1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER 00024889
------------------------
CELL PATHWAYS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 702 ELECTRONIC DRIVE 23-2969600
(State or other jurisdiction HORSHAM, PA 19044 (I.R.S. Employer
of (Address of principal Identification No.)
incorporation or executive offices)
organization)
(215) 706-3800
(Registrant's telephone number,
including area code)
------------------------
Securities registered pursuant to section 12(b) of the Act:
NONE
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, $ .01 PAR VALUE PER SHARE
PREFERRED STOCK PURCHASE RIGHTS
(TITLE OF CLASS)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 1, 2001 was approximately $178,140,000, based upon
the last reported sales price of the Registrant's Common Stock on the Nasdaq
National Market.
As of March 1, 2001 there were 31,095,904 shares of the Registrant's Common
Stock outstanding.
------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the Annual Meeting of
Stockholders to be held on May 30, 2001, are incorporated by reference into Part
III of this report. Other documents incorporated by reference are listed in the
Exhibit Index.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
PART I
ITEM 1. BUSINESS
Certain statements in this report, and oral statements made in respect of
this report, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are those
which express plan, anticipation, intent, contingency or future development
and/or otherwise are not statements of historical fact. These statements are
subject to risks and uncertainties, known and unknown, which could cause actual
results and developments to differ materially from those expressed or implied in
such statements. Such risks and uncertainties relate to, among other factors,
the absence of approved products; history of operating losses and the need for
further financing; early stage of development; the costs, delays and
uncertainties inherent in science, basic pharmaceutical research, drug
development, clinical trials and the regulatory approval process, with respect
to both our current product candidates and our future product candidates, if
any; dependence on the development and market acceptance of Aptosyn(TM)
(exisulind) for one or more significant disease indications; limitations on, or
absence of, the predictive value of data obtained in laboratory tests, animal
models and human clinical trials when planning additional steps in product
development; uncertainty of obtaining regulatory approval of any compound for
any disease indication; uncertainty and adversity arising from the action of the
U.S. Food and Drug Administration, or FDA, in issuing a "not approvable' letter
with respect to the New Drug Application, or NDA, submitted for Aptosyn(TM)
(exisulind) for the orphan drug condition of familial adenomatous polyposis, or
FAP, a rare disease that puts those afflicted at high risk of developing colon
cancer; the timing and scope of any approval which might be received, or any
failure to receive approval, for any compound for any indication in the future;
the volatility of the market price of our common stock; acceptance of any
product candidates by physicians and providers of healthcare reimbursement; the
actions of competitors; the pace of technological changes in the
biopharmaceutical industry; dependence upon third parties; the validity, scope
and enforceability of patents; the risk of our pending class action securities
litigations; potential product liability claims; and availability of insurance.
These and other risks are detailed in our reports filed from time to time
under the Securities Act and/or the Securities Exchange Act, including the
sections entitled "Business," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Other Events" in
our annual reports on Form 10-K, quarterly reports on Form 10-Q and periodic
reports on Form 8-K and in such registration statements on Form S-3 as we may
file from time to time. You are encouraged to read these filings as they are
made. They are available over the Internet from the SEC in its EDGAR database at
http://www.sec.gov and from the Company. Be sure to read the "Risk Factors" in
this Item 1 (and also the discussion of the related subject matters appearing in
this Item 1).
Given the uncertainties affecting pharmaceutical companies in the
development stage, you are cautioned not to place undue reliance on any such
forward-looking statements, any of which may turn out to be wrong due to
inaccurate assumptions, unknown risks, uncertainties or other factors. No
forward-looking statement can be guaranteed; actual future results may vary
materially.
Both forward-looking statements and statements of historic fact must be
understood in the context of the risks referred to above which characterize our
development-stage business. We undertake no obligation to update or revise the
statements made herein or the risk factors that may relate thereto.
OVERVIEW
Cell Pathways, Inc. ("CPI" or "we" or the "Company") is a development stage
pharmaceutical company focused on the research, development and
commercialization of products to prevent cancer and to treat cancer. Our
technology may prove to have applicability beyond these fields. We will be
considered to be in the development stage until we receive approval for, and
generate significant revenues from, the marketing of one or more of our
pharmaceutical drug candidates.
Our technology is based upon the discovery of a novel mechanism which we
believe, based on our research, can be targeted to induce selective apoptosis,
or programmed cell death, in precancerous and
1
3
cancerous cells without affecting apoptosis in normal cells. We have created a
new class of selective apoptotic anti-neoplastic drugs ("SAANDs") and have
synthesized many new chemical compounds in this new class. In screening assays,
many of these new compounds have displayed greater apoptotic potency than our
lead drug candidate, Aptosyn(TM) (exisulind).
Our product development program focused initially on compounds likely to be
helpful in treating precancerous lesions such as colonic polyps and cervical
dysplasia. Attention next turned to the prevention of the recurrence of prostate
cancer and breast cancer. Clinical trials subsequently expanded into the direct
treatment of prostate and lung cancer. More recently, we have made arrangements
for clinical trials of Aptosyn(TM) (exisulind) in combination with leading
cancer chemotherapeutic agents of major pharmaceutical companies in trials
intended to address lung, prostate and breast cancers.
We commenced clinical trials of our lead compound, Aptosyn(TM) (exisulind)
(previously known as FGN-1(TM) (exisulind) and Prevatac(TM) (exisulind)), in
1994. By 1997, that clinical trial program had expanded to include several
cancer and precancer indications. In August 1999, we filed with the U. S. Food
and Drug Administration ("FDA") a New Drug Application ("NDA") seeking marketing
approval for Aptosyn(TM) (exisulind) for the orphan drug indication of familial
adenomatous polyposis ("FAP"). In September 2000, the FDA issued a "not
approvable" letter with respect to the NDA for FAP. We have notified the FDA
that we intend to amend the NDA and meet with the FDA to discuss the
deficiencies and the need for additional data. The Company is evaluating the FAP
program, including the regulatory and competitive environment. The future of the
FAP program is uncertain. See "Products in Development" "Familial Adenomatous
Polyposis (FAP)" below.
We began the clinical trial program of our second compound, CP461, in 1999.
Descriptions of the clinical trial programs of Aptosyn(TM) (exisulind) and CP461
are set forth below under "Products in Development." Aptosyn(TM) (exisulind) and
CP461 are the only CPI product candidates which we expect to be studying in
clinical trials during 2001. No pharmaceutical product may be marketed in the
United States without FDA approval. There can be no assurance that the FDA will
approve any of our product candidates for marketing for any indication or, as to
when, if ever, any such approval would occur.
In anticipation of eventually marketing our products with our own sales
force, we entered into an agreement to market an approved cancer therapy in 2000
and commenced marketing that product at the end of the third quarter. The
product is Nilandron(R) (nilutamide), developed by Aventis Pharmaceuticals, Inc.
("Aventis") as a hormone therapy for advanced prostate cancer.
BUSINESS STRATEGY
Our primary objectives are to be a leader in the development of
pharmaceutical products to prevent cancer and to treat cancer. If our technology
proves to have applicability beyond the fields of precancer and cancer, we will
evaluate our course in light of such developments. To meet our primary
objectives we intend to:
- Pursue clinical development of Aptosyn(TM) (exisulind), with emphasis on
cancer indications.
- Develop Aptosyn(TM) (exisulind) and other SAANDs as part of combination
therapy with leading chemotherapeutic agents to achieve enhanced
anti-cancer effects.
- Use our proprietary technology to develop additional SAANDs such as CP461
for cancer therapy and for cancer chemoprevention.
- Commercialize products directly to focused physician groups. Through a
contract sales force, we are currently marketing the product Nilandron(R)
(nilutamide) under an agreement with Aventis.
- Develop strategic pharmaceutical industry collaborations for research,
development and/or commercialization.
- Selectively and opportunistically acquire or in-license technologies,
products and/or companies devoted to the prevention, diagnosis and/or
treatment of cancer.
2
4
CARCINOGENESIS
Cancer results from a sequence of changes involving the genes of cells.
This sequence eventually leads to abnormal and uncontrolled cell proliferation.
This multi-stage process is known as carcinogenesis and generally results from a
combination of factors which occur over a period of years. Certain factors, such
as inherited genetic defects, are present at birth. Other factors that may
contribute to carcinogenesis include environmental exposures and the aging
process. Carcinogenesis is first recognized clinically when abnormal cells
become detectible by a screening procedure or reach a size or location
sufficient to create clinical signs and symptoms. The clinical emergence may
occur many years following the events which first initiated carcinogenesis.
Generally, cells characterized by abnormal growth that may lead to cancer but
have not yet invaded surrounding tissue are termed precancerous.
PRECANCEROUS LESIONS. Many cancers are preceded by precancerous lesions.
These lesions are accumulations of abnormal cells. Because precancerous lesions
are usually asymptomatic, the ability to identify and monitor them and to
intervene clinically before the possible development of cancer is dependent upon
diagnostic screening tests. Recent years have seen broader applications of
screening tests which have varying degrees of reliability and predictability.
These screening tests include the Pap smear, flexible sigmoidoscopy and the
Prostate Specific Antigen ("PSA") test. In addition, there have been recent
advances in genetic screening, such as the BRCA1 and BRCA2 tests to detect
individuals with a higher risk of developing breast cancer in the future.
Precancerous lesions are most often diagnosed in epithelial tissues, such
as the skin or the inside surface of organs, including the intestine, cervix,
bladder and prostate. The following table lists examples of epithelial
precancerous lesions, the types of cancer to which such lesions can progress and
the diagnostic screening tests currently in use to detect such lesions.
EXAMPLES OF EPITHELIAL PRECANCEROUS LESIONS
CONVENTIONAL
TYPE OF LESION RELATED CANCER METHOD OF DIAGNOSIS
-------------- -------------- --------------------------------------
Actinic Keratosis Skin Visual examination
Adenomatous Colonic Polyp Colorectal Endoscopy (sigmoidoscopy or
colonoscopy)
Barrett's Esophagus Esophageal Endoscopy (esophagogastroscopy)
Bronchial or Lung Dysplasia Lung Sputum cytology
Cervical Intraepithelial Neoplasia Cervical Papanicolau (Pap) smear
Prostatic Intraepithelial Neoplasia Prostate Prostate Specific Antigen (PSA) and
digital rectal examination
Transitional Cell Carcinoma in situ Bladder Cystoscopy
(earliest stage)
Patients with precancerous lesions are advised to follow a program of
regular monitoring and removal of lesions where appropriate. However, existing
techniques for treating precancerous lesions are often expensive, have
undesirable side effects or are of limited effectiveness. Endoscopic or surgical
removal can be effective for single lesions. But risks and costs increase
significantly if lesions recur, if there are numerous lesions or if lesions
occur in less accessible tissues. Because of their significant side effects,
systemic administration of most existing chemotherapeutic drugs is not generally
appropriate for treating precancerous lesions. Reduction of environmental risks
or change in diet are generally more effective in preventing the early stages of
carcinogenesis than in arresting or reversing the changes that occur in the
later stages of carcinogenesis. As a result of the inadequacy of current
treatments, there is a significant need for the development of new therapeutics
to treat precancerous lesions. If left untreated and not reversed by natural
processes, precancerous lesions may progress to cancer.
CANCER. The American Cancer Society estimates that over 1,220,100 new
cases of cancer were diagnosed and approximately 552,200 cancer deaths occurred
in the U.S. in 2000. Cancer is the second leading cause of death in the U.S.
Approximately 10 million people living in the U.S. have a history of cancer.
3
5
Due in part to the development of new diagnostic procedures, the highest number
of new cancer diagnoses are currently occurring in the prostate, breast, lung
and colon/rectum, representing approximately 50% of all new cancer cases.
Cancer is generally treated by attempting to remove the cancerous cells,
either by surgery or by chemical or radiation therapies. Most currently
available chemotherapies and radiation therapies target all rapidly dividing
cells, both cancerous and healthy. This can result in serious side effects. The
limited efficacy and harmful side effects of existing cancer treatments and the
costs associated with managing these side effects continue to drive the search
for new therapies.
CPI TECHNOLOGY
To address the need for new therapies, our technology focuses on the
induction of apoptosis selectively in cells that manifest abnormal growth
(neoplastic cells), such as precancerous and cancerous cells. Apoptosis is a
naturally occurring physiological process in which a number of components inside
a cell "program" the cell to die without causing harm to surrounding cells.
Apoptosis occurs in tissues that are continually renewing themselves, such as
the lining of the digestive system, or as a natural defense mechanism that
prevents the replication of cells that have undergone DNA damage. Our technology
is based upon the discovery of a novel mechanism which we believe, based on our
research, can be targeted to induce selective apoptosis in neoplastic cells.
Many existing chemotherapeutic agents as well as radiation induce apoptosis
in rapidly proliferating cells without differentiating between neoplastic cells
and normal cells. This can result in toxicity, including suppression of the
immune system, hair loss and gastrointestinal disturbances. As a result of this
toxicity, most existing chemotherapeutic agents and radiation therapy are not
appropriate for treating precancerous lesions in otherwise healthy individuals
for whom safety and tolerability are essential for chronic or extended
therapeutic use.
CONVENTIONAL INDUCTION OF APOPTOSIS IN CANCER THERAPY. Radiation therapy
and many existing chemotherapeutic agents act on proliferating cells by
disrupting cellular DNA synthesis to induce apoptosis. Once significant damage
occurs to the DNA, a process is initiated that is controlled by the gatekeeper
protein p53 and modulated by various proteins such as bax and bcl-2. This
process results in the activation of caspases, a family of enzymes that is
involved in the apoptotic process, which trigger a cascade of events resulting
in apoptosis. The end result of apoptosis is the dismantling of the cell into
apoptotic vesicles, which are naturally cleared by the body. The apoptotic
mechanism identified by CPI does not appear to involve p53 or the modulator
proteins such as bax or bcl-2.
DISCOVERY OF NOVEL APOPTOTIC MECHANISM. Our research focuses on the
discoveries described below. We plan to continue this research in pursuit of our
oncology-related goals; we may not succeed. We believe we have discovered a
previously undefined mechanism that may regulate apoptosis. Research suggests
that two key elements of this mechanism include cyclic GMP ("cGMP"), which is
generated by enzymatic conversion of GTP to cGMP by guanyl cyclase initiated by
naturally-occurring triggers, and cGMP phosphodiesterase ("PDE"), which plays a
key role in controlling the intracellular levels of cGMP. We believe, based on a
study of a limited number of colon cancer patients, that neoplastic tissue has a
higher level of cGMP PDE activity than neighboring normal tissue; this may
prevent neoplastic cells from responding to normal signals that trigger
apoptosis. When the activity of this cGMP PDE is elevated, as in neoplastic
cells, cGMP levels are reduced and activation of a critical downstream protein,
protein kinase G, is interrupted. Research suggests this is an adaptive
mechanism associated with mutations forcing cells toward dysplasia. Although we
have a high degree of confidence in our research findings to date, further
research may alter these findings or lead to new research insights which
adversely impact our research efforts.
