
2001 under product withdrawal. Reflected in insurance claim receivable at June
30, 2001 of $3,240,000 is $2,552,000 which the Company paid through June 30,
2001 to the group of law firms defending the Company in the Redux-related
product liability litigation and an additional $688,000 which the Company has
estimated and accrued for services rendered by such law firms through May 30,
2001. The Company currently intends to finalize payments for such fees and to
file claims for reimbursement from the insurance companies. The insurance
company from whom the Company is currently seeking reimbursement for its
outstanding claims has notified the Company that it is in rehabilitation.
Rehabilitation, in Pennsylvania, is a court-ordered action authorized under the
state's insurance laws that places the state's Insurance Commissioner as the
"Rehabilitator" in control over an insurance company whereby the Rehabilitator
conducts an analysis of the insurance company's financial position and
determines what steps are feasible and necessary to correct the insurance
company's problems while giving priority to protecting the policyholders. The
insurance company has indicated to the Company that the Company's claims on its
policy will be paid, although there can be no assurance the Company will receive
such reimbursements. The Company expects to be reimbursed for Redux-related
product liability insurance claims until the aggregate limits of its other
commercial excess insurance policies are paid.
In October 2000, the District Court returned $1,757,000 to the Company from
the initial payment the Company made to the District Court pursuant to a
proposed settlement which was rejected by the District Court. The Company
reflected this amount at September 30, 2000 as a receivable.
On August 7, 2001, Columbia Casualty Company, one of the Company's insurers
for the period May 1997 through May 1998, filed an action in the United States
District Court for the District of Columbia against the Company. The lawsuit is
based upon a claim for breach of contract and declaratory judgment, seeking
damages against the Company in excess of $20,000,000, the amount that the
plaintiff has paid to the Company under its insurance policy. The plaintiff
alleges that under the policy it was subrogated to any claim for indemnification
that Interneuron may have had against AHP related to Redux and that such claim
was compromised without its consent when the Company entered into the AHP
Agreement. The Company is evaluating the lawsuit and plans to vigorously defend
this litigation.
See "Liquidity and Capital Resources - Analysis of Cash Flows" and "PART II.
Item 1. Legal Proceedings."
Pagoclone
In December 1999, the Company entered into an agreement with Pfizer, Inc.
("Pfizer") (the "Pfizer Agreement"), under which it licensed to Pfizer
exclusive, worldwide rights to develop and commercialize pagoclone. Under the
Pfizer Agreement, Pfizer is responsible for conducting and funding all further
clinical development, regulatory review, manufacturing and marketing of
pagoclone on a worldwide basis. Under the Company's agreement with Aventis, S.A.
("Aventis"), Aventis is entitled to receive a portion of certain of the
potential payments to be received by the Company from Pfizer. Pfizer is
currently testing pagoclone in a Phase III trial for panic disorder and a Phase
II trial for generalized anxiety disorder.
13
Trospium
In November 1999, the Company obtained an exclusive U.S. license to trospium,
a prescription drug product currently marketed as a treatment for overactive
bladder in Europe. Based on conversations with the U.S. Food and Drug
Administration ("FDA"), the Company elected to conduct a standardized
electrocardiographic safety study which is recommended by the FDA for drugs in
the pharmacological class of trospium. Additionally, based upon those
discussions with the FDA, the Company believes that, in combination with the
existing efficacy and safety data on trospium, a single, successful Phase III
trial will be necessary and sufficient for submission of an NDA. On December
12, 2000, the Company filed an Investigational New Drug Application for trospium
and has since completed the safety study. The Company expects to begin a 500-
patient Phase III trial in the fall of 2001.
IP 501
In January 2001, the Company exercised its option and entered into an
agreement to license IP 501, an orally-administered, anti-fibrotic purified
phospholipid compound in Phase III development for the treatment and prevention
of liver diseases, including alcohol and Hepatitis C-induced cirrhosis.
IP 501 is currently being studied in an 800-patient Phase III clinical trial
sponsored by the Veterans Administration. Data analysis from the trial is
ongoing and the Company intends to announce the results of the trial when they
become available to the Company. In January 2001, the Company announced the
start of a 250-patient, government-funded Phase III trial designed to evaluate
the safety and effectiveness of IP 501 in treating patients with Hepatitis C-
associated cirrhosis.
