UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 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)
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Delaware 04-3047911
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
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One Ledgemont Center, 99 Hayden Avenue 02421-7966
Lexington, Massachusetts (Zip Code)
(Address of principal executive offices)
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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 February 12, 2002:
Common Stock $.001 par value 46,506,682 shares
INTERNEURON PHARMACEUTICALS, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2001
and September 30, 2001 .................................................. 3
Consolidated Statements of Operations for the Three Months
ended December 31, 2001 and 2000 ........................................ 4
Consolidated Statements of Cash Flows for the Three Months
ended December 31, 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 ........................................ 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk ....... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 12
Item 6. Exhibits and Reports on Form 8-K ................................ 14
SIGNATURES ............................................................... 15
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Item 1. Financial Statements
INTERNEURON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands except share data)
December 31, September 30,
2001 2001
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 42,182 $ 24,923
Marketable securities 4,571 4,479
Accounts receivable 3,527 331
Prepaids and other current assets 459 397
---------- ---------
Total current assets 50,739 30,130
Marketable securities 4,088 2,769
Equity securities 563 693
Property and equipment, net 41 67
Insurance claim receivable 1,258 1,258
---------- ---------
Total assets $ 56,689 $ 34,917
========== =========
LIABILITIES
Current liabilities:
Accounts payable $ -- $ 53
Accrued expenses 5,963 6,107
---------- ---------
Total current liabilities 5,963 6,160
Minority interest 97 97
STOCKHOLDERS' EQUITY
Preferred stock; $.001 par value, 5,000,000 shares authorized;
Series B, 239,425 shares issued and outstanding
(liquidation preference at December 31, 2001 $3,034) 3,000 3,000
Series C, 5,000 shares issued and outstanding
(liquidation preference at December 31, 2001 $503) 500 500
Common stock; $.001 par value, 80,000,000 shares authorized;
46,426,349 and 43,283,016 shares issued and outstanding at December 31
and September 30, 2001, respectively 46 43
Additional paid-in capital 300,435 276,399
Accumulated deficit (253,239) (251,293)
Accumulated other comprehensive income (loss) (113) 11
----------- ---------
Total stockholders' equity 50,629 28,660
---------- ---------
Total liabilities and stockholders' equity $ 56,689 $ 34,917
========== =========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
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INTERNEURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended December 31, 2001 and 2000
(Unaudited)
(Amounts in thousands except per share data)
Three Months Ended December 31,
2001 2000
----------- ----------
Revenues:
Royalty revenue $ 3,199 $ 360
Contract and license fee revenue 342 --
--------- ---------
Total revenues 3,541 360
Costs and expenses:
Cost of revenues 838 72
Research and development 3,245 1,041
General and administrative 1,578 1,611
--------- ---------
Total costs and expenses 5,661 2,724
--------- ---------
Loss from operations (2,120) (2,364)
Investment income, net 228 507
Minority interest (54) --
--------- ---------
Loss before cumulative effect of change in
accounting principle (1,946) (1,857)
Cumulative effect of change in accounting principle -- (10,000)
--------- ---------
Net loss $ (1,946) $ (11,857)
========== =========
Loss per common share- basic and diluted:
Loss before cumulative effect of change in
accounting principle $ (0.04) $ (0.04)
Cumulative effect of change in accounting principle -- (0.23)
Net loss $ (0.04) $ (0.28)
Weighted average common shares outstanding:
Basic and diluted 43,659 42,780
========= =========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
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INTERNEURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31, 2001 and 2000
(Unaudited)
(Amounts in thousands)
Three months ended December 31,
2001 2000
------------ ------------
Cash flows from operating activities:
Net loss $ (1,946) $ (11,857)
Adjustments to reconcile net loss to net cash
used in operating activities:
Cumulative effect of change in accounting principle -- 10,000
Depreciation and amortization 26 28
Minority interest in net income of consolidated subsidiary 54 --
Noncash compensation 604 246
Changes in assets and liabilities:
Accounts receivable (3,196) (360)
Insurance claim receivable -- (1,281)
Settlement deposit receivable -- 1,757
Prepaid and other assets (62) 88
Accounts payable (53) (122)
Accrued expenses and other liabilities (153) (798)
--------- ----------
Net cash used in operating activities (4,726) (2,299)
--------- ----------
Cash flows from investing activities:
Purchases of marketable securities (4,108) (981)
Proceeds from maturities and sales of marketable securities 2,704 977
Capital expenditures -- (3)
--------- ----------
Net cash used in investing activities (1,404) (7)
--------- ----------
Cash flows from financing activities:
Net proceeds from issuance of common stock 23,443 --
Distribution to minority interest stockholder (54) --
Principal payments of capital lease obligations -- (2)
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Net cash provided by (used in) financing activities 23,389 (2)
-------- ---------
Net change in cash and cash equivalents 17,259 (2,308)
Cash and cash equivalents at beginning of period 24,923 24,871
-------- ---------
Cash and cash equivalents at end of period $ 42,182 $ 22,563
======== =========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
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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, 2001.