SELECTIVE INDUCTION OF APOPTOSIS BY CPI COMPOUNDS. Research suggests that
our compounds, including Aptosyn(TM) (exisulind) and CP461, may inhibit the
activity of cGMP PDE in neoplastic cells. Our compounds appear to reduce cGMP
PDE activity, thereby preventing it from degrading cGMP. Research suggests that
cGMP activates PKG to trigger critical downstream proteins which lead to the
subsequent activation of
4
6
caspases. As in the case of some conventional cancer treatment, caspases then
trigger a cascade of events leading to increased apoptosis.
RESEARCH AND DEVELOPMENT ACTIVITIES. Our scientists identified
intracellular proteins targeted by Aptosyn(TM) (exisulind) and made significant
progress in characterizing the target proteins. We have developed
pharmaceutical, immunological and molecular biologic probes that may be used to
identify additional indications to be targeted and to develop diagnostic tools.
We will continue to work to identify additional elements involved in regulating
the newly identified apoptotic mechanism. We plan to investigate the potential
applicability of its novel apoptotic mechanism to hyperproliferative,
hypoproliferative and other disease conditions. We may not succeed in attaining
our research and development goals.
Using our understanding of chemical structure and biological activity
(including advanced computer modeling efforts), we developed and expanded a new
class of SAANDs (selective apoptotic anti-neoplastic drugs). Within this new
class of SAANDs, we identified thousands of new chemical compounds in various
different chemical families and classes. We test our new compounds for
inhibitory effects on the growth of cancer cells in vitro for the induction of
apoptosis and for activity against intracellular targets, including cGMP PDE.
Many of the newly synthesized compounds display greater apoptotic potency than
Aptosyn(TM) (exisulind) in these tests.
A number of our compounds have shown activity against in vitro cultures of
immortalized cell lines of transplantable human cancers of the breast, colon,
lung and prostate. Preliminary results of studies with our compounds in
short-lived primary cultures of human cancers obtained from individual patients
have shown activity against breast cancer. Using these data, we have evaluated
several new chemical entities ("NCEs"). We filed an IND in December 1998 with
respect to CP461 as our second product development candidate. We plan to
continue our evaluation of other compounds as potential product development
candidates. Significant additional preclinical and clinical trials are necessary
to determine the activity and utility of any product development candidate.
Please also read the section under "Risk Factors" below which discusses our
early stage of development, the absence of developed products and the
uncertainty of clinical trials.
We plan to leverage our understanding of the structure-activity
relationship of our compounds, and to expand our proprietary chemical library,
through a variety of evolving discovery techniques that may include, from time
to time, combinatorial chemistry and high-throughput screening. We have
contracted from time to time with outside firms to create or purchase targeted
chemical libraries including diverse chemical classes. We screen such compounds
to identify additional classes of compounds of interest and potential lead
compounds.
PRODUCTS IN DEVELOPMENT
We are developing a family of product candidates, SAANDs, targeted at the
treatment and management of precancerous lesions and cancer. Our lead compound
in this family of new drugs, Aptosyn(TM) (exisulind), is a sulfone derivative of
the nonsteroidal anti-inflammatory drug ("NSAID") sulindac. Aptosyn(TM)
(exisulind) is not an NSAID and lacks the COX 1 and COX 2 inhibitory activity
that is associated with the serious upper gastrointestinal ulceration and
bleeding and kidney injury observed with NSAID use.
We began clinical studies of Aptosyn(TM) (exisulind) in 1994. In August
1999, the Company filed an NDA with the FDA seeking approval to market
Aptosyn(TM) (exisulind) for familial adenomatous polyposis, or FAP, a rare
disease that puts those afflicted at high risk of developing colon cancer. In
September 2000, as discussed below, the FDA issued a "not approvable" letter
with respect to the NDA for FAP.
We began clinical studies of CP461 in 1999. Aptosyn(TM) (exisulind) and
CP461 are the only two product candidates which we expect to have in clinical
studies during 2001.
We intend to continue to conduct clinical trials of Aptosyn(TM) (exisulind)
for several cancer and precancer indications. We may not be able to conduct
sufficient clinical trials, or to obtain favorable results in clinical trials to
support the approval of the NDA for FAP or to support the filing and approval of
any other NDA seeking marketing approval for Aptosyn(TM) (exisulind) for any
other indication. The same applies to our development program for CP461 and for
any other product candidate or compound for any disease condition,
5
7
including those indications discussed below. FDA approval is required for
marketing a drug in the United States. There can be no assurance that the FDA
will ever approve any of our product candidates for marketing.
Despite the growing number of clinical trials, the clinical testing of
Aptosyn(TM) (exisulind) has involved only a limited number of patients. The
clinical testing of CP461 did not start until April 1999. Results obtained from
studying a compound in any clinical trial are not necessarily predictive of the
results of the same compound (or of any other compound) in other clinical
trials, whether for the same indication or for other indications. Please also
read, below, the section under "Risk Factors" which discusses our early stage of
development, the absence of developed products and the uncertainty of clinical
trials.
Numerous steps are required before a drug may be marketed in the U.S. These
steps include: (i) preclinical laboratory and animal tests; (ii) submission to
the FDA of an application for an IND exemption, which must become effective
before human clinical trials commence; (iii) human clinical trials to establish
the safety and efficacy of the drug; (iv) submission of a detailed NDA to the
FDA; and (v) FDA approval of the NDA. The number and type of clinical trials
which may be necessary to gain marketing approval from the FDA may depend upon
the nature of the disease indication, the size of the patient population, the
nature of the proposed therapy, the results of previous clinical trials, the
availability of other approved therapies and other factors.
Clinical trials involve the administration of the investigational drug to
patients. Clinical trials typically are conducted in three phases that generally
are conducted sequentially. Drugs are first tested in Phase I for safety, side
effects, dosage tolerance, metabolism and clinical pharmacology. Phase II
involves tests in a larger but still limited patient population to determine the
efficacy of the drug for specific indications, to determine optimal dosage and
to identify possible side effects and safety risks. Phase III trials are
generally undertaken to evaluate the safety and efficacy of a drug candidate and
the overall risks and benefits of the drug in relationship to the treated
disease in light of other available therapies. Clinical trials may overlap in
design and objective. There can be no assurance that Phase I, Phase II or Phase
III testing will be completed successfully within any specified time period, if
at all. Furthermore, the company and/or the FDA may suspend clinical trials at
any time if it decides that patients are being exposed to a significant health
risk, there are other concerns about the validity of the trial or for other
reasons.
In general, the FDA requires at least two adequate and well-controlled
clinical studies demonstrating efficacy in order to approve an NDA. Under the
Food and Drug Modernization Act of 1997 ("FDAMA"), the FDA may determine that
data from one such clinical trial may be sufficient. The FDA may request
additional information, such as long term toxicity studies or other long-term
studies relating to product safety or efficacy. Notwithstanding the submission
of such data, the FDA ultimately may decide that the application does not
satisfy its regulatory criteria for approval. Finally, the FDA may require
additional clinical tests following NDA approval.
Our current clinical trial strategy seeks to identify patient populations
for the various targeted indications where the endpoints of clinical trials
occur in high frequency or in a relatively short time frame. Because we are
studying Aptosyn(TM) (exisulind) in multiple indications, we plan to utilize
safety and pharmacokinetic data obtained in clinical trials already completed to
provide a basis for commencing more advanced clinical trials in other
indications. We believe that this strategy of designing clinical trials around
selected populations and utilizing existing safety data may allow us to reduce
the duration of clinical trials and the number of test subjects enrolled in its
clinical trials, thereby generating clinical results more quickly and
cost-effectively. There can be no assurance that this strategy will result in
generating clinical results more quickly and cost-effectively, that such
clinical trials will be successful or that such clinical trials will lead to
drug approvals.
The clinical portion of our product development program commenced with the
filing of an IND for Aptosyn(TM) (exisulind) in December 1993. Our initial
efforts were directed at precancerous lesions such as the colonic polyps of FAP
patients. By 1997, we had expanded our clinical program to include cancer
itself. By 2000, cancer had become the focus of most of our clinical efforts.
6
8
CLINICAL DEVELOPMENT OF APTOSYN(TM) (EXISULIND) FOR PRECANCEROUS LESIONS
We believe that Aptosyn(TM) (exisulind) may be useful in treating patients
with precancerous lesions. However, the development of a drug candidate for
precancerous lesions is not well understood. With limited exceptions, the FDA
has not approved any drug for precancerous lesions. FDA may require that a drug
candidate developed for precancerous lesions be shown effective not only in
reducing precancerous lesions or other precancerous symptoms, but also in
preventing or reducing the incidence of cancer in the studied population. This
may require clinical trials following large numbers of patients over very long
periods of time. While we continue to pursue and consider the clinical
development of Aptosyn(TM) (exisulind) in several types of precancerous
conditions, as described below, as of this time, the major portion of our
resources is being committed to the cancer trials described below in Clinical
Development of Aptosyn(TM) (exisulind) for Cancerous Lesions.
FAMILIAL ADENOMATOUS POLYPOSIS (FAP). FAP is an inherited disease
characterized by the development of hundreds to thousands of adenomatous polyps
in the colon and the progression to colon cancer if left untreated. This disease
can be confirmed within a family by genetic testing. Most FAP patients must be
endoscopically screened beginning in their teenage years and must have a
substantial portion of their large intestine removed by age 20. Even with this
treatment, these patients continue to develop polyps in the remaining rectal
tissue and are typically monitored by endoscopy two to four times each year. It
is anticipated that polyps will be removed at each examination. Our clinical
program has been testing Aptosyn(TM) (exisulind) in patients who previously have
had most of their large intestine removed, leaving the rectum intact (sub-total
colectomy), and in the pediatric population whose colons have not been removed.
It is estimated that FAP occurs in between 8,000 and 36,000 persons in the
United States.
In an open label polyp regression study conducted with the support of the
National Cancer Institute at the Cleveland Clinic Foundation, 18 FAP patients
were treated with Aptosyn(TM) (exisulind) for six months. The study was
commenced in August 1995. It was designed to observe the safety and
pharmacokinetics of increasing doses of Aptosyn(TM) (exisulind) and to provide
preliminary data on dosage, clinical efficacy and mechanisms of action. At the
800 milligram total daily dose level, four out of six patients displayed
asymptomatic reversible elevations of liver enzymes; all of such patients
continued in the trial at lower dose levels. This trial assisted in determining
a total daily dose of 600 milligrams in FAP patients with subtotal colectomy.
At the end of the six-month study, all 18 patients elected to continue
taking the drug in extension studies. Polyp regression was monitored at
six-month intervals for periods ranging up to a total of 12 to 30 months from
the start of the study (most patients started on separate dates; some did not
complete all study extensions), at which point all 13 continuing patients had
all remaining polyps removed. As of March 2001, nine patients are continuing on
study drug, with most of them having been on drug for over five years.
In the polyp regression study and its extensions, reduction in the number
and size of exophytic (i.e., raised over the surface) precancerous rectal polyps
was observed to be correlated to dosage, with 600 milligrams per day appearing
to have a more pronounced effect than 400 milligrams per day. Each of the 12
patients who received 500 milligrams per day or more from the outset of the
study was observed to reduce his number of exophytic polyps. This would seem to
indicate both regression of existing polyps and prevention of new polyps.
In the polyp regression study, examination of certain regressing polyps
following drug treatment showed increases in the rate of apoptosis as compared
with the rate of apoptosis of untreated polyps at the beginning of the study. At
the same time, the rate of apoptosis in nearby normal tissue measured unchanged.
This suggests that Aptosyn(TM) (exisulind) induces apoptosis in neoplastic cells
without affecting apoptosis in normal cells.
In July 1998, the FDA granted Aptosyn(TM) (exisulind) "Fast Track"
designation for expedited review for FAP. The Fast Track Program is a new
mechanism, introduced in the FDAMA, for facilitating the development and
expediting the approval of drugs that demonstrate the potential to address unmet
medical needs for serious and life-threatening conditions. This mechanism builds
upon existing FDA programs for accelerated approval.
7
9
In January 1999, we completed a double-blind, placebo-controlled polyp
prevention study of Aptosyn(TM) (exisulind) in FAP. The study was conducted at
centers in the U.S., Sweden, the United Kingdom and Israel. Of the 74 patients
enrolled in the study, 65 completed the one-year course of drug (or placebo)
treatment. The primary endpoint of the study was a statistical comparison of the
formation of new polyps (as measured by periodic polyp fulguration) in
drug-treated patients as compared with patients receiving placebo. The analysis
of all 65 patients who completed the study regardless of whether they met the
inclusion criteria of the study showed a reduction in new polyp formation;
however, the reduction did not achieve statistical significance. We believe this
may be due to the variations introduced by virtue of the fact that several
centers included patients in the study who did not meet the study's
inclusion/exclusion criteria. In the patient group determined to have met the
eligibility criteria of the study -- those who form between approximately 10 and
approximately 40 polyps per year -- Aptosyn(TM) (exisulind) demonstrated a
statistically significant reduction in new polyp formation when compared to
placebo. Of the 34 patients meeting these eligibility criteria, the 15 patients
on Aptosyn(TM) (exisulind) showed a statistically significant reduction in new
polyp formation of approximately 50% as compared with the 19 patients on
placebo. Adverse events observed in this study included reversible elevations of
liver enzymes (most frequently managed by dose modification or interruption) and
episodes of severe abdominal pain, due in some patients to cholecystitis or
pancreatitis occurring most often in patients with underlying biliary disease
(gallstones or tumors impinging on their bile ducts). In the majority of these
patients, these events did not preclude completion of treatment.
Of the 65 patients who completed the polyp prevention study, 55 elected to
participate in, and 47 completed a one-year extension study. The 25 former
placebo patients who crossed over to Aptosyn(TM) (exisulind) experienced during
the one-year extension study a 49% reduction in their polyp formation rate. The
22 patients who continued on Aptosyn(TM) (exisulind) experienced declines in
their polyp formation rate to 54% below the already reduced rate they had
demonstrated during the first year on drug.