In April 2001, Takeda Chemical Industries Ltd. ("Takeda") exercised a
previously granted option to negotiate a license to one of the Company's
compounds ( see "Citicoline"). Takeda has designated IP 501 as such compound.
Takeda will have a six month period during which the Company may not offer the
compound selected by Takeda to any other party on terms more favorable than
those offered to Takeda without first re-offering such compound to Takeda on
such new terms. Upon the expiration of such six month period on October 1,
2001, in the event the Company has not entered into an agreement with Takeda,
Takeda will have no further rights to IP 501.
PRO 2000
In June 2000, the Company licensed exclusive, worldwide rights to develop and
market PRO 2000, a candidate topical microbicide to prevent infection by HIV and
other sexually transmitted pathogens. In October 2000, dosing and follow-up for
a Phase I/Phase II clinical trial of PRO 2000 was completed by the National
Institutes of Health at sites in the U.S. and South Africa. No serious adverse
events were reported, and PRO 2000 was judged by investigators to be safe and
well tolerated. Additional government-funded clinical testing is planned,
including a Phase II/Phase III clinical trial to evaluate long-term safety and
protective efficacy against HIV.
Sarafem/TM/
In June 1997, the Company licensed to Eli Lilly and Company ("Lilly")
worldwide, exclusive rights to Interneuron's patent covering the use of
14
fluoxetine to treat certain conditions and symptoms associated with premenstrual
syndrome. Lilly received approval for fluoxetine to treat premenstrual
dysphoric disorder and is marketing the drug under the trade name Sarafem. The
agreement provides for milestone payments and royalties based on net sales in
the United States. The maximum aggregate royalty payments to Interneuron in any
calendar year range from three to five million dollars and are conditioned upon
the achievement of net sales in the United States above an annually escalating
baseline. Royalties to the Company will terminate at the end of the first two
consecutive quarters in which 70% or less of total Prozac prescriptions are
"dispensed as written." Based on a recent Federal Court of Appeals ruling,
Lilly's composition of matter patent on fluoxetine expires in August 2001. As a
result, the Company expects royalty payments under this agreement to cease in
early 2002.
Citicoline
In December 1999, the Company entered into an agreement with Takeda (the
"Takeda Agreement"), subsequently amended, under which the Company licensed to
Takeda exclusive U.S. and Canadian commercialization rights to citicoline. In
December 2000, Takeda notified the Company of its decision not to participate in
the further development of citicoline, thereby terminating the Takeda Agreement.
Therefore, the Company has reacquired all rights to this compound. The Company
does not intend to further develop citicoline unless it is able to find another
partner to participate in such development. Takeda has exercised its option
under the Takeda Agreement to negotiate a license of another one of the
Company's compounds and has selected IP 501 as such compound.
Results of Operations
---------------------
Fiscal 2001 revenues consisted of $287,000 and $932,000 of royalty revenue
received from Lilly on sales of Sarafem in the three and nine month periods
ended June 30, 2001, respectively. Fiscal 2000 revenue in the nine month period
ended June 30, 2000 consisted of $23,751,000 in contract and license fee
revenue, $13,750,000 of which was received from Pfizer pursuant to the Pfizer
Agreement and $10,000,000 from Takeda pursuant to the Takeda Agreement. The
Company reported no revenue in the three month period ended June 30, 2000.
Cost of revenues of $70,000 and $200,000 in the three and nine month periods
ended June 30, 2001, respectively, consists primarily of amounts due or paid to
Massachusetts Institute of Technology for its portion of the Sarafem royalty
revenue. Cost of revenues of $2,075,000 in the nine month period ended June 30,
2000 reflect payments to Aventis for its portion of the initial license payment
received by the Company from Pfizer.