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. Basic and Diluted Loss Per Common Share
--------------------------------------------
During the three month period ended December 31, 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 139,565 shares of Common Stock at exercise
prices ranging from $8.37 to $20.13 with expiration dates ranging up to December
5, 2011; and (ii) warrants to purchase 550,000 shares of Common Stock with
exercise prices ranging from $7.88 to $10.00 and with expiration dates ranging
up to June 1, 2002. Additionally, during the three month period ended December
31, 2001, 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 9,394,165 shares of Common
Stock at exercise prices ranging from $1.47 to $7.25 and expiration dates
ranging up to November 26, 2011; (ii) Series B and C preferred stock convertible
into 622,222 shares of Common Stock; (iii) warrants to purchase 130,000 shares
of Common Stock at exercise prices ranging from $5.00 to $7.13 and expiration
dates ranging up to July 17, 2006; and (iv) unvested Restricted Stock Awards of
225,000 shares of Common Stock granted pursuant to the Company's 1997 Equity
Incentive Plan.
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During the three month period ended December 31, 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 9,551,143 shares of Common Stock at prices
ranging from $1.88 to $20.13 with expiration dates ranging up to August 14,
2010; and (ii) warrants to purchase 750,000 shares of Common Stock with exercise
prices ranging from $5.00 to $10.00 and with expiration dates ranging up to July
17, 2006. Additionally, during the three month period ended December 31, 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 75,000 shares of Common Stock
at an exercise price of $1.53 and with an expiration date of September 15, 2006;
(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.
C. Comprehensive Loss
-----------------------
Comprehensive loss for the three month periods ended December 31, 2001 and
2000, respectively, is as follows:
Three Months Ended December 31,
2001 2000
--------------- -----------------
Net loss $(1,946,000) $(11,857,000)
Change in unrealized net
gain or loss on investments (124,000) (594,000)
---------------- ----------------
Comprehensive loss $(2,070,000) $(12,451,000)
================ ================
D. Equity
-----------
In December 2001, the Company completed a private placement of 3,125,000
shares of its Common Stock which resulted in net proceeds to the Company of
approximately $23,400,000. In January 2002, the Company filed a registration
statement on Form S-3 to register the resale of these shares.
E. Recent Accounting Pronouncements
-------------------------------------
In June 2001, the Financial Accounting Standards Board ("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 October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
supersedes FASB Statement No. 121, "Accounting
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for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", and provides a single accounting model for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired. The
provisions of SFAS No. 144 will be effective for fiscal years beginning after
December 15, 2001, and, generally, its provisions are to be applied
prospectively. The Company does not expect SFAS No. 144 will have a material
effect on its financial position or results of operations.