We commenced our NDA filing for Aptosyn(TM) (exisulind) for FAP in 1998
with submission to the FDA of the chemistry section of the NDA in November of
that year. In December 1998, we submitted to the FDA the pharmacology/toxicology
section of the NDA. In August 1999, we submitted the third, or clinical, section
of the NDA to formally complete the NDA submission. In October 1999 and June
2000, we submitted additional data with respect to continuing FAP trials.
On September 25, 2000, the FDA issued a "not approvable" letter noting
deficiencies and finding that the information presented as to the safety and
efficacy of Aptosyn(TM) (exisulind) for the treatment of FAP was inadequate. The
FDA did not consider the studies presented in the NDA as providing adequate
evidence to support a claim of effectiveness of the use of Aptosyn(TM)
(exisulind) for the treatment of FAP. The FDA raised safety concerns relating to
the intended use in FAP patients. We have notified the FDA that we intend to
amend the NDA and meet with the FDA to discuss the deficiencies noted and the
need for additional data, including the possible requirements for additional
clinical data. If the FDA requires that we conduct additional clinical trials
(which would be time-consuming and expensive), we may have difficulty enrolling
sufficient patients that meet the study eligibility criteria. Even if we conduct
additional clinical trials, we cannot be sure that we will be able to provide
the FDA with the information it requires, or that the FDA will ever approve the
NDA for FAP. The approval of Celebrex(R) (celecoxib) for use in FAP patients may
make it more difficult for us to achieve regulatory approval of Aptosyn(TM)
(exisulind) for use in FAP. The Company is evaluating the FAP program, including
the regulatory and competitive environment. The future of the FAP program is
uncertain.
In 1998, we commenced a safety study of Aptosyn(TM) (exisulind) in six
pediatric FAP patients. Based upon observations during this study, we commenced
an open label study in 20 pediatric patients in April 1999. This study is
continuing.
SPORADIC ADENOMATOUS COLONIC POLYPS. Sporadic adenomatous colonic polyps
are relatively common precancerous lesions occurring in the large intestine.
These polyps are histologically, microscopically and genetically
indistinguishable from the polyps of FAP. More than 30% of people in the U.S.
over the age of 50 have sporadic adenomatous colonic polyps. Most of these
people will develop only one or two polyps, and once the polyps are removed,
will not require significant ongoing medical attention. There are, however,
subgroups
8
10
of people at higher than usual risk of developing colorectal cancer who should
be monitored frequently. These patients include people with close relatives that
have had colorectal cancer, people over age 60 and people with multiple polyps
or polyps which are large or severely dysplastic or which recur frequently.
The American Cancer Society, American College of Gastroenterology, American
Gastroenterological Association and other expert organizations recommend that
all people over the age of 50 be screened for precancerous colonic polyps and
colon cancer. This recommendation is not followed universally and, as a result,
a large number of people whose polyps have not been detected are at risk of
developing colon cancer. The procedure for screening for sporadic adenomatous
colonic polyps is an endoscopic examination of the lower part of the large
intestine. This procedure, a sigmoidoscopy, is performed by gastroenterologists,
internists and other physicians. For more extensive and invasive examination of
patients who have had polyps detected by sigmoidoscopy and for the treatment of
sporadic adenomatous colonic polyps, a colonoscopy is performed, usually by a
gastroenterologist.
In September 1997, we completed a two-month safety and pharmacokinetic
study in 18 patients who had a history of either sporadic adenomatous colonic
polyps or cervical dysplasia. We then initiated a one-year multi-center study in
the regression of sporadic colonic polyps. This study, initiated in December
1997, was a double-blind, placebo-controlled study to evaluate the safety and
efficacy of different doses of Aptosyn(TM) (exisulind) for the treatment of
existing sporadic adenomatous colonic polyps. This study closed enrollment with
282 patients by early May 1999. Participants completed the one-year of treatment
in May of 2000.
The Company is evaluating the regulatory and competitive environment and is
unlikely to pursue regulatory approval for use of Aptosyn(TM) (exisulind) in SAP
at this time. The population at risk for developing SAP includes all people over
50. A drug targeted for widespread application in a relatively healthy
population will require an extensive safety and efficacy database for FDA
approval. As of this time the major portion of our resources is being committed
to the cancer trials described below. The number of clinical trials we are able
to support will depend on a number of factors including, in particular, the
amount of funding available to us and the extent of support from existing and
future pharmaceutical company collaborations, if any.
BARRETT'S ESOPHAGUS. Barrett's Esophagus is a precancerous condition of
the lower esophagus characterized by progressive and readily identifiable
changes in the appearance of the lining of the esophagus or esophageal
epithelium. Some patients experience reflux of stomach acid into the esophagus,
exacerbating the condition. Patients with Barrett's Esophagus have 30 to 40
times greater risk of developing esophageal cancer than the average person.
Treatment with anti-acid therapy or other anti-reflux measures is usually not
effective. Approximately one percent of the U.S. population, or an estimated 2.0
million people, are being managed for Barrett's Esophagus.
Clinical testing of Aptosyn(TM) (exisulind) for Barrett's Esophagus is at a
very early stage. In December 1998, we initiated a study in patients with
Barrett's Esophagus to evaluate the safety and efficacy of Aptosyn(TM)
(exisulind). The proposed clinical endpoints are reduction in the area affected
or in the degree of dysplasia found in the affected tissues. Enrollment in this
approximately 20 patient study closed in the first quarter of 2000. The
treatment phase will not be complete until the first quarter of 2001. The data
generated in this study should assist us to determine whether to sponsor
additional studies in this disease indication.
BRONCHIAL DYSPLASIA. Bronchial dysplasia is a precancerous condition of
the lower respiratory tract characterized by progressive and readily
identifiable changes in the appearance of the lining of the bronchi of the lung
or bronchial epithelium. In the bronchial epithelium, smoking may initiate a
multi-step process that first appears histologically as dysplasia or metaplasia,
a biological precursor to lung cancer. Two-thirds of heavy smokers may develop
these precancerous lesions.
We did not commence a clinical study of Aptosyn(TM) (exisulind) in patients
with bronchial dysplasia in 2000 due to a variety of factors including competing
demands for our limited resources. We do not know when or if we will schedule
such a study in the future.
CERVICAL DYSPLASIA. Cervical dysplasia is a relatively common precancerous
lesion of the cervix that is easily diagnosed by Pap smears. Fifty million Pap
smears are performed each year in the U.S., of which
9
11
approximately five percent reveal some form of cervical dysplasia. Although very
few cases of cervical dysplasia progress to cancer, it is estimated that in 1997
there were approximately 14,000 new cases of cervical cancer in the U.S.
In September 1997, we completed a two-month safety and pharmacokinetic
study in 18 patients who had a history of sporadic adenomatous colonic polyps or
cervical dysplasia. We have not commenced a clinical study to evaluate the
safety and efficacy of different doses of Aptosyn(TM) (exisulind) in patients
with cervical dysplasia. When and if we initiate such a study will depend upon a
variety of factors, including regulatory and competitive, as well as
developments in our other programs and competing demands for our limited
resources.
CLINICAL DEVELOPMENT OF APTOSYN(TM) (EXISULIND) FOR CANCEROUS LESIONS.
Laboratory studies suggest that Aptosyn(TM) (exisulind) arrests or slows
the progression of certain cancerous lesions. Based on the novel mechanism of
activity, we believe that Aptosyn(TM) (exisulind) may be clinically useful
either as stand-alone therapy or in combination with radiation or conventional
chemotherapy in the treatment of cancers and the prevention of recurrence. In
1997 our clinical program expanded to include cancer indications. By 2000,
cancer had become the focus of most of our clinical efforts.
We believe that cancer cells that are resistant to radiation or
conventional chemotherapy may be killed by Aptosyn(TM) (exisulind) due to its
effect on an apoptotic mechanism that is different from that targeted by
conventional therapies. Results of clinical trials of Aptosyn(TM) (exisulind) in
the treatment of any precancer indication may not be predictive of the results
that may be obtained from trials of Aptosyn(TM) (exisulind) for the treatment of
cancer.
LUNG CANCER. Aptosyn(TM) (exisulind) has shown some positive results in
the prevention of chemically-induced and implanted human lung cancer in rodents.
We initiated a study of the safety and efficacy of Aptosyn(TM) (exisulind) in
patients with advanced lung cancer in December 1997. This exploratory study
initially included six patients and concluded with 16 patients.
As of the first quarter of 2001, we commenced enrollment in a Phase III
randomized placebo-controlled study of a regimen of Taxotere(R) (docetaxel) in
combination with Aptosyn(TM) (exisulind) versus Taxotere(R) (docetaxel) in
combination with placebo in non-small cell lung cancer patients who have failed
a prior platinum-containing regimen.
There is an ongoing Phase I/II study of the combination Aptosyn(TM)
(exisulind) with Taxotere(R) (docetaxel) in patients with solid tumors,
including lung cancer patients, which is intended to assess the safety of the
combination and establish a Phase III dose. This study is supported by Aventis.
Also in the first quarter of 2001, a Phase I/II study commenced enrollment
as a combination therapy lung cancer study, supported by Aventis, which is
intended to assess the toxicity profile of Aptosyn(TM) (exisulind) in
combination with Taxotere(R) (docetaxel) and carboplatin in previously untreated
patients with metastatic non-small cell lung cancer, to evaluate the potential
pharmacokinetic interactions of the combination of the drugs, and to evaluate
antitumor efficacy of the combination with regard to time to tumor progression
and/or treatment failure.
Also in the first quarter of 2001, we commenced enrollment in a Phase I/II
combination therapy lung cancer study, with the cooperation of GlaxoSmithKline
("Glaxo"), to determine the maximally tolerated dose of Aptosyn(TM) (exisulind)
with a fixed dose of Navelbine(R) (vinorelbine tartrate injection) in previously
untreated elderly patients with advanced non-small cell lung cancer, and to
determine response rate, overall survival rate and toxicity profile.
Also in the first quarter of 2001, we commenced enrollment in a Phase I/II
combination therapy lung cancer study, with the cooperation of Eli Lilly and
Company ("Lilly"), which is intended to study Aptosyn(TM) (exisulind) in
combination with Gemzar(R) (gemcitabine HCI) in patients with refractory or
recurrent non-small cell lung cancer. This study is intended to evaluate the
time to disease progression in patients who progressed through first-line
therapy (refractory) or patients who developed progressive disease more than
three months from completion of first-line therapy (recurrent), and also to
determine the response rate and toxicity profile.
10
12
Lung cancer may be diagnosed by general practitioners or internists.
Oncologists manage the chemotherapeutic treatment of lung cancer.
PROSTATE CANCER. In vitro and in vivo studies suggest that Aptosyn(TM)
(exisulind) inhibits growth of prostate cancer cells, including one type of
prostate cancer cell that is resistant to conventional chemotherapeutic drugs.
In August 1998, we completed enrollment of 96 patients in a one-year Phase
II/III clinical study for the prevention of prostate cancer recurrence. This
study involved men who had had a prostatectomy and had rising PSA levels. This
is often a sign of recurrent prostate cancer that is not detectable by current
imaging or diagnostic methods. The endpoint of this study was the arrest or
delay in the elevation of PSA. The primary analysis of this study showed a
statistically significant difference in mean change in PSA levels from baseline
between drug and placebo groups: PSA levels continued to rise in the placebo
group, while in the drug-treated group PSA levels stabilized.
Although a rising level of PSA is not itself a disease condition, it is
widely regarded in the medical community as a surrogate marker indicative of the
presence of prostate cancer. To our knowledge, no drug has yet been approved by
the FDA for the treatment of prostate cancer solely on the basis of data with
respect to PSA levels. Prevailing thought suggests that to achieve FDA approval,
efficacy must be shown in a clinical endpoint such as survival or tumor
regression.
In our clinical program for prostate cancer during 2001, we plan to
initiate a Phase III randomized placebo-controlled study of a regimen of
Taxotere(R) (docetaxel) in combination with Aptosyn(TM) (exisulind) versus
Taxotere(R) (docetaxel) in combination with placebo in patients with hormone
refractory prostate cancer.
There is an ongoing Phase I/II study of the combination Aptosyn(TM)
(exisulind) with Taxotere(R) (docetaxel) in hormone refractory prostate cancer
which is intended to assess the safety and efficacy of the combination. This
study is supported by Aventis.
According to the American Cancer Society, there were approximately 180,000
new cases of prostate cancer in 2000. Prostate cancer is commonly diagnosed and
treated by urologists, of whom there are approximately 10,000 in the United
States. Oncologists, of whom there are approximately 5,500 in the U.S., manage
the chemotherapeutic treatment of prostate cancer. Our contract sales force
currently markets Nilandron(R) (nilutamide) to urologists.
BREAST CANCER. We have observed that Aptosyn(TM) (exisulind) and other CPI
compounds show dose-related inhibitory effects in several in vitro breast cancer
cell systems, in in vivo chemically-induced cancer models and in in vitro
studies with primary breast cancer tissues removed from patients.
During 2001, we plan to commence enrollment in a Phase I/II combination
therapy breast cancer trial, supported by Aventis, which is intended to
establish tolerable doses of Aptosyn(TM) (exisulind) and Taxotere(R)
(docetaxel), to determine response rates in patients with metastatic breast
cancer who may or may not have received prior chemotherapy, to evaluate the side
effect profile of the combination of the two drugs, and to determine the effect
on time to disease progression.
As of the first quarter of 2001, we have commenced enrollment in a Phase
I/II combination therapy breast cancer trial, in cooperation with Roche
Laboratories, Inc. ("Roche"), which is intended to evaluate the safety, efficacy
and pharmacokinetic interactions of Aptosyn(TM) (exisulind) and Xeloda(R)
(capecitabine) administered together in patients with metastatic breast cancer,
and to determine the antitumor activity of the combination therapy as measured
by objective response.
It is estimated that in 2001 there will be approximately 180,000 new cases
of breast cancer in the United States. Gynecologists usually diagnose breast
cancer, while oncologists manage the chemotherapeutic treatment.