Research and development expense increased $647,000, or 79%, to $1,461,000
in the three month period ended June 30, 2001 from $814,000 in the three month
period ended June 30, 2000, and increased $570,000, or 18%, to $3,660,000 in the
nine month period ended June 30, 2001 from $3,090,000 in the nine month period
ended June 30, 2000. The increase in the three month period primarily reflects
increased clinical-related costs for the development of trospium and PRO 2000
and a relative increase due to the reversal of accruals in the fiscal 2000 three
month period related to the end of the citicoline trial, partially offset by a
decrease due to the initial PRO 2000 license payment recorded in the fiscal 2000
three month period. The increase in the nine month period is primarily due to
$1,800,000 of credits recorded in the nine month period ended June 30, 2000
reflecting the reversal of costs accrued relative to the Phase 3 citicoline
clinical trial, which were determined to be unnecessary, and reversal of expense
accrued for pagoclone development which was determined to be unnecessary
subsequent to the Pfizer Agreement. In the fiscal 2001 nine month period, the
Company also incurred increased clinical-related costs for the development of
PRO 2000, trospium, and IP 501. These increases were offset by reductions in
expense due to the completion of the Phase III citicoline clinical trial in
fiscal 2000, the initial PRO 2000 license payment recorded in fiscal 2000, and
reduced payroll and employee-related expenses resulting from
15
reductions in staffing in fiscal 2000. Research and development expenses are
expected to increase in future periods due to the initiation of new trospium and
PRO 2000 clinical studies.
General and administrative expense increased $682,000, or 41%, to $2,337,000
in the three month period ended June 30, 2001 from $1,655,000 in the three month
period ended June 30, 2000, and decreased $246,000, or 4%, to $6,035,000 in the
nine month period ended June 30, 2001 from $6,281,000 in the nine month period
ended June 30, 2000. The increase in the three month period is due primarily to
the significant increase in the price of the Company's Common Stock in the three
month period which resulted in recording increased noncash charges for stock
options which were granted to consultants of the Company in lieu of cash
compensation. Expense reductions in the nine month period includes reduced
expense related to restricted stock awards granted pursuant to the Company's
1997 Equity Incentive Plan, reduced payroll and employee-related expenses
resulting from reductions in staffing and reduced insurance, facilities and
consultant expense. These nine month period reductions were substantially offset
by increased noncash charges from stock options which were granted to
consultants to the Company in lieu of cash compensation and increased costs
related to the Company's lawsuit against AHP, which lawsuit has been dismissed
pursuant to the AHP Agreement.
As a result of the AHP Agreement, the Company believes that it is no longer
probable that it will have to pay approximately $8,000,000 for estimated
liabilities that had been established at the time Redux was withdrawn.
Accordingly, the Company has reversed these accruals in the three month period
ended June 30, 2001 and has reflected the reversal as a credit in product
withdrawal in the Company's statements of operations. This credit is offset by a
noncash charge of $561,000 for the fair value of stock options granted to
attorneys involved in the AHP Litigation resulting in a net credit of $7,480,000
in product withdrawal for the three month period ended June 30, 2001. Product
withdrawal for the nine month period ended June 30, 2001 was a credit of
$8,098,000 and additionally includes insurance reimbursements for other Redux-
related expenses.
Investment income, net decreased $105,000, or 21%, to $405,000 in the three
month period ended June 30, 2001 from $510,000 in the three month period ended
June 30, 2000, and increased $175,000, or 13%, to $1,478,000 in the nine month
period ended June 30, 2001 from $1,303,000 in the nine month period ended June
30, 2000. The decrease in the three month period is primarily due to lower
interest rates on slightly higher average invested balances. While yields were
lower in the nine month period ended June 30, 2001 than the nine month period
ended June 30, 2000, average invested balances were significantly higher
resulting in an increase in investment income, net in fiscal 2001.
Gain on investment securities of $1,550,000 in the nine month period
ended June 30, 2000 resulted from the Company's sale of 288,000 shares of Incara
Pharmaceuticals Corporation ("Incara") stock. The loss on investment securities
of $43,000 in the nine month period ended June 30, 2001 additionally related to
Incara stock.
For the three month period ended June 30, 2001, the Company had net income
of $4,300,000, or $0.09 per share, diluted, compared to net loss of
$(1,983,000), or $(0.05) per share, diluted, for the three month period ended
June 30, 2000. For the nine month period ended June 30, 2001, the Company had
net income of $558,000, or $0.01 per share, diluted, compared to net income of
$15,158,000, or $0.35 per share, diluted, for the nine month period ended June
30, 2000. The change to net income from net loss in the three month period ended
June 30, 2001 is primarily the result of the items discussed above, the most
notable being the product withdrawal credit. The decrease in net income in the
nine month period ended June 30, 2001 is primarily due to the absence of
16
contract and license fee revenue from Takeda and Pfizer reflected in the fiscal
2000 nine month period being partially offset by the product withdrawal credit
recorded in the fiscal 2001 nine month period. The Company currently expects to
incur loses for its consolidated operations in fiscal 2001.