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
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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 and other forward-looking statements made by the Company in
reports that we file with the Securities and Exchange Commission, press
releases, and public statements of our officers, corporate spokespersons, or our
representatives are based on a number of assumptions and relate to, without
limitation: the Company's ability to successfully develop, obtain regulatory
approval for and commercialize any products; the Company's ability to enter into
corporate collaborations or obtain sufficient additional capital to fund
operations; and the Redux(TM)-related litigation. 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 such forward-looking statements may turn out to be
wrong. 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, 2001. These factors include, but are not limited
to: uncertainties relating to clinical trials, regulatory approval and
commercialization of our products; the early stage of products under
development; need for additional funds and corporate partners; history of
operating losses and expectation of future losses; product liability and
insurance uncertainties; risks relating to the Redux-related litigation;
dependence on third parties for manufacturing and marketing; competition; risks
associated with contractual arrangements; limited patents and proprietary
rights; and other risks. The forward-looking statements represent our judgement
and expectations as of the date of this Form 10-Q. We assume 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, 2001. 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 four core compounds which are the focus of
the Company's development program: trospium for overactive bladder, pagoclone
for panic and generalized anxiety disorders, PRO 2000 for the prevention of
infection by the human immunodeficiency virus and other sexually transmitted
pathogens, and dersalazine for inflammatory bowel disease.
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Products
Trospium is a muscarinic receptor antagonist in development as a treatment
for overactive bladder. The Company is currently conducting a Phase III,
double-blind, placebo-controlled study in approximately 500 patients, comparing
both the number of micturitions and incontinence episodes among trospium-treated
patients versus placebo-treated patients during a twelve week treatment period.
The trial is expected to be completed in the fall of 2002. If the trial is
successful, the Company plans to file a New Drug Application by the end of 2002.
Pagoclone is a novel GABA (gamma amino butyric acid) receptor agonist in
development for the treatment of anxiety disorders. In December 2001, Pfizer
Inc. ("Pfizer"), the Company's licensee for pagoclone, announced that in a Phase
II clinical trial, patients treated with pagoclone experienced a statistically
significant improvement in symptoms of generalized anxiety disorder ("GAD")
compared to patients treated with placebo. In addition, pagoclone was well
tolerated, with no difference from placebo in sedation and no evidence of
withdrawal effects. As part of its comprehensive clinical development program
for pagoclone, Pfizer is conducting a number of clinical trials, including a
Phase III trial in panic disorder, multiple Phase II trials in GAD and multiple
clinical pharmacology studies.
PRO 2000 is a topical microbicide in development for the prevention of the
sexual transmission of HIV and other sexually-transmitted diseases. Multiple
clinical trials in HIV prevention are expected to begin in 2002, including a
Phase II trial sponsored by the European Commission and a Phase II/III trial to
be conducted by the National Institutes of Health in approximately 10,000 women
in Africa and India.
In September 2001, the Company acquired worldwide rights to dersalazine, an
anti-inflammatory compound in clinical development to treat inflammatory bowel
disease, which includes ulcerative colitis and Crohn's disease. The Company
expects to complete a multiple-dose Phase I clinical study for dersalazine and
initiate Phase II trials in ulcerative colitis in 2002.
Results of Operations
Total revenues increased to $3,541,000 in the three month period ended
December 31, 2001 from $360,000 in the three month period ended December 31,
2000. Royalty revenue, consisting of royalties received from Eli Lilly and
Company ("Lilly") for sales of Sarafem, increased from $360,000 in the first
quarter of fiscal 2001 to $3,199,000 in the first quarter of fiscal 2002. This
substantial increase resulted from higher sales of Sarafem. The Company expects
royalty payments from Sarafem to expire in March 2002 and the final royalty
payment to be substantially decreased. Contract and license fee revenue of
$342,000 in the first quarter of fiscal 2002 consisted primarily of revenue from
a research grant related to certain PRO 2000 development costs. Minimal
additional future revenue will be recognized pursuant to this grant.
Cost of revenues of $838,000 in the three month period ended December 31,
2001 consisted primarily of $640,000 due to Massachusetts Institute of
Technology ("MIT") for their portion of the Sarafem royalty revenue and the
development costs related to the PRO 2000 research grant. Cost of revenues of
$72,000 in the three month period ended December 31, 2000 primarily relates to
amounts due to MIT for their portion of the Sarafem royalty revenue recognized
in the same period.
Research and development expense increased $2,204,000, or 212%, to
$3,245,000 in the three month period ended December 31, 2001 compared to
$1,041,000 in the three month period ended December 31, 2000. This increase is
primarily due to expenses incurred by the Company for its Phase III clinical
trial for trospium which commenced in September 2001.