We are not in a position to know at this time if or when an NDA for
Aptosyn(TM) (exisulind) will be filed for any cancer indication (whether alone
or in combination with a cancer chemotherapeutic compound of another
pharmaceutical company), or whether these clinical trials will show positive
results, or which additional clinical trials may be required for the submission
of an NDA for a particular cancer indication, or
11
13
(if an NDA is filed) when or if the FDA will find that Aptosyn(TM) (exisulind),
on the basis of any or all of the studies which have been conducted or may
hereafter be conducted, is sufficiently safe and effective to warrant marketing
approval by the FDA for any such indication.
COLLABORATIONS WITH MAJOR PHARMACEUTICAL COMPANIES FOR CLINICAL DEVELOPMENT OF
APTOSYN(TM) (EXISULIND) IN COMBINATION WITH APPROVED CHEMOTHERAPEUTIC AGENTS
We are cooperating with Aventis to investigate Aptosyn(TM) (exisulind) in
combination with Aventis' Taxotere(R) (docetaxel). The cooperation intends to
investigate the combination of Aptosyn(TM) (exisulind) and Taxotere(R)
(docetaxel) in breast, prostate and non-small cell lung cancer.
We are cooperating with Roche to investigate Aptosyn(TM) (exisulind) in
combination with Roche's Xeloda(R) (capecitabine) in breast cancer.
We are cooperating with Lilly to investigate Aptosyn(TM) (exisulind) in
combination with Lilly's Gemzar(R) (gemcitabine HCI) in non-small cell lung
cancer.
We are cooperating with Glaxo to investigate Aptosyn(TM) (exisulind) in
combination with Glaxo's Navelbine(R) (vinorelbine tartrate injection) as a
first line treatment for elderly patients with advanced non-small cell lung
cancer.
In each of the four collaborations, investigators have designed studies
which have been reviewed by CPI and the respective cooperating company. Under
the cooperations, product rights will be retained by each party for its
respective product and the parties will share access to the data.
CP461 DEVELOPMENT PROGRAM
Clinical Development of CP461 for Cancer Treatment. Preclinical toxicology
and efficacy studies of CP461 support its potential for anti-cancer activity
against a broad range of human cancer cell lines. The preclinical studies also
appear to support the potential of CP461 to selectively induce apoptosis in
abnormal cells and inhibit the formation of precancerous lesions without
affecting apoptosis in normal healthy cells.
The Company filed an IND for CP461 in December 1998. A single dose safety
and pharmacokinetic study in normal volunteers was completed in July 1999 and
demonstrated good tolerability in study subjects following oral administration.
Plasma levels of CP461 exceeded those predicted to be necessary to achieve
anti-cancer effects, based on preclinical studies. No clinically significant
drug-related side-effects were observed at doses given in this study.
A multiple dose safety, pharmacokinetic and preliminary efficacy study in
late stage cancer patients is ongoing to establish a recommended dose for Phase
II clinical trials.
During 2001, we plan to conduct Phase I studies to evaluate the safety of
CP461 in combination with a number of commercially available chemotherapeutic
agents.
During 2001, we plan to commence one or more Phase II studies in several
tumor types to obtain additional safety and efficacy data. The commencement of
these studies will depend upon a variety of factors including developments in
other Company programs, developments in the field of cancer therapy generally,
and competing demands for our limited resources.
In conjunction with the foregoing section "Products in Development," please
read in the "Risk Factors" section below the portions which discuss our early
stage of development, the absence of developed products, the uncertainty of
clinical trials, technological uncertainty and regulatory uncertainty, as well
as those portions which discuss extensive government regulation and the lack of
assurance of necessary FDA and other regulatory approvals.
AGREEMENT WITH AVENTIS FOR CPI TO MARKET NILANDRON(R) (NILUTAMIDE)
In July 2000, we entered into a marketing and promotion agreement with
Aventis granting us the exclusive rights to market Nilandron(R) (nilutamide) to
urologists, in the United States and Puerto Rico, for
12
14
use in patients who suffer from prostate cancer. Nilandron(R) (nilutamide) is a
hormonal therapy that blocks the production of testosterone and is used to
increase survival time and promote disease regression in men with advanced
prostate cancer. Utilizing our existing relationship with Innovex, Inc., a
leading provider of contract sales and marketing solutions in the healthcare
industry, we hired and trained a contract sales force and commenced promoting
Nilandron(R) (nilutamide) at the end of the third quarter of 2000. For our
marketing and promotion services, we receive a percentage of the gross margin on
sales of Nilandron(R) above a threshhold amount defined in the agreement.
Revenues for our services are not expected to be material. The agreement is for
a term from September 1, 2000 to December 31, 2002, subject to earlier
termination as set forth in the agreement. The agreement also provides Aventis
with the right to convert the agreement to a nonexclusive agreement upon 90
days' written notice to the Company.
NATIONAL CANCER INSTITUTE AND OTHER THIRD-PARTY ARRANGEMENTS
CPI and the National Cancer Institute ("NCI") entered into a clinical
trials agreement in 1994. In this agreement, the NCI agreed to sponsor human
clinical trials (including but not limited to safety and efficacy testing) of
Aptosyn(TM) (exisulind) in at least two precancer indications. The first
indication is colonic adenomas, including FAP. The NCI sponsored the first
six-month portion of the polyp regression clinical study for FAP that commenced
in August 1995. Under the Agreement, NCI had the right to conduct as many
additional clinical trials as it would like and we were obligated to provide
Aptosyn(TM) (exisulind) for such studies. The agreement with the NCI contains no
provisions for royalties or restrictions on our ability to commercialize
Aptosyn(TM) (exisulind). The clinical trials agreement expired on July 1, 1999.
In June 1991, CPI entered into a research and license agreement with the
University of Arizona (the "University"). Under the agreement, we agreed to
attempt to commercialize at least one product while the University agreed to
conduct a research program in support of our efforts. The agreement, as amended,
provides for us to establish a budget for the research program with the
University on an annual basis and for us to be licensed under all patents based
on inventions developed by the University's employees in conjunction with us. We
have agreed to pay to the University a royalty based on sales of products, if
any based on each such patent family; this would apply to Aptosyn(TM)
(exisulind) and CP461. The research portion of the agreement expired on June 26,
2000.
We also contract with university-based researchers and commercial vendors
throughout the U.S., Europe and other areas who furnish cell biology studies, in
vivo pharmacological studies, in vivo drug candidate screening, animal
toxicological studies, scale-up and synthesis of promising new compounds,
manufacture of clinical and commercial supplies, conduct and monitoring of
clinical studies, laboratory analysis and/or other goods and services incident
to the development of the our business. In conjunction with the foregoing
section "National Cancer Institute and Other Third-Party Arrangements," please
read the "Risk Factors" sections below which discuss reliance on third parties.
COLLABORATIVE NATURE OF THE PHARMACEUTICAL INDUSTRY
Our industry requires highly specialized expertise in a wide variety of
disciplines and is characterized by collaborative and cooperative endeavors
among participants. This dynamic involves the receipt of assistance from third
parties, the payment of royalties or other value in exchange for this
assistance, and the risks of dependence upon third parties. Intra-industry
discussion and interchange is an ongoing process, covering subject matters
ranging from basic research to strategic alliance. We have participated in this
process for years and intend to continue to do so. The arrangements discussed in
the two immediately preceding subsections above, and in the subsection
"Marketing and Sales" below, are illustrative of this process. During intra-
industry discussions, agendas may substantially broaden or may substantially
narrow from those anticipated at the outset; most frequently, discussions serve
only as information exchange and do not lead to transactions of any kind. The
fact of intra-industry discussion activity should not be misunderstood as an
indication that our business, strategies or prospects are about to change; on
the other hand, the unpredictable nature of ubiquitous industry interchange may
lead to developments which neither we nor others may be in a position to
anticipate. As discussed above under "Business Strategy," we intend to develop
industry collaborations and relationships
13
15
to achieve our objectives. However, we are not in a position to predict what, if
any, collaborations, alliances or transactions we may enter into in addition to
those described elsewhere in this description of our business.
ADVISORY BOARD
We are assisted in our research and development activities by our
Scientific Advisory Board ("SAB"). The SAB is composed of physicians and
scientists who review our research and development, discuss technological
advances relevant to our business and otherwise assist us on scientific and
clinical matters. The members of the SAB are appointed by our management. The
SAB meets periodically. Certain members meet in smaller groups or meet with us
individually as requested to address selected topics. Dr. Rifat Pamukcu, our
Chief Scientific Officer and Executive Vice President, Research and Development,
served as co-chair of our SAB prior to joining CPI in 1993, and continues to
participate in all SAB meetings. W. Joseph Thompson, Ph.D., our Vice President,
Research, serves as Co-Chair for SAB meetings. We compensate non-employee SAB
members in either cash or stock options or both for their services; we also
reimburse them for expenses incurred when traveling to and attending meetings.
Non-employee SAB members have commitments or consulting contracts with other
organizations and companies, some of which are competitors or potential
competitors; such commitments may limit the availability of such members to us.
None of these individuals is expected to devote more than a small portion of his
time to our affairs. The members of the SAB are listed below.
SCIENTIFIC ADVISORY BOARD
NAME PROFESSIONAL AFFILIATION
---- ------------------------
Dennis Ahnen, M.D................. Professor of Medicine, University of Colorado School of
Medicine; Director of Cancer Prevention and Control,
University of Colorado Cancer Center
David S. Alberts, M.D............. Associate Dean of Research, Director of Cancer Prevention
and Control Program, and Professor of Medicine and
Pharmacology, Arizona Cancer Center, University of Arizona
Randall W. Burt, M.D. Professor of Internal Medicine and Chief of Gastroenterology,
(Chairman)...................... University of Utah School of Medicine; formerly Chief of
Medical Services, Veterans Administration Medical Center,
Salt Lake City, Utah
Sharron H. Francis, Ph.D.......... Professor, Department Molecular Physiology and Biophysics,
Vanderbilt University School of Medicine
Alan C. Sartorelli, Ph.D.......... Alfred Gilman Professor of Pharmacology and Epidemiology,
Yale University School of Medicine; Director of Yale
Comprehensive Cancer Center
Richard Schilsky, M.D............. Associate Dean for Clinical Research, Professor of Medicine,
Biological Sciences Division and the Pritzker School of
Medicine, Director of University of Chicago Cancer Research
Center
Daniel D. Von Hoff, M.D........... Director, Arizona Cancer Center; Professor of Medicine, The
Arizona Health Sciences Center, Tucson; Co- Director of
Research, U.S. Oncology, Inc.
Louis M. Weiner, M.D.............. Chairman of the Department of Medical Oncology, Division
of Medical Science at Fox Chase Cancer Center; Professor in
the Department of Medicine, Temple University School of
Medicine
14
16
NAME PROFESSIONAL AFFILIATION
---- ------------------------
I. Bernard Weinstein, M.D......... Frode Jensen Professor of Medicine, Professor of Genetics and
Development and Public Health, Columbia University;
Director Emeritus, Herbert Irving Comprehensive Cancer
Center, Columbia University
PATENTS, TRADEMARKS AND PROPRIETARY TECHNOLOGY
Our success will depend, in part, on our ability to obtain patents, operate
without infringing the proprietary rights of others and maintain trade secrets,
both in the U.S. and other countries. Patent matters in the pharmaceutical
industry can be highly uncertain and involve complex legal and factual
questions. Accordingly, the validity, breadth, and enforceability of our patents
and the existence of potentially blocking patent rights of others cannot be
predicted, either in the U.S. or in other countries.
We hold title or exclusive licenses to several issued U.S. patents and
pending patent applications relating to the therapeutic uses of Aptosyn(TM)
(exisulind) in the treatment of neoplasia, precancerous lesions and/or other
indications. A composition of matter patent is not available to us (or anyone
else) because the sulfone derivative of sulindac, now named exisulind, was
described in the scientific and patent literature over 20 years ago. Thus, our
current patent rights relating to Aptosyn(TM) (exisulind) are limited to a
series of patents and patent applications pertaining to various specific uses of
Aptosyn(TM) (exisulind). We have also been issued or hold exclusive licenses to
various foreign patents (including patents in various European countries,
Australia, Canada, Korea and Japan) and pending applications relating to the use
of Aptosyn(TM) (exisulind) in pharmaceutical compositions for the treatment of
neoplasia, precancerous lesions and/or other indications. In Europe, our patent
rights relating to Aptosyn(TM) (exisulind) are directed to the use of
Aptosyn(TM) (exisulind) in the manufacture of pharmaceutical compositions for
the treatment of precancerous lesions. We also hold title or exclusive licenses
to several pending U.S. and international patent applications relating to uses
of exisulind in combination with certain existing conventional
chemotherapeutics.
We also hold title or exclusive licenses to patents and pending
applications relating to CP461, its composition of matter and various of its
therapeutic uses.
In addition, we hold title or exclusive licenses to many patents and patent
applications on other compounds, or therapeutic methods involving such
compounds, for the treatment of colonic polyps, precancerous lesions and/or
neoplasia. We also have patents and patent applications on methods for screening
compounds for their usefulness in selectively inducing apoptosis. We have also
filed patent applications relating to diagnostic methodologies, and patent
applications relating to certain business methods and packaged pharmaceuticals
with descriptive material describing and relating to the mechanisms of action.
We intend to file additional applications, as appropriate, for patents on
new compounds, products, or processes discovered or developed through
application of our technology.
Research is an on-going process. Whether a new development or discovery
could be successfully patented is a very complicated question and depends on the
facts as they develop over time. Thus, we cannot provide assurance that our
continuing research activities will discover or develop patentable products or
processes, or that patents will issue from any of the currently pending patent
applications, or that claims granted on issued patents will be sufficient in
their validity, breadth and enforceability to protect our technology or
competitive commercial advantage. Potential competitors or other researchers in
the field may have filed patent applications, been issued patents, published
articles or otherwise created prior art that could restrict or block our efforts
to obtain additional patents. Similarly, we cannot predict whether our issued
patents or pending patent applications, if issued, will be challenged,
invalidated, circumvented or breached by others, or whether judicial protection
and enforcement will be available to us to counteract such actions by others, or
whether the rights granted thereunder will provide us with proprietary
protection or competitive advantages. Our patent rights also depend in part on
our compliance with technology and patent licenses upon which our patent rights
are based and upon the validity of assignments of patent rights from consultants
and other inventors that are not or were not employed by us.
15
17
Competitors may manufacture and sell our potential products in those
countries where we have not filed for patent protection or where patent
protection may be unavailable, not obtainable or ultimately not enforceable. The
ability of such competitors to do this is usually governed by the patent laws of
the countries in which the product is sold. If clinical uses of exisulind are
discovered beyond those set forth in our patent claims, we may not be able to
enforce its patent rights against companies marketing exisulind for such other
clinical uses.