Liquidity and Capital Resources
-------------------------------
Cash, Cash Equivalents and Marketable Securities
At June 30, 2001, the Company had consolidated cash, cash equivalents and
marketable securities of $34,876,000 compared to $33,751,000 at September 30,
2000. This increase of $1,125,000 is primarily due to the receipt of $8,419,000
in January 2001 of insurance claims, net of approximately $4,100,000 of
payments, relating to the group of legal firms representing the Company in its
Redux-related product liability litigation, $1,757,000 returned to the Company
from the District Court and reflected at September 31, 2000 as settlement
deposit receivable, and $663,000 of proceeds from the issuance of Common Stock,
substantially offset by funding the Company's operations for the nine month
period ended June 30, 2001. See "Analysis of Cash Flows" and "Part II, Item 1.
Legal Proceedings."
While the Company believes it has sufficient cash for currently planned
expenditures for the next twelve months, based on certain assumptions relating
to operations and other factors, it will require additional funds after such
time. The Company does not currently have sufficient funds to fully develop and
commercialize any of its current products and product candidates and will
require additional funds or corporate collaborations for the development and
commercialization of its compounds in development, as well as any new
businesses, products or technologies acquired or developed in the future. The
Company has no commitments or arrangements to obtain such funds. If such funds
are not available, the Company will be required to further reduce its operations
and delay development and regulatory efforts. There can be no assurance that the
Company will be able to obtain additional financing to satisfy future cash
requirements or that any financing will be available on terms favorable or
acceptable, or at all, due to uncertainties associated with the Redux-related
litigation, market conditions and other factors generally affecting the
Company's ability to raise capital.
Product Development
The Company expects to continue to expend substantial additional amounts for
the development of its products. There can be no assurance that results of any
ongoing current or future pre-clinical or clinical trials will be successful,
that additional trials will not be required, that any drug or product under
development will receive FDA approval in a timely manner or at all, or that such
drug or product could be successfully manufactured in accordance with current
Good Manufacturing Practices or successfully marketed in a timely manner, or at
all, or that the Company will have sufficient funds to commercialize any of its
products.
Analysis of Cash Flows
Reflected in insurance claim receivable at June 30, 2001 of $3,240,000 is
$2,552,000 which the Company paid to the group of law firms defending the
Company in the Redux-related product liability litigation and an additional
estimated $688,000 which the Company owes to such law firms for services
rendered (see "Part II, Item 1. Legal Proceedings"). In January 2001, the
Company received an $8,419,000 payment of insurance claims. Following the AHP
Agreement as of May 30, 2001, AHP has assumed defense and related costs of the
Company's product liability litigation. The Company does not expect to make
significant additional payments to the group of law firms defending the Company
for Redux-related product liability litigation.
Accrued expenses and other liabilities decreased $9,368,000 in the nine month
period June 30, 2001 primarily as a result of the reversal of Redux withdrawal-
related liabilities and a reduction in the amount accrued for services provided
by the law firms providing Redux-related product liability litigation services.
17
Other
-----
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" ("SFAS No. 141") and SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"). SFAS No. 141 requires that all business combinations
be accounted for under the purchase method only and that certain acquired
intangible assets in a business combination be recognized as assets apart from
goodwill. SFAS No. 142 requires that ratable amortization of goodwill be
replaced with periodic tests of the goodwill's impairment and that intangible
assets other than goodwill be amortized over their useful lives. SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001 and for
all business combinations accounted for by the purchase method for which the
date of acquisition is after June 30, 2001. The provisions of SFAS No. 142 will
be effective for fiscal years beginning after December 15, 2001, and will thus
be adopted by the Company, as required, in fiscal year 2003. The impact of SFAS
No. 141 and SFAS No. 142 on the Company's financial statements has not yet been
determined.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"), which clarifies the SEC's
views related to revenue recognition and disclosure. In June 2000, the SEC
issued SAB 101B which delayed the implementation date of SAB 101. The Company
will adopt SAB 101 in the fourth quarter of fiscal 2001. The Company is
currently assessing the impact of SAB 101, the adoption of which could have a
significant noncash effect on the Company's results of operations for fiscal
2001. To the extent the adoption of SAB 101 results in the deferral of revenue
recognized prior to fiscal 2001 in connection with the Company's collaboration
with Takeda, such deferral would be reflected as a cumulative effect of a change
in accounting principle in the Company's statement of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. SFAS No. 133 requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. In June 1999, the FASB issued SFAS No. 137 which deferred the
effective date of adoption of SFAS No. 133 to fiscal years beginning after June
15, 2000. The Company adopted SFAS No. 133 in the fiscal quarter ended December
31, 2000 and the adoption did not have an impact on the Company's financial
statements.