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General and administrative expense decreased $33,000, or 2%, to $1,578,000
in the three month period ended December 31, 2001 from $1,611,000 in the three
month period ended December 31, 2000. This decrease was primarily due to the
absence of legal fees relating to the Company's former suit against American
Home Products Corporation ("AHP") principally offset by increased noncash
charges for stock options previously granted to consultants of the Company which
resulted from the significant increase in the price of the Company's Common
Stock during the quarter ended December 31, 2001.
Investment income decreased $279,000, or 55%, to $228,000 in the three
month period ended December 31, 2001 from $507,000 in the three month period
ended December 31, 2000. This decrease resulted from substantially reduced
market interest rates from the first quarter of fiscal 2001 to the first quarter
of fiscal 2002.
The charge for the cumulative effect of the change in accounting principle
of $10,000,000 in the three month period ended December 31, 2000 is related to
the Company's adoption in fiscal 2001 of the Securities and Exchange Commissions
Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements."
For the three month period ended December 31, 2001, the Company had a net
loss of $(1,946,000), or $(0.04) per share, basic and diluted, compared to a net
loss of $(11,857,000), or $(0.28) per share, basic and diluted, for the three
month period ended December 31, 2000. The Company expects to report losses for
its consolidated operations for fiscal 2002.
Liquidity and Capital Resources
Cash, Cash Equivalents and Marketable Securities
At December 31, 2001, the Company had consolidated cash, cash equivalents
and marketable securities of $50,841,000 compared to $32,171,000 at September
30, 2001. This increase of $18,670,000 is primarily due to receipt of
approximately $23,400,000 of net proceeds from the Company's December 2001
private placement of 3,125,000 shares of Common Stock, offset primarily by
approximately $4,726,000 of cash used in operating activities.
The Company believes it has sufficient cash for currently planned
expenditures for at least the next twelve months. Based on certain assumptions
relating to operations and other factors, the Company may 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 to obtain such funds. 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.
Product Development
The Company expects to continue to expend substantial additional amounts
for the development of its products. In particular, the Company expects to
expend a substantial amount during the next twelve months to fund its on-going
Phase III trial for trospium. There can be no assurance that results of any
on-going current
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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 develop or commercialize any of its
products.
Analysis of Cash Flows
Cash used in operating activities during fiscal 2002 of $4,726,000
consisted primarily of the net loss of $(1,946,000) and an increase in accounts
receivable primarily reflecting the $3,199,000 of royalty revenue from Lilly
which was collected in January 2002.
Cash used in investing activities in fiscal 2002 of $1,404,000 consisted
of net outflows from purchases of marketable securities.
Cash provided by financing activities in fiscal 2002 of $23,389,000
consisted primarily of net proceeds from the Company's December 2001 private
placement of 3,125,000 shares of its Common Stock.
Insurance claim receivable
As of December 31, 2001, the Company had an outstanding insurance claim of
approximately $3,632,000, which the Company paid through December 31, 2001 to
the group of law firms defending the Company in the Redux-related product
liability litigation, for services rendered by such law firms through May 30,
2001. The full amount of the Company's current outstanding insurance claim is
made pursuant to the Company's product liability policy issued to the Company by
Reliance Insurance Company ("Reliance").
In October 2001, the Commonwealth Court of Pennsylvania granted an Order of
Liquidation to the Insurance Commissioner of Pennsylvania to begin liquidation
proceedings against Reliance. Based upon discussions with the Company's
attorneys and other consultants regarding the amount and timing of potential
collection of its claims against Reliance, the Company reduced the balance to an
estimated net realizable value of $1,258,000 reflecting the Company's best
estimate given the available facts and circumstances. The amount the Company
collects could differ from the $1,258,000 reflected as a noncurrent insurance
claim receivable at December 31, 2001. There can be no assurance that the
Company will collect any of the $3,632,000 claim. If the Company incurs
additional product liability defense and other costs within the remaining limits
of the $5,000,000 Reliance product liability policy, the Company will have to
pay such costs without expectation of reimbursement and will incur charges to
operations for all or a portion of such payments.