Our success will also depend, in part, on our not infringing patents issued
to others. Pharmaceutical companies, biotechnology companies, universities,
research institutions and others may have filed patent applications or have
received, or may obtain, issued patents in the U.S. or elsewhere relating to
aspects of our technology. It is uncertain whether the issuance of any
third-party patents will require us to alter our products or processes, obtain
licenses or cease certain activities. Some third-party applications or patents
may conflict with our issued patents or pending applications. Such conflict
could result in a significant reduction of the coverage of our issued or
licensed patents. In addition, if patents are issued to other companies which
contain blocking, dominating or conflicting claims and such claims are
ultimately determined to be valid, we may be required to obtain licenses to
these patents or to develop or obtain alternative technology. If any licenses
are required, we might not be able to obtain any such licenses on commercially
favorable terms, if at all; and if these licenses are not obtained, we might be
prevented from pursuing the development of certain of its potential products.
Our failure to obtain a license to any technology that we may require to
commercialize our products may have a material adverse impact on our business,
financial condition and results of operations.
Litigation may be necessary to enforce any patents issued or licensed to
us. Litigation may be necessary to determine the scope and validity of the
proprietary rights of others. Litigation could result in substantial costs to us
which may have a material adverse effect on our business, financial condition
and results of operations.
Under the abbreviated new drug application ("ANDA") provisions of U.S. law,
after four years from the date marketing approval is granted to us by the FDA
for a patented drug, a generic drug company may submit an ANDA to the FDA to
obtain approval to market in the U.S. a generic version of the drug patented by
us. If approval were given to the generic drug company, we would be required to
promptly initiate patent litigation to prevent the marketing of such a generic
version prior to the normal expiration of the patent. We cannot provide
assurance that our issued or licensed patents would be held valid by a court of
competent jurisdiction. In addition, if our competitors file patent applications
in the U.S. that claim technology also claimed by us, we may have to participate
in interference proceedings to determine priority of invention. These
proceedings, if initiated by the U.S. Patent and Trademark Office, could result
in substantial cost to us, even if the eventual outcome is favorable to us. An
adverse outcome with respect to a third-party claim or in an interference
proceeding could subject us to significant liabilities, require disputed rights
to be licensed from third parties, or require us to cease using such technology,
any of which could have a material adverse effect on our business, financial
condition and results of operations.
We also rely on trade secrets to protect technology, especially where
patent protection is not believed to be appropriate or obtainable or where
patents have not been issued. We attempt to protect our proprietary technology
and processes, in part, by confidentiality agreements and assignment of
invention agreements with our employees and confidentiality agreements with our
consultants and certain contractors. We cannot provide assurance that these
agreements will not be breached, that we would have adequate remedies for any
breach, or that our trade secrets will not otherwise become known or be
independently discovered by competitors. If our trade secrets or other
intellectual property should become known to our competitors, this could result
in a material adverse effect on our business, financial condition and results of
operations. To the extent that we or our consultants or research collaborators
use intellectual property owned by others in work for us, disputes may arise as
to the rights to related or resulting know-how and inventions.
Aptosyn(TM) (exisulind) is our proposed trademark for exisulind. We have
filed an intent to use trademark application for the mark with the U.S. Patent
and Trademark Office, and we plan to perfect foreign trademark rights in the
mark. While we have searched for confusingly similar marks and believe that
Aptosyn(TM) (exisulind) is available for use on our product under prevailing
standards of trademark law, there can be no
16
18
guarantee that that mark will not be challenged by others, or that others have
not perfected or attempted to perfect rights in a confusingly similar mark. In
the event of a successful challenge to our adoption and use of Aptosyn(TM)
(exisulind), we could be forced to change our proposed mark in one or more
countries in the world.
COMPETITION
The industry in which we compete is very competitive. It is characterized
by extensive research and development efforts and rapid technological progress.
New developments occur and are expected to continue to occur at a rapid pace.
Discoveries or commercial developments by our competitors may render some or all
of our potential products obsolete, subject to competition or non-competitive.
This would have a material adverse effect on our business, financial condition
and results of operations. Our competitive position also depends on our ability
to attract and retain qualified scientific and other personnel, develop
effective proprietary products, implement development and marketing plans,
obtain patent protection and secure adequate capital resources.
We face competition in our specific areas of focus. In the fields of cancer
therapy and the prevention of precancerous and cancerous lesions, other products
and procedures are in use or in development that may compete directly with the
products that we are seeking to develop and market for cancer treatment or
cancer prevention. Surgery, radiation, chemotherapeutic agents and compounds
that interfere with hormone activities have been in use for years in the
treatment of cancer. Nolvadex(R) (tamoxifen citrate) has been granted limited
approval for use in the prevention of breast cancer. The arthritis drug
Celebrex(R) (celecoxib) has been granted approval for the regression of polyps
in FAP patients. We are aware of clinical trials in which a number of
pharmaceutical and nutritional agents are being examined for their potential
usefulness in the treatment of precancerous lesions and cancer. These include
studies of additional chemotherapeutic agents, monoclonal antibodies, hormone
blockers, cyclooxegenase inhibitors, thalidomide and other anti-angeogenesis
agents in the treatment of cancer; studies of NSAID-like compounds,
cyclooxygenase inhibitors, difluoromethylornithine ("DFMO") and natural
nutrients in the treatment of FAP and sporadic colonic polyps; studies of
retinoids and DFMO in the treatment of cervical dysplasia; and studies of
tamoxifen for the prevention of breast cancer. Additional compounds being tested
in various epithelial lesions include compounds related to aspirin, various
vitamins and nutritional supplements, oltipraz, N-acetyl cysteine and compounds
that interfere with hormone activities. The studies are being conducted by
pharmaceutical and biotechnology companies, major academic institutions and
government agencies. There are other agents, including certain prescription
drugs, that have been observed to have an effect in the general area of cGMP
PDE; although we are not aware that any third party has demonstrated the
preclinical utility of these compounds in the treatment of precancerous or
cancerous lesions, there can be no assurance that such existing or new agents
will not ultimately be found to be useful, and therefore competitive with our
future products.
We expect near-term competition from fully integrated and more established
pharmaceutical and biotechnology companies. Most of these companies have
substantially greater financial, research and development, manufacturing and
marketing experience and resources than we and represent substantial long-term
competition for us. Such companies may succeed in discovering and developing
pharmaceutical products more rapidly than us or pharmaceutical products that are
safer, more effective or less costly than any we may develop. Such companies
also may be more successful than us in production and marketing. Smaller
companies may also prove to be significant competitors, particularly through
collaborative arrangements with large pharmaceutical and established
biotechnology companies. Academic institutions, governmental agencies and other
public and private research organizations also conduct clinical trials, seek
patent protection and establish collaborative arrangements for the development
of oncology products.
We will face competition based on a number of factors: product efficacy and
safety; the timing and scope of regulatory approvals; availability of supply;
marketing and sales capability; reimbursement coverage; price; and patent
position. Our competitors may develop safer and more effective products. Our
competitors may obtain patent protection or intellectual property rights that
limit our ability to commercialize products. Our competitors may develop or
commercialize products earlier than us. Our issued patents or pending patent
17
19
applications, if issued, may be challenged, invalidated or circumvented and the
rights granted thereunder may not provide proprietary protection or competitive
advantage to us.
GOVERNMENT REGULATION
Our activities are subject to extensive governmental regulation. In
particular, the research, design, testing, manufacturing, labeling, marketing,
distribution and advertising of products such as our proposed products are
subject to extensive regulation by governmental regulatory authorities in the
U.S. and other countries. The drug development and approval process is generally
lengthy, expensive and subject to unanticipated delays.
The FDA and comparable agencies in foreign countries impose substantial
requirements on the introduction of new pharmaceutical products through lengthy
and detailed preclinical and clinical testing procedures, sampling activities
and other costly and time-consuming compliance procedures. A new drug may not be
marketed in the U.S. until it has undergone rigorous testing and has been
approved by the FDA. The drug may then be marketed only for the specific
indications, uses, formulation, dosage forms and strengths approved by the FDA.
Similar requirements are imposed by foreign regulators upon the marketing of a
new drug in their respective countries.
Satisfaction of such regulatory requirements, which includes demonstrating
to the satisfaction of the FDA that the relevant product is both safe and
effective, typically takes several years or more depending upon the type,
complexity and novelty of the product. It also requires the expenditure of
substantial resources. Preclinical studies must be conducted in conformance with
the FDA's Good Laboratory Practice ("GLP") regulations. Our compounds require
extensive clinical trials and FDA review as new drugs. Clinical trials are
vigorously regulated and must meet requirements for FDA review and oversight and
requirements under Good Clinical Practice ("GCP") guidelines. We may encounter
problems in clinical trials which would cause us or the FDA to delay or suspend
clinical trials. Any such delay or suspension could have a material adverse
effect on our business, financial condition and results of operations. The steps
required before a drug may be marketed in the U.S. include: (i) preclinical
laboratory and animal tests; (ii) submission to the FDA of an application for an
IND exemption, which must become effective before human clinical trials may
commence; (iii) human clinical trials to establish the safety and efficacy of
the drug; (iv) submission of a detailed NDA to the FDA; and (v) FDA approval of
the NDA. In addition to obtaining FDA approval for each product, each domestic
establishment where the drug is to be manufactured must be registered with the
FDA. Domestic manufacturing establishments must comply with the FDA's Good
Manufacturing Practice ("GMP") regulations and are subject to periodic
inspections by the FDA. Foreign manufacturing establishments manufacturing drugs
intended for sale in the U.S. also must comply with GMP regulations and are
subject to periodic inspection by the FDA or by local authorities under
agreement with the FDA.
Preclinical tests include laboratory evaluation of product chemistry and
animal studies to assess the metabolic and pharmacologic activity and potential
safety and efficacy of the product. Preclinical tests must be conducted by
laboratories that comply with FDA regulations regarding GLP. The results of
preclinical tests are submitted to the FDA as part of an IND, which must become
effective before the sponsor may conduct clinical trials in human subjects.
Unless the FDA objects to an IND, the IND becomes effective 30 days following
its receipt by the FDA. There is no certainty that submission of an IND will
result in FDA authorization of the commencement of clinical trials. A separate
IND application may be required by the FDA, in its sole discretion, as to each
indication. Our cancer prevention and therapeutic studies for Aptosyn(TM)
(exisulind) are being conducted under our IND application filed in December
1993. Clinical trials of CP461 are proceeding under our IND filed in December
1998.
Clinical trials involve the administration of the investigational drug to
patients. Every clinical trial must be conducted under the review and oversight
of an institutional review board ("IRB") at each institution participating in
the trial. The IRB evaluates, among other things, ethical factors, the safety of
human subjects and the possible liability of the institution. Clinical trials
typically are conducted in phases, which generally are conducted sequentially,
but which may overlap. Clinical trials test for efficacy and safety, side
effects, dosage, tolerance, metabolism and clinical pharmacology. Initial tests
involve the introduction of the drug to a small group of subjects to test for
safety, dosage tolerance, pharmacology and metabolism. Subsequent trials involve
18
20
a larger but still limited patient population to determine the efficacy of the
drug for specific indications, to determine optimal dosage and to identify
possible side effects and safety risks. Larger-scale trials may then be
undertaken to evaluate the safety and effectiveness of the drug, usually, though
not necessarily, in comparison with a placebo or an existing treatment.
There are many uncertainties in the overall clinical trial process. All
phases of testing may not be completed successfully within any specified time
period, if at all. The FDA may increase, decrease or re-characterize the number
and phases of trials required for approval. The FDA may suspend clinical trials
at any time if it decides that patients are being exposed to a significant
health risk.
The results of the preclinical studies and clinical trials are submitted to
the FDA as part of an NDA for approval of the marketing of the drug. The NDA
also includes information pertaining to the chemistry, formulation and
manufacture of the drug and each component of the final product, as well as
details relating to the sponsoring company. In prior years, the NDA review
process has taken from one to two years on average to complete, although reviews
of treatments for cancer and other life-threatening diseases may be accelerated.
The process may take substantially longer if the FDA has questions or concerns
about a product. In general, the FDA requires at least two adequate and
well-controlled clinical studies demonstrating safety and efficacy in order to
approve an NDA. The FDA may, however, request additional information, such as
long-term toxicity studies or other studies relating to product safety, and may
increase, decrease or re-characterize the number and phases of trials required
for approval. Notwithstanding the submission of requested data, the FDA
ultimately may decide that the application does not satisfy its regulatory
criteria for approval. Finally, the FDA may require additional clinical tests
following NDA approval.
We may not succeed in developing drugs that prove to be safe and effective
in treating or preventing cancer. The development of such drugs will require the
commitment of substantial resources to conduct the preclinical development and
clinical trials necessary to bring such compounds to market. Drug research and
development by its nature is uncertain. There is a risk of delay or failure at
any stage, and the time required and cost involved in successfully accomplishing
our objectives cannot be predicted. Actual drug research and development costs
could exceed budgeted amounts, which could have a material adverse effect on our
business, financial condition and results of operations.
As discussed above, we submitted an NDA for Aptosyn(TM) (exisulind) for the
indication of FAP in August 1999. The FDA issued a "not approvable" letter with
respect to that NDA in September 2000. We cannot predict the future course of
the NDA for FAP or when, if ever, we will submit another NDA for Aptosyn(TM)
(exisulind), for CP461 or for any other compound currently under development.
See the discussion of Aptosyn(TM) (exisulind) and CP461 above under "Products in
Development."
No new drug may be marketed in the U.S. until it has been approved by the
FDA. We have already encountered delay and rejection in the approval process; we
may encounter further delay and rejection. The FDA may make policy changes
during the period of product development or the period of FDA regulatory review
of an NDA. A delay in obtaining, or failure to obtain, approval would have a
material adverse effect on our business, financial condition and results of
operations. Even if regulatory approval were obtained, it would be limited as to
the indicated uses for which the product may be promoted or marketed.
A marketed product, its manufacturer and the facilities in which it is
manufactured are subject to continual review and periodic inspections. If
marketing approval were granted, we would be required to comply with FDA
requirements for manufacturing, labeling, advertising, record keeping and
reporting of adverse experiences and other information. In addition, we would be
required to comply with federal and state anti-kickback and other health care
fraud and abuse laws that pertain to the marketing of pharmaceuticals. Failure
to comply with regulatory requirements and other factors could subject us to
regulatory or judicial enforcement actions, including, but not limited to,
product recalls or seizures, injunctions, withdrawal of the product from the
market, civil penalties, criminal prosecution, refusals to approve new products
and withdrawal of existing approvals, as well as enhanced product liability
exposure, any of which could have a material adverse effect on our business,
financial condition and results of operations.