PART II - Other Information
Item 1. Legal Proceedings
-----------------
Product Liability Litigation: Subsequent to the market withdrawal of Redux in
September 1997, the Company has been named, together with other pharmaceutical
companies, as a defendant in approximately 3,200 legal actions, many of which
purport to be class actions, in federal and state courts relating to the use of
Redux. The actions generally have been brought by individuals in their own right
or on behalf of putative classes of persons who claim to have suffered injury or
18
who claim that they may suffer injury in the future due to use of one or more
weight loss drugs including Pondimin (fenfluramine), phentermine and Redux.
Plaintiffs' allegations of liability are based on various theories of recovery,
including, but not limited to, product liability, strict liability, negligence,
various breaches of warranty, conspiracy, fraud, misrepresentation and deceit.
These lawsuits typically allege that the short or long-term use of Pondimin
and/or Redux, independently or in combination (including the combination of
Pondimin and phentermine popularly known as "fen-phen"), causes, among other
things, primary pulmonary hypertension, valvular heart disease and/or
neurological dysfunction. In addition, some lawsuits allege emotional distress
caused by the purported increased risk of injury in the future. Plaintiffs
typically seek relief in the form of monetary damages (including economic
losses, medical care and monitoring expenses, loss of earnings and earnings
capacity, other compensatory damages and punitive damages), generally in
unspecified amounts, on behalf of the individual or the class. In addition, some
actions seeking class certification ask for certain types of purportedly
equitable relief, including, but not limited to, declaratory judgments and the
establishment of a research program or medical surveillance fund. On December
10, 1997, the Federal Judicial Panel on Multidistrict Litigation issued an Order
allowing for the transfer or potential transfer of the federal actions to the
Eastern District of Pennsylvania ("District Court") for coordinated or
consolidated pretrial proceedings. To date, there have been no settlements or
judgments against the Company. Following the dismissal and the anticipated
dismissal of Interneuron as a defendant in certain cases, the Company estimates
that there will be fewer than 1,700 remaining cases.
Objection to AHP's Settlement of Diet-Drug Litigation: On November 23, 1999,
the District Court preliminarily approved a nationwide settlement of AHP's diet-
drug litigation. The Company is not a released party under this settlement. To
preserve any contribution or indemnification rights it may have against AHP, the
Company objected to the Brown Settlement and filed an appeal from the District
Court's August 28, 2000 order finally approving the settlement to the Third
Circuit Court of Appeals. Pursuant to the May 30, 2001 AHP Agreement, the
Company withdrew its objection to the Brown Settlement (See "AHP Agreement"
below).
Interpleader Litigation and Funding of Product Liability Litigation Costs: On
November 20, 1998, December 30, 1998 and February 5, 1999, the Company's three
product liability insurers filed actions against Servier and the Company in the
District Court, pursuant to the federal interpleader statute. The aggregate
limit of the three commercial excess insurance policies issued by the insurers
to the Company is $40,000,000. The insurers alleged that the Company asserted
claims against these policies, a substantial portion of which has been used in
the Company's defense of the litigation, and Servier, as an additional insured
under these policies, asserted its right to claim against these policies. The
insurers deposited the available proceeds up to the limits of their policies
(the "Deposited Funds"), which are subject to ongoing claims by the Company and
Servier, into the registry of the District Court. On May 3, 2000, the Company
moved to dismiss such actions as moot in light of the District Court's rejection
of the Company's proposed settlement and the dismissal of the Company's petition
to appeal from such order. In October 2000, the District Court dismissed the
interpleader actions and the Deposited Funds were subsequently returned to the
insurance companies. In January 2001, the Company was reimbursed for litigation
expenses previously incurred by the Company. See "Liquidity and Capital
Resources--Analysis of Cash Flows."