Other
Recent Accounting Pronouncements: In June 2001, the FASB issued 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
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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 October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of", and provides a single
accounting model for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. The provisions of SFAS No. 144 will
be effective for fiscal years beginning after December 15, 2001, and, generally,
its provisions are to be applied prospectively. The Company does not expect SFAS
No. 144 will have a material effect on its financial position or results of
operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
-----------------------------------------------------------
Interneuron owns financial instruments that are sensitive to market risks
as part of its investment portfolio. The investment portfolio is used to
preserve Interneuron's capital until it is required to fund operations,
including Interneuron's research and development activities. None of these
market-risk sensitive instruments are held for trading purposes. Interneuron
does not own derivative financial instruments in its investment portfolio.
Interest Rate Risk
Interneuron invests its cash in a variety of financial instruments,
principally securities issued by the U.S. government and its agencies,
investment grade corporate and money market instruments. These investments are
denominated in U.S. dollars. These bonds are subject to interest rate risk, and
could decline in value if interest rates fluctuate. Interneuron's investment
portfolio includes only marketable securities with active secondary or resale
markets to help ensure portfolio liquidity and Interneuron has implemented
guidelines limiting the duration of investments. Due to the conservative nature
of these instruments, Interneuron does not believe that it has a material
exposure to interest rate risk.
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 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
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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 for coordinated or consolidated pretrial proceedings.
To date, there have been no judgments against the Company, nor has the Company
paid any amounts in settlement of any of these claims.
The Company entered into the AHP Indemnity and Release Agreement on May 30,
2001 pursuant to which AHP agreed to indemnify the Company against certain
classes of product liability cases filed against Interneuron related to Redux.
The Company's indemnification covers existing plaintiffs who have already opted
out of AHP's national class action settlement of diet drug claims and claimants
alleging primary pulmonary hypertension. In addition, AHP has agreed to fund all
future legal costs related to the Company's defense of Redux-related product
liability cases. The agreement also provides for AHP to fund additional
insurance coverage to supplement the Company's existing product liability
insurance. The Company believes this total insurance coverage is sufficient to
address its potential remaining Redux product liability exposure. However, there
can be no assurance that uninsured or insufficiently insured Redux-related
claims or Redux-related claims for which the Company is not otherwise
indemnified or covered under the AHP Indemnity and Release Agreement 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. Up to the date of the AHP Indemnity and Release Agreement, the
Company's defense costs were paid by, or subject to reimbursement to the Company
from, the Company's product liability insurers. To date, there have been no
Redux-related product liability settlements or judgments paid by the Company or
its insurers. In exchange for the indemnification, defense costs, and insurance
coverage provided to Interneuron by AHP, the Company agreed to dismiss its suit
against AHP filed in January 2000, its appeal from the order approving AHP's
national class action settlement of diet drug claims, and its cross-claims
against AHP related to Redux product liability legal actions.
Insurance Litigation: 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 Indemnity and Release Agreement. The Company is
vigorously defending this litigation.
General: Pursuant to agreements between the parties and related to the
diet-drug litigation, under certain circumstances, the Company may be required
to indemnify Les Laboratoires Servier, Boehringer Ingelheim Pharmaceuticals,
Inc. and other parties.
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Although the Company maintains certain product liability and director and
officer liability insurance and intends to defend these and similar actions
vigorously, the Company has been required and may continue to be required to
devote significant management time and resources to these 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 and its
officers and directors, 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
None
(b) Reports on Form 8-K
On December 20, 2001, the Company filed a report on Form 8-K announcing
that Pfizer Inc. reported positive clinical trial results in generalized
anxiety disorder with the Company's product pagoclone. The Company also
reported on the progress of other clinical-stage products.
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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: February 14, 2002 By: /s/ Glenn L. Cooper, M.D.
-----------------------------------------
Glenn L. Cooper, M.D., President, Chairman
and Chief Executive Officer
(Principal Executive Officer)
Date: February 14, 2002 By: /s/ Michael W. Rogers
-----------------------------------------
Michael W. Rogers, Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: February 14, 2002 By: /s/ Dale Ritter
------------------------------------------
Dale Ritter, Senior Vice President, Finance
(Principal Accounting Officer)
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