19
21
Sales of our products outside the U.S. will be subject to foreign
regulatory requirements governing clinical trials, marketing approval,
manufacturing and pricing. Non-compliance with these requirements could result
in enforcement actions and penalties or could delay introduction of our products
in certain countries.
Our current clinical trial strategy for the development of drugs for the
prevention of precancerous lesions assumes that, for precancer trials, the FDA
will accept reduction in the formation of precancerous lesions as an endpoint.
To date, the FDA has not approved any compounds which are solely chemoprevention
compounds, and there can be no assurance that the FDA will approve such
compounds in the future. Should the FDA require us to demonstrate the efficacy
of Aptosyn(TM) (exisulind) in the reduction of certain cancers or in overall
mortality rates resulting from certain cancers, our clinical trial strategy for
precancerous conditions would be materially and adversely affected. Significant
additional time and funding would be required to demonstrate such efficacy. For
these and other reasons, we may not be able to successfully develop a safe and
efficacious chemoprevention product. If we do succeed in obtaining approval for
a cancer chemopreventive product, the product may not be commercially viable or
accepted in the market place.
In 1988 and again in 1992, the FDA issued regulations intended to expedite
the development, evaluation and marketing of new therapeutic products to treat
life-threatening and severely debilitating illnesses for which no satisfactory
alternative therapies exist. One program under these regulations provides for
early consultation between the sponsor and the FDA in the design of both
preclinical studies and clinical trials. Another program provides for
accelerated approval based on a surrogate endpoint. This does not mean that any
future products CPI may develop will be eligible for evaluation by the FDA under
these regulations. Nor does this mean that Aptosyn(TM) (exisulind) or any future
products we may develop, if eligible for these programs, will be approved for
marketing sooner than would be traditionally expected, if ever. Regulatory
approval granted under these regulations may be restricted by the FDA as
necessary to ensure the safe use of the drug. In addition, post-marketing
clinical studies may be required. If Aptosyn(TM) (exisulind) or any of our
future products do not perform satisfactorily in such post-marketing clinical
studies, they would likely be required to be withdrawn from the market.
We have obtained "Orphan Drug" status for Aptosyn(TM) (exisulind) for the
treatment of FAP. "Orphan Drug" status may provide an applicant with exclusive
marketing rights in the U.S. for a designated indication for seven years
following marketing approval. In order to obtain such benefits, however, the
applicant must be the sponsor of the first NDA approved for that drug and
indication. Moreover, amendment of the Orphan Drug Act by the U.S. Congress and
reinterpretation by the FDA are frequently discussed. Therefore, the precise
scope of protection that may be afforded by Orphan Drug status in the future is
uncertain. The current level of marketing exclusivity may not remain in effect.
The FDA has granted us "Fast Track" designation for Aptosyn(TM) (exisulind)
for the reduction in development of new polyps in patients with FAP. The Fast
Track Program is a new mechanism, introduced in the FDA Modernization Act of
1997, for facilitating the development and expediting the approval of drugs that
demonstrate the potential to address unmet medical needs for serious and
life-threatening conditions. This mechanism builds upon existing FDA programs
for accelerated approval of such drugs.
Among other things, the Fast Track provisions provide for rolling review of
the NDA (marketing application) for the Fast Track drug, so that portions of the
application can be submitted and reviewed by FDA before the complete application
is submitted. This can help to accelerate FDA review. Under Fast Track
designation, we submitted to the FDA the chemistry section of our NDA with
respect to Aptosyn(TM) (exisulind) for FAP in November 1998, the
pharmacology/toxicology section in December 1998, and the clinical portion in
August 1999. See the discussion of the Phase III trial above under "Products in
Development." The FDA has not yet approved the NDA for Aptosyn(TM) (exisulind);
it issued a "not approvable" letter in September 2000. Clearly, the FDA will not
approve the NDA any sooner than would be traditionally expected, and the FDA may
not approve the NDA at all. See discussion under "Clinical Development of
Aptosyn(TM) (exisulind) for Precancerous Lesions" and "Familial Adenomatous
Polyposis (FAP)."
In most cases, pharmaceutical companies rely on patents to provide market
exclusivity for the periods covered by the patents. See "Patents, Trademarks and
Proprietary Technology" above. In the U.S., the Drug
20
22
Price Competition and Patent Term Restoration Act of 1984 (the "Hatch-Waxman
Act") permits an extension of patents in certain cases to compensate for patent
time expended during clinical development and FDA review of a drug. In addition,
the Hatch-Waxman Act establishes a period of market exclusivity, independent of
any patents, during which the FDA may not accept or approve abbreviated
applications for generic versions of the drug from other sponsors, although the
FDA may accept and approve long-form applications for the drug. The applicable
period of market exclusivity for a drug containing an active ingredient not
previously approved is five years. There is no assurance that all or any of our
products, if approved, will receive market exclusivity under the Hatch-Waxman
Act. Failure to receive such exclusivity could have an adverse effect on our
business, financial condition and results of operations at that time.
Among the requirements for product approval is the requirement that
prospective manufacturers conform to the GMP standards, which also must be
observed at all times following approval. Accordingly, manufacturers must
continue to expend time, money and effort in production, record keeping and
quality control to ensure compliance with GMP standards. Failure to so comply
subjects the manufacturer to possible FDA action, such as the suspension of
manufacturing or seizure of the product. The FDA may also request recall of
products.
Health care reform legislation, if enacted, could result in significant
change in the financing and regulation of the health care business. Also,
legislation affecting coverage and reimbursement under Medicare, Medicaid and
other government medical assistance programs has been enacted and modified from
time to time. The future course of legislation is unpredictable. Changes
adversely affecting drug pricing, drug reimbursement and prescription benefits,
among other changes, could have a materially adverse effect on our business,
financial condition and results of operations at that time.
MANUFACTURING
We have no facilities for the manufacture, formulation or finishing of
products for clinical or commercial use. We rely on third parties to produce our
compounds for research, clinical and commercial purposes (both bulk drug and
final pharmaceutical forms). We will need to develop our own facilities or
continue to contract with third parties for the production of products, if any,
that we may develop for our own account or in connection with collaborative
arrangements in which we have retained manufacturing rights. See under "Risk
Factors" below the section discussing our lack of manufacturing experience and
our reliance on contract manufacturers and suppliers.
MARKETING AND SALES
To date we have established our own marketing organization and have
established a third-party sales force through an agreement with Innovex to
promote Nilandron(R) (nilutamide) in the U.S and Puerto Rico. The sales force
consists of approximately 13 people who promote Nilandron(R) (nilutamide) to
urologists. To date, none of our own products have been approved for marketing.
We intend to evaluate and consider alternatives for marketing and selling our
products when they are approved, if ever. We may market and sell our products on
our own, through a third-party sales force, or, if appropriate, we may enter
into co-marketing or other agreements with others such as pharmaceutical or
biotechnology companies to market and sell our products.
We have entered into distribution agreements for Aptosyn(TM) (exisulind) in
Canada and Israel. If we receive approvals to market our products in
international markets, we anticipate marketing our products internationally by
entering into strategic alliance agreements with organizations that have local
resources and expertise. See under "Risk Factors" below the section discussing
our lack of sales and marketing experience and our dependence on third parties.
EMPLOYEES
As of January 31, 2001, CPI employed approximately 60 persons full-time.
21
23
EXECUTIVE OFFICERS
ROBERT J. TOWARNICKI, 49, has served as Chief Executive Officer and a
Director of CPI since October 1996; as President of CPI since January 1998; and
as Chairman of the Board of Directors since May 31, 2000. Prior to joining CPI,
from 1992 to 1996, he served as President, Chief Operating Officer, a director
and most recently as Executive Vice President of Integra LifeSciences
Corporation, which is the publicly-held parent firm for a group of biotechnology
and medical device companies; including Collatech, Inc., ABS LifeSciences Inc.,
Telios Pharmaceuticals, Inc. and Vitaphore Corporation. In addition, from 1991
to 1992, he served as Founder, President and Chief Executive Officer of MediRel,
Inc. From 1989 to 1991, he was General Manager of Focus/MRL, Inc.; from 1985 to
1989, he was Vice President of Development and Operations for Collagen
Corporation and from 1974 to 1985, he held a variety of operations management
positions at Pfizer, Inc. and Merck & Co., Inc. Mr. Towarnicki was a Ph.D.
candidate in Pharmaceutical Chemistry at Temple University School of Pharmacy
and received his M.S. and B.S. degrees from Villanova University.
RIFAT PAMUKCU, M.D., 43, has served as CPI's Chief Scientific Officer since
inception of the enterprise in 1990; as Vice President, Research and Development
since 1993; as Senior Vice President since 1997; as Executive Vice President
since July 2000; and as a member of the Board of Directors since September 2000.
Dr. Pamukcu is a co-founder of CPI. Prior to joining CPI full time in 1993, from
1989 to March 1993, he was Assistant Professor of Medicine at the University of
Cincinnati and co-chair of CPI's Scientific Advisory Board. He continued as an
Adjunct Assistant Professor of Medicine at the University of Cincinnati from
1993 to 1995. He was a postdoctoral fellow from 1986 to 1989 in the Division of
Gastroenterology at the University of Chicago. Dr. Pamukcu received a B.A. in
Biology from Johns Hopkins University in 1979 and an M.D. degree from the
University of Wisconsin School of Medicine in 1983.
ROBERT E. BELLET, M.D., 58, has served as Senior Vice President, Clinical
and Regulatory Affairs, since joining CPI in July 2000. Prior to joining CPI,
Dr. Bellet was Director, Medical Affairs -- Oncology at Aventis Pharmaceuticals,
Inc. (formerly Rhone-Poulenc Rorer). Prior to joining Rhone-Poulenc Rorer in
1992, Dr. Bellet held a series of academic appointments and served as a clinical
investigator at institutions including Jefferson Medical College, Fox Chase
Cancer Center, the American Oncologic Hospital and Temple University. He was
also an independent investigator for the National Cancer Institute during 1972-
1992. Dr. Bellet is a Fellow of the American College of Clinical Pharmacology
and the American College of Physicians. He received his M.D. degree from
Jefferson Medical College.
MARTHA E. MANNING, ESQ., 46, has served as Senior Vice President, General
Counsel and Secretary since joining CPI in October 2000. From 1993 to 1999 she
served as General Counsel and Secretary of U.S. Bioscience, Inc., as a Vice
President from 1993-1996, as a Senior Vice President from 1996-1998 and as an
Executive Vice President from 1998-1999. From 1988 to 1993 she served as General
Counsel of The Wistar Institute, a premier biomedical research institution. From
1983 to 1988 she was an associate of the law firm of Morgan, Lewis & Bockius.
She served as a financial analyst with the U.S. Department of the Treasury from
1978 to 1980. She received a J.D. from the University of Pennsylvania Law School
and B.B.A. from the University of Massachusetts.
BRIAN J. HAYDEN, 49, has served as Vice President, Finance and Chief
Financial Officer of CPI since November 1997 and as Treasurer since June 1998.
Prior to joining CPI, during 1996 and 1997, he served as Vice President of
Finance and Administration for NeoStrata, Inc., a dermatology company, and Vice
President and Chief Financial Officer of Micrus Corporation, a medical device
company. From 1992 to 1996, he served as Vice President, Finance, Chief
Financial Officer and Treasurer of Biomatrix, Inc. From 1976 to 1992, Mr. Hayden
served in senior financial management positions in the pharmaceutical,
biotechnology and health care industries, including Hoffmann-La Roche, Inc. From
1973 to 1976 he served on the audit staff of Coopers and Lybrand LLP. Mr. Hayden
received a B.B.A. in Accounting from Loyola University of Chicago and completed
graduate courses at Seton Hall University.
LLOYD G. GLENN, 45, has served as Vice President, Marketing of CPI since
June 1998 and as Vice President, Sales and Marketing since January 2000. Prior
to joining CPI, from 1995 to 1998, he served as Vice President of Marketing for
Athena Neurosciences, Inc., the Neurological Division of Elan. From 1983 to
22
24
1994, he served in a series of sales management positions, ultimately serving as
Senior Product Manager for the Pharmaceutical Division of Allergan, Inc. His
additional past experience includes positions at Block Drug, from 1982 to 1983,
and Airwork, a subsidiary of Purex, Inc. from 1981 to 1982. Mr. Glenn received
his B.S. degree in marketing from Brigham Young University.
23
25
RISK FACTORS
The following risk factors relate to the business of the Company and
qualify the statements made in this report about the business of the Company.
These factors, among others, could cause actual results to differ materially
from those contained in forward-looking statements made in this report and/or
presented elsewhere by management from time to time. The subheadings below
identify the risks discussed but cannot do so completely. Each subsection may
relate to more than one aspect of the Company's business. Accordingly, each risk
factor should be considered carefully in evaluating the business of the Company
and any investment in the Company. These risk factors should be read in
conjunction with the related descriptions of the business of the Company
contained in this report. Attention is also directed to the SEC filings of the
Company on Forms 10-K, 10-Q, 8-K and S-3, particularly the sections entitled
"Business Description," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Risk Factors" and "Other Events."
Prospective investors should carefully consider the following risk factors
and the other information included in this report, including the documents
incorporated by reference in this report, before deciding to invest in the
common stock.
WE HAVE A HISTORY OF NET LOSSES AND MAY NEVER BECOME PROFITABLE.
We are a development-stage pharmaceutical company. Our business has
experienced significant operating losses since its inception in 1990. We have
not received any revenue from the sale of products and none of our product
candidates has been approved for marketing. As of December 31, 2000, we had an
accumulated deficit of $91,880,302. We expect to incur additional operating
losses for at least the next several years and expect cumulative losses to
increase substantially as research and development efforts and preclinical and
clinical testing expand. If we succeed in obtaining marketing approval for any
of our product candidates, we will incur significant manufacturing and marketing
costs. Among other things, our ability to achieve profitability is dependent on
our ability, alone or with others, to:
- obtain additional financing;
- successfully complete the development of our product candidates;
- obtain the required regulatory approvals;
- successfully manufacture and market, or have others successfully
manufacture and market, our product candidates; and
- gain market acceptance for our product candidates.
We may never achieve profitability.
WE ARE AT AN EARLY STAGE OF DEVELOPMENT, AND HAVE NO PRODUCTS APPROVED FOR SALE;
ONLY TWO OF OUR PRODUCT CANDIDATES HAVE BEEN SUBJECT TO CLINICAL STUDIES, AND
THE FDA HAS ISSUED A "NOT APPROVABLE" LETTER WITH RESPECT TO OUR NEW DRUG
APPLICATION, OR NDA, FOR USE OF APTOSYN(TM) (EXISULIND) IN FAMILIAL ADENOMATOUS
POLYPOSIS, OR FAP; OUR LONG-TERM VIABILITY WILL BE IMPAIRED IF WE ARE UNABLE TO
OBTAIN REGULATORY APPROVAL FOR, OR SUCCESSFULLY MARKET, OUR PRODUCT CANDIDATES.
We have only two product candidates that have been subject to clinical
trials: Aptosyn(TM) (exisulind) and CP461. Our business is significantly
dependent upon the successful development and approval of these product
candidates for one or more cancerous or precancerous disease conditions.
The first disease condition for which we have been clinically testing
Aptosyn(TM) (exisulind) is FAP, an inherited disease characterized by the
development of hundreds to thousands of polyps in the colon and the progression
of colon cancer if left untreated. In August 1999, we submitted a NDA to the FDA
for Aptosyn(TM) (exisulind) in the treatment of FAP. On September 25, 2000, the
FDA issued a "not approvable" letter noting deficiencies and finding that the
information presented as to the safety and efficacy of Aptosyn(TM) (exisulind)
for the treatment of FAP was inadequate.
24
26
We have notified the FDA that we intend to amend the NDA and meet with the
FDA to discuss the deficiencies noted and the need for additional data,
including the possible requirements for additional clinical data. If the FDA
requires that we conduct additional clinical trials, we may have difficulty
enrolling sufficient patients that meet the study eligibility criteria. Even if
we conduct additional clinical trials (which would be time-consuming and
expensive), we cannot be sure that we will be able to provide the FDA with the
information it requires, or that the FDA will ever approve the NDA for FAP. The
approval of Celebrex(R) (celecoxib), a commercially available drug marketed by
Pharmacia Corporation, for use in FAP patients may make it more difficult for us
to achieve regulatory approval of Aptosyn(TM) (exisulind) for use in FAP. The
Company is evaluating the FAP program, including the regulatory and competitive
environment. The future of the FAP program is uncertain.
Even if the FDA were to approve the NDA for FAP, the commercial potential
of Aptosyn(TM) (exisulind) would be limited, because persons with FAP represent
only a relatively small market.
In order to market Aptosyn(TM) (exisulind) for other indications, it will
be necessary for us to file NDAs for the additional indications. However, in
order to receive FDA approval to market the drug for each indication, we must
successfully complete lengthy clinical trials demonstrating the safety and
efficacy of the drug for that particular indication. We may not successfully
complete these clinical trials; even if we do, we may not receive regulatory
approval. If we are not able to obtain FDA approval for any indication with
substantial market potential, our ability to ever become profitable would be
impaired.
We are conducting early-stage clinical trials of CP461. These clinical
trials may fail to yield data that are favorable or useful for purposes of
further developing this product candidate and ultimately seeking regulatory
approval for marketing it. We have not developed any other compound to the
extent necessary to commence clinical trials.
We are investigating Aptosyn(TM) (exisulind) and CP461 in combination with
other approved chemotherapeutic agents. While we have scientific rationale for
the combinations under investigation, there can be no assurance that the
combinations will be more effective than the single approved chemotherapeutic
agent for the disease indication being investigated. The combination of these
agents may not result in increased efficacy and may even interfere with the
efficacy of the chemotherapeutic agent being combined with our products. There
is also risk that the combinations may result in unexpected toxicity, or
increase side effects associated with the individual drugs to an unacceptable
level.
Preclinical and clinical studies of our product candidates may not display
the safety and efficacy necessary to obtain regulatory approvals. Drug
development is a highly uncertain process. Pharmaceutical and biotechnology
companies have suffered significant setbacks in advanced clinical trials, even
after experiencing promising results in earlier trials. Data obtained from tests
are susceptible to varying interpretations which may delay, limit or prevent
regulatory approval. Assessing clinical trial results of combination therapy
studies may be more difficult and may add additional complexity to
interpretation of those results. Regulatory authorities may refuse or delay
approval as a result of many other factors, including changes in regulatory
policy during the period of product development. Product candidates that appear
to be promising at earlier stages of development may not reach the market or be
marketed successfully for a number of reasons, including the following:
- researchers may find during later preclinical testing or clinical trials
that the product candidate is ineffective or has harmful side effects;
- variability in the number and types of patients available for clinical
studies;
- new information about the mechanisms by which a drug candidate works may
adversely affect its development;
- the product candidate may fail to receive necessary regulatory approval
or clearance;
- the product candidate may be too difficult to manufacture on a large
scale;
- the product candidate may be too expensive to manufacture or market;
25
27
- the product candidate may not achieve broad market acceptance;
- others may hold proprietary rights that will prevent the product
candidate from being marketed; or
- others may market equivalent or superior products.
Our ability to market Aptosyn(TM) (exisulind) in a disease indication is
dependent on our ability to provide the FDA with sufficient data to support
approval of an NDA for that disease indication. We cannot assure that we will
ever be able to provide such information. With respect to CP461, and any other
compound that we may decide to develop, development may not be complete and
marketing of such product candidates may not occur for at least several years,
if at all. We have limited experience in managing clinical trials, and delays or
terminations of clinical trials we undertake in the future could impair our
development of product candidates. Delays or terminations could result from a
number of factors, including stringent enrollment criteria, slow rate of
enrollment, size of the patient population, having to compete with other
clinical trials for eligible patients, geographical considerations and others.
The area of cancer prevention is not thoroughly understood. With limited
exceptions, the FDA has not approved any drug for the prevention of precancerous
lesions or cancer. The FDA sometimes revises its views as to the prerequisites
for drug approvals in these areas, and such revisions could adversely affect our
programs. The FDA may require that a drug candidate intended to treat
precancerous lesions or prevent cancer be shown to be effective not only in
reducing precancerous lesions or other precancerous symptoms, but also in
preventing actual cancer, which may require clinical trials following large
numbers of patients over long periods of time.
We and our collaborators may not succeed in our research and product
development efforts and we may not be successful in marketing any approved
products. Moreover, after commercial introduction of a new product, discovery of
problems through adverse event reporting could result in restrictions on the
product, including recall or withdrawal from the market and, in certain cases,
civil or criminal penalties resulting from actions by regulatory authorities or
damages from product liability judgments. Products introduced into the market
are subject to the risk that physicians may choose not to use the products and
providers of health care reimbursement may choose not to reimburse for the use
of the products. If we are unable to complete clinical trials, obtain regulatory
approval or successfully market our products, our long-term viability will be
threatened.
OUR BUSINESS WILL BE HARMED IF WE FAIL TO OBTAIN THE CAPITAL NECESSARY TO FUND
OUR OPERATIONS.
We believe that our available cash will be sufficient to fund operations
into the second half of 2002, and we will need to raise substantial additional
funds to continue our business activities. Among other things, we anticipate
that we will devote expenditures to the following:
- additional clinical studies relating to Aptosyn(TM) (exisulind) in
connection with our attempt to obtain FDA approval of Aptosyn(TM)
(exisulind) in one or more cancerous or precancerous disease indications;
- additional clinical trials for CP461;
- preclinical studies and clinical trials relating to additional compounds
for cancerous and precancerous disease conditions;
- regulatory approval processes;
- drug development and formulation;
- production of product candidates for clinical trials;
- basic research; and
- establishment of sales, marketing and distribution capabilities.
26
28
The amount of capital we may need depends on many factors, including:
- whether the FDA approves the NDA for Aptosyn(TM) (exisulind) for the FAP
indication;
- whether the FDA approves any future NDA for Aptosyn(TM) (exisulind) with
regard to any other indication;
- the progress of our research and development programs;
- the progress of preclinical testing;
- the progress of clinical testing for CP461;
- the time and costs involved in obtaining regulatory approvals;
- the costs relating to patents and other intellectual property;
- our ability to establish collaborative arrangements;
- the effect of any changes or development in our existing collaborative
relationships;
- the effect of competing technological and market developments; and
- our ability to successfully commercialize an approved product candidate.
We do not know whether additional financing will be available on acceptable
terms when needed. We may seek to raise funds through public or private equity
offerings or debt financings or through corporate collaborations and licensing
arrangements.
If we raise additional capital by issuing equity securities, our
stockholders' percentage ownership will be reduced, and our stockholders may
experience substantial dilution. At the time we are trying to raise capital,
market conditions may be adverse. Any equity securities issued may also provide
rights, privileges or preferences superior to the common stock. If we raise
additional funds by issuing debt securities, we may be subject to significant
restrictions on our operations. If we raise additional funds through
collaborations and licensing arrangements, we may be required to relinquish some
rights to our technologies or product candidates, or grant licenses on terms
that are not favorable to us.
If adequate funds are not available on acceptable terms, our ability to
fund our operations, develop products or technologies or otherwise respond to
competitive pressures could be significantly delayed or limited and we may have
to reduce or cease our operations. If additional funds become available, there
can be no assurance that we can accurately predict the time and costs required
to complete development programs or that we will not substantially exceed our
budgets or that revenue forecasts, if made, will not prove inaccurate.
THE EXERCISE OF OUTSTANDING WARRANTS AND STOCK OPTIONS COULD CAUSE SUBSTANTIAL
DILUTION.
As of December 31, 2000, our outstanding equity securities included:
- warrants, outstanding or issuable, to purchase 4,503,249 shares of our
common stock for an exercise price of $12.00 per share; and
- options, exercisable at various exercise prices between $0.32 and $49.88,
to purchase 3,432,646 shares of our common stock.
Investors in our common stock could experience substantial dilution of
their investment if these warrants and options are exercised.
FUTURE SALES OF SHARES MAY DEPRESS THE PRICE OF OUR COMMON STOCK.
If stockholders sell a substantial number of shares of our common stock in
the public market, or investors perceive that these sales might occur, the
market price of our common stock could decrease. Such a decrease could make it
difficult for us to raise capital by selling our stock. To the extent additional
shares of capital
27
29
stock are issued, investors purchasing our common stock or securities
convertible into common stock may incur additional dilution.
OUR BUSINESS MAY BE HARMED BY PENDING LITIGATION.
Following our announcement on February 1, 1999 that we anticipated a delay
in filing the NDA for Aptosyn(TM) (exisulind) for FAP, five stockholder class
actions were filed against us and certain of our officers and directors. These
actions were consolidated into one action and, in June 1999, a consolidated
amended complaint was filed on behalf of a class of all purchasers of our common
stock between October 7, 1998 and February 2, 1999. The complaint alleged that
we violated antifraud and other provisions of the federal securities laws by
making materially false and misleading statements relating to, among other
things, the progress of our clinical trials. This action is pending in the
United States District Court for the Eastern District of Pennsylvania. We filed
a motion to dismiss the complaint, which motion has been denied by the District
Court. Our request to the United States Third Circuit Court of Appeals to review
the District Court's denial of our motion to dismiss was denied by the Circuit
Court. The case is currently in discovery which we expect will be completed by
the second quarter of 2001. Dispositive motions and pretrial proceedings are to
be filed shortly after discovery ends. While we are vigorously defending the
litigation, we cannot be sure that we will prevail. The cost of completing
discovery, filing dispositive motions and proceeding through trial and appeals
will be significant and will further deplete available insurance. If the costs
of this litigation are in excess of available insurance, and particularly if a
judgment were rendered in excess of available insurance, it could have a
material adverse effect on the Company.
Following our announcement on September 22, 2000 that the FDA had advised
us that our NDA for FAP was not approvable, our stock price dropped. On March
13, 2001, two shareholders filed a class action in the United States District
Court in Philadelphia against the Company, and certain of its officers and
directors alleging violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934. The complaint was filed on behalf of persons who purchased
our securities from October 27, 1999 through September 22, 2000. Two identical
complaints on behalf of other stockholders have subsequently been filed. The
complaints allege that the Company made false and misleading statements about
the Company's drug candidate, exisulind. The Company denies any allegations of
wrongdoing and intends to vigorously defend the litigation. While we intend to
vigorously defend this litigation, we cannot be sure that we will prevail. If
the costs of this litigation are in excess of available insurance, and
particularly if a judgment were rendered in excess of available insurance, it
could have a material adverse effect on the Company. Both this recent action,
and the earlier class action are covered by the same insurance policy which has
already been significantly eroded by the costs of defending the earlier
litigation.
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, OR TO AVOID INFRINGING
THE RIGHTS OF OTHERS, OUR ABILITY TO COMPETE EFFECTIVELY WILL BE IMPAIRED.
Our intellectual property consists of patents, licenses, trade secrets and
trademarks. Our success depends in part on our ability to:
- obtain and maintain patents and other intellectual property;
- establish and maintain trademarks;
- maintain our trade secrets;
- operate without infringing the proprietary rights of others; and
- otherwise maintain adequate protection of our intellectual property for
our technologies and products in the United States and other countries.
We have several patents and pending United States patent applications
relating to the therapeutic uses of Aptosyn(TM) (exisulind). However, the
composition of matter patent for Aptosyn(TM) (exisulind), which is desirable
because it gives patent protection for a drug's chemical compound, is not
available because Aptosyn(TM) (exisulind) was described in scientific and patent
literature over 20 years ago. Therefore, if clinical
28
30
uses of Aptosyn(TM) (exisulind) are discovered beyond those covered by our
patent claims, we may not be able to enforce our patent rights against companies
marketing the compound with respect to these other clinical uses. In general,
patent protection currently lasts only approximately 17-20 years, depending on
the filing date of the patent application, the issuance date of the patent and,
sometimes, the time required for FDA approval. However, it can take many more
years than offered by patent protection to transform a drug discovery through
testing and development into a commercially viable product. Moreover, patent
applications filed by us or on our behalf may not result in patents being issued
to us. Even if a patent is issued, the patent may not afford protection against
competitors with similar technology. Others may independently develop similar
technologies or duplicate our technology. It is possible that before any of our
potential product candidates can be commercialized, the related patents may
expire, or remain in existence for only a short period following
commercialization, thus reducing the advantage of the patent.
Our commercial success depends in part on avoiding infringing patents and
proprietary rights of third parties and developing and maintaining a proprietary
position with regard to our own technologies and product candidates. The patent
positions of pharmaceutical companies, including our patent position, involve
complex legal and factual questions. Whether a company will be able to enforce
its patent cannot always be predicted with certainty. Even if we obtain patents,
we may lose part or all of them as a result of challenges by competitors. We
cannot be sure that relevant patents have not been issued, or that relevant
publications or actions by others have not occurred, that could block our
ability to obtain patents or to operate as we would like. Others may develop
similar technologies or duplicate technologies that we have developed or claim
that we are infringing their patents. As a result of these factors, we may need
to obtain patent licenses from others. However, we may be unable to obtain
patent licenses on acceptable terms. Moreover, our rights under any patent
licenses depend on maintaining our obligations to the licensor under the
applicable license agreement, and we may be unable to do so.
Extensive litigation regarding patents and other intellectual property
rights characterizes our industry. We may become involved in litigation or
interference proceedings declared by the United States Patent and Trademark
Office, or oppositions or other intellectual property proceedings outside of the
United States. If any of our competitors have filed patent applications or
obtained patents that claim inventions that we also claim, we may have to
participate in an interference proceeding to determine priority of invention
and, therefore, who has the right to a patent for these inventions or
discoveries in the United States. If a litigation or interference proceeding is
initiated, we may have to spend significant amounts of time and money to defend
our intellectual property rights or to defend infringement claims of others.
Litigation or interference proceedings could divert our management time and
effort. Even unsuccessful claims against us could result in significant legal
fees and other expenses, diversion of management time and disruption in our
business. Any of these events could harm our ability to compete and adversely
affect our business.
An adverse ruling arising out of any intellectual property dispute could
invalidate or diminish our intellectual property position. An adverse ruling
could also subject us to significant liability for damages, prevent us from
using processes or products, or require us to license disputed rights from third
parties. Costs associated with licensing arrangements entered into to resolve
litigation or an interference may be substantial and could include ongoing
royalties. We may not be able to obtain any necessary licenses on satisfactory
terms.
In addition, we rely on trade secrets to protect technology. We attempt to
protect our proprietary technology by requiring our employees to execute
confidentiality and assignment of invention agreements. We also require our
consultants and certain contractors to execute confidentiality agreements.
However, these agreements could be breached and, in the event they are breached,
our remedies may be inadequate. In addition, our trade secrets may otherwise
become known or independently discovered by our competitors. Our business
requires the use of consultants and research collaborators in connection with
the development of our product candidates. These arrangements involve the
exposure of our trade secrets to the scrutiny of others, which increases the
risk that we may lose our trade secrets. If we lose any of our trade secrets,
our business and ability to compete could be harmed.
29
31
WE MAY NOT BE ABLE TO KEEP PACE WITH TECHNOLOGICAL CHANGES IN THE
BIOPHARMACEUTICAL INDUSTRY, WHICH MAY PREVENT US FROM COMMERCIALIZING OUR
PRODUCT CANDIDATES.
Our business is characterized by extensive research efforts and rapid
technological progress. New developments in molecular biology, medicinal
chemistry and other fields of biology and chemistry are expected to continue at
a rapid pace in both industry and academia. Research and discoveries by others
may render some or all of our programs or product candidates non-competitive or
obsolete. Our business strategy is based, in part, upon the application of our
technology platform to discover and develop pharmaceutical products to prevent
cancer or treat cancer through the use of selective apoptosis, which means
causing cell death in precancerous and cancerous cells. This strategy is subject
to the risks inherent in the development of new products using new and emerging
technologies and approaches.
Unforeseen problems may develop with our technologies or applications.
Further research may alter our research findings or lead to new research
insights which adversely impact our research efforts. We may not be able to
successfully address technological challenges that we encounter in our research
and development programs and may not ultimately develop commercially feasible
products.
WE FACE INTENSE COMPETITION WHICH COULD HARM OUR BUSINESS AND OPERATING RESULTS.
Our industry is very competitive. It is characterized by extensive research
and development efforts and rapid technological progress. Discoveries and
commercial developments by our competitors may render some or all of our product
candidates obsolete. Many of our potential competitors have far greater
resources and experience than we do. These competitors may succeed in
discovering and developing pharmaceutical products more rapidly than we do or
pharmaceutical products that are safer, more effective or less costly than any
that we may develop. Competing products may obtain regulatory approval sooner
and may be marketed more successfully than our product candidates.
There are many entities, both public and private, including well-known,
large pharmaceutical companies, chemical companies, biotechnology companies,
government agencies and research institutions, engaged in developing
pharmaceuticals for applications similar to those targeted by us. We also
compete with these organizations in recruiting and retaining qualified
scientific and management personnel.
In the fields of cancer therapy and the prevention of precancerous and
cancerous lesions, other products and procedures are in use or in development
that may compete directly with the products that we are seeking to develop and
market for cancer treatment or cancer prevention. Surgery, radiation,
chemotherapeutic agents and compounds that interfere with hormone activities
have been in use for years in the treatment of cancer. Nolvadex(R) (tamoxifen)
has been granted approval for reducing the incidence of breast cancer in women
at high risk for breast cancer. Celebrex(R) (celecoxib) has been granted
approval for use in the reduction in the number of adenomatous (or precancerous)
colorectal polyps in FAP patients as an addition to usual care (e.g., endoscopic
surveillance, surgery, etc.). A number of other pharmaceutical and nutritional
agents are being examined for their potential usefulness in the treatment of
precancerous lesions and cancer. The manufacturers of many of these products
have far greater resources and experience than we do.
OUR BUSINESS WOULD BE ADVERSELY AFFECTED IF THIRD PARTIES UPON WHOM WE PLACE
SUBSTANTIAL RELIANCE FAIL TO PERFORM THEIR OBLIGATIONS PROPERLY.
We depend on third-party contractors to perform activities on our behalf,
such as the following:
- basic laboratory research studies;
- animal toxicology studies;
- animal efficacy studies;
- human clinical trials;
- bulk drug manufacture;
- drug assay and characterization;
30
32
- product formulation and finishing;
- strategic consulting;
- commercialization planning; and
- planned product distribution.
Subject to limited exceptions in foreign markets, we do not have any
relationships with other pharmaceutical companies for the commercialization of
products. We cannot assure that we will be able to negotiate cooperative
arrangements relating to commercialization or any other aspect of our
development and marketing of products in the future should we choose to do so.
To the extent that we do not make arrangements with third parties, we must rely
on our own limited resources. Any arrangements that we enter into may not be
maintained, may not be performed properly by the third parties or may not prove
to be successful. The failure of any third party to comply with applicable
government regulations could substantially harm our development and marketing
efforts and delay or prevent regulatory approval of our product candidates. If
these third parties fail to perform their obligations properly, we may be
compelled to delay our development efforts, and our business could be harmed.
WE MUST OBTAIN REGULATORY APPROVAL TO MARKET OUR PRODUCT CANDIDATES IN THE U.S.
AND FOREIGN JURISDICTIONS.
We must obtain regulatory approval before marketing or selling our product
candidates. In the United States, we must obtain approval from the FDA for each
product candidate that we intend to commercialize. The drug development process
is typically lengthy and expensive, and FDA approval is highly uncertain.
Clinical studies which show favorable results may not be adequate for regulatory
approval. We or our third-party manufacturers must pass a pre-approval
inspection of manufacturing facilities by the FDA before the product can obtain
marketing approval. Products distributed outside the United States are also
subject to foreign government regulation.
On September 25, 2000, the FDA issued a "not approvable" letter with
respect to the NDA that we submitted in August 1999 for Aptosyn(TM) (exisulind)
for the FAP indication. We have notified the FDA that we intend to amend the NDA
and meet with the FDA to discuss the deficiencies noted in the letter and the
need for additional data, including the possible requirement for additional
clinical trials (which would be time-consuming and expensive). Regardless of any
additional activities we undertake, the NDA for FAP may never be approved. The
FDA may require additional clinical tests or other data as a condition of
approval, and these requirements may make it impractical for us to continue to
seek approval for this NDA.
None of our other product candidates has received regulatory approval to be
commercially marketed and sold. If we fail to obtain regulatory approval, we
will be unable to market and sell any of our product candidates. Because of the
risks and uncertainties in biopharmaceutical development, our product candidates
could take a significantly longer time to gain regulatory approval than we
expect or may never gain approval. If regulatory approval is delayed, our
business would be harmed.
The process of obtaining FDA and other required regulatory approvals,
including foreign approvals, often takes many years and can vary substantially
based upon the type, complexity and novelty of the product candidates involved.
This approval process is extremely expensive and uncertain. We cannot guarantee
that any of our product candidates will be approved for marketing by the FDA.
Even if regulatory approval of a product candidate is granted, we cannot be
certain that we will be able to obtain the labeling claims necessary or
desirable for the promotion of that product candidate.
EVEN IF OUR PRODUCT CANDIDATES RECEIVE REGULATORY APPROVAL, WE MAY STILL FACE
DEVELOPMENT AND REGULATORY DIFFICULTIES RELATING TO THE DRUG PRODUCTS IN THE
FUTURE.
If we receive regulatory approval of any of our product candidates, the FDA
or a comparable foreign regulatory agency may grant such approval only for a
limited indication. In addition, a marketed product, its manufacturer and the
manufacturer's facilities are subject to continual review and periodic
inspections by regulatory agencies. The discovery of previously unknown problems
with a product, manufacturer or facility
31
33
may result in restrictions on the product or manufacturer, including withdrawal
of the product from the market. The failure to comply with applicable regulatory
requirements can, among other things, result in:
- warning letters;
- fines and other civil penalties;
- suspended regulatory approvals;
- refusal to approve pending applications or supplements to approved
applications;
- refusal to permit exports from the United States;
- product recalls;
- seizure of products;
- injunctions;
- operating restrictions;
- total or partial suspension of production; and
- criminal prosecutions.
Even if we obtain regulatory approval, we may be required to undertake
post-approval trials. In addition, side effects identified or better understood
after a drug is on the market or the occurrence of manufacturing problems could
result in withdrawal of approval, or require reformulation of the drug,
additional preclinical testing or clinical trials, changes in labeling of the
product, and/or additional marketing applications.
If we receive FDA approval, we will be subject to ongoing FDA obligations
and continued regulatory review. In particular, we or third-party manufacturers
that we use will be required to adhere to requirements pertaining to the FDA's
current Good Manufacturing Practices requirement, commonly known as GMP. Under
current GMP, we are required to manufacture our products and maintain our
records in a prescribed manner with respect to manufacturing, testing and
quality control activities. We will also be subject to ongoing FDA requirements
for submission of safety and other post-market information. Similar regulatory
requirements are in place in foreign countries for similar products approved in
those countries. Our failure, or our third-party manufacturer's failure, to
comply with the FDA and other applicable regulators could cause our business to
be significantly harmed.
REIMBURSEMENT FOR ANY OF OUR FUTURE PRODUCTS MAY NOT BE AVAILABLE, WHICH MAY
HARM OUR RESULTS OF OPERATIONS.
Our ability to commercialize our products successfully will depend, in
part, on the extent to which reimbursement for the cost of our products and
related treatments will be available from government health administration
authorities, such as Medicare and Medicaid in the United States, private health
insurers and other organizations. Significant uncertainty exists as to the
reimbursement status of newly approved health care products, particularly for
indications for which there is no current effective treatment or for which
medical care typically is not sought. Adequate third-party coverage may not be
available to enable us to maintain price levels sufficient to realize an
appropriate return on our investment in product research and development. If
adequate coverage and reimbursement levels are not provided by government and
third-party payors for use of our products, our products may fail to achieve
market acceptance and our results of operations will be harmed.
Our future revenues, profitability and access to capital will also be
affected by the continuing efforts of governmental and private third-party
payors to contain or reduce the costs of health care through various means.
There have been a number of federal, state and foreign proposals to control the
cost of drugs through legislation or regulation. We are unsure of the form that
any legislation on the subject may have or what actions federal, state, foreign,
and private payors may take in response to any enacted legislation. Therefore,
we cannot predict the effect of any implemented reform on our business.
32
34
IF WE ARE UNABLE TO MANUFACTURE OR CONTRACT WITH THIRD PARTIES TO MANUFACTURE
PRODUCT CANDIDATES IN SUFFICIENT QUANTITIES AND AT AN ACCEPTABLE COST, WE MAY BE
UNABLE TO COMPLETE CLINICAL TRIALS AND COMMERCIALIZE THESE PRODUCT CANDIDATES.
Our completion of any preclinical trials for our product candidates
involving large quantities of chemical compounds, or any future clinical trials
and commercialization of product candidates, will require access to, or
development of, facilities to manufacture a sufficient supply of our product
candidates. We do not have the facilities or experience to manufacture the
quantities of product candidates necessary for any such trials or commercial
purposes on our own and do not intend to develop or acquire facilities for the
manufacture of such quantities of product candidates in the foreseeable future.
We have entered into agreements with third-party manufacturers for the
manufacture of Aptosyn(TM) (exisulind) and intend to rely on third-party
contract manufacturers for our other product candidates. However, except with
respect to Aptosyn(TM) (exisulind) and CP461, we have not tested the
manufacturing processes for our product candidates in quantities needed for
clinical trials or commercial sales.
Our manufacturing strategy presents the following risks:
- we may not be able to locate acceptable manufacturers or enter into
favorable long-term agreements with them;
- third parties may fail to successfully manufacture our product candidates
or to manufacture them in a cost effective and/or timely manner;
- delays in scale-up to commercial quantities could delay clinical studies,
regulatory submissions and commercialization of product candidates;
- we may not have intellectual property rights, or may have to share
intellectual property rights, to many improvements in the manufacturing
processes or new manufacturing processes for our product candidates;
- our product candidates require a long lead time to manufacture and the
manufacturing process is complex; and
- manufacturers of our product candidates are subject to current GMPs, and
similar foreign standards, and we do not have control over compliance
with these regulations by third-party manufacturers.
Any of these factors could delay clinical trials or commercialization of
our product candidates, entail higher costs and result in our being unable to
effectively sell any products.
IF WE ARE UNABLE TO OBTAIN RAW AND INTERMEDIATE MATERIALS NEEDED TO MANUFACTURE
OUR PRODUCTS IN SUFFICIENT AMOUNTS OR ON ACCEPTABLE TERMS, OUR BUSINESS WOULD
SUFFER.
We, or the manufacturers with whom we