Complaint Against AHP: On January 24, 2000, the Company announced the filing
of a complaint against AHP in the Superior Court of the Commonwealth of
Massachusetts. The complaint sought unspecified but substantial damages and
attorneys' fees pursuant to common and statutory law for AHP's knowing and
willful deceptive acts and practices, fraud and misrepresentations and breach of
contract. Pursuant to the AHP Agreement described below, the Company dismissed
its complaint against AHP with prejudice.
AHP Agreement: On May 30, 2001, the Company and AHP entered into the AHP
Agreement. Under the terms and conditions of the AHP Agreement, AHP will (i)
defend and indemnify the Company against all claims and any judgments or
settlements in diet-drug litigation brought by persons who have exercised their
19
right to opt-out of the Brown Settlement ("initial opt-outs") and by persons
pursuing claims alleging Primary Pulmonary Hypertension (PPH), (ii) defend the
Company from any and all claims existing now or brought in the future by diet-
drug litigants other than initial opt-outs from the Brown Settlement, and (iii)
fund additional insurance coverage to supplement the Company's existing product
liability insurance. In exchange for these considerations, the Company agreed to
(i) to dismiss with prejudice its lawsuit, Interneuron v. AHP, No. 00-294 (Mass.
Superior Court, Middlesex County), which the Company filed in January, 2000,
(ii) to withdraw its appeal to the United States Third Circuit Court of Appeals
from the order approving the Brown Settlement, and (iii) to dismiss its cross
claims against AHP in all pending Redux-related product liability litigation.
Complaint by Product Liability Insurer: On August 7, 2001, Columbia
Casualty Company, one of the Company's insurers for the period May 1997 through
May 1998, filed an action in the United States District Court for the District
of Columbia against the Company. The lawsuit is based upon a claim for breach of
contract and declaratory judgment seeking damages against the Company in excess
of $20,000,000, the amount that the plaintiff has paid to the Company under its
insurance policy. The plaintiff alleges that under the policy it was subrogated
to any claim for indemnification that Interneuron may have had against AHP
related to Redux and that such claim was compromised without its consent when
the Company entered into the AHP Agreement. The Company is evaluating the
lawsuit and plans to vigorously defend this litigation.
General: Pursuant to agreements between the parties, under certain
circumstances, the Company may be required to indemnify Servier and Boehringer
Ingelheim Pharmaceuticals, Inc. against certain claims, damages or liabilities
incurred in connection with Redux.
Although the Company maintains certain product liability and director and
officer liability insurance and intends to defend these and any similar actions
vigorously, the Company has been required and may continue to be required to
devote significant management time and resources to such legal actions. In the
event of successful uninsured or insufficiently insured claims, or in the event
a successful indemnification claim were made against the Company, the Company's
business, financial condition and results of operations could be materially
adversely affected. The uncertainties and costs associated with these legal
actions have had, and may continue to have, an adverse effect on the market
price of the Company's Common Stock and on the Company's ability to obtain
corporate collaborations or additional financing to satisfy cash requirements,
to retain and attract qualified personnel, to develop and commercialize products
on a timely and adequate basis, to acquire rights to additional products, or to
obtain product liability insurance for other products at costs acceptable to the
Company, or at all, any or all of which may materially adversely affect the
Company's business, financial condition and results of operations.
Item 6. Exhibits and Reports on Form 8-K
---------------------------------
(a) Exhibits
1.120 Indemnity and Release Agreement between American Home Products
Corporation and Interneuron Pharmaceuticals, Inc. dated as of May 30,
2001 (1)
_______________________
(1) Confidential treatment requested.
(b) Reports on Form 8-K
On June 14, 2001, the Company filed a report on Form 8-K reporting the
AHP Agreement.
20
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.
INTERNEURON PHARMACEUTICALS, INC.
Date: August 14, 2001
By: /s/ Glenn L. Cooper
__________________________________________
Glenn L. Cooper, M.D., President, Chairman
and Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2001
By: /s/ Michael W. Rogers
__________________________________________
Michael W. Rogers, Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: August 14, 2001
By: /s/ Dale Ritter
__________________________________________
Dale Ritter, Senior Vice President, Finance
(Principal Accounting Officer)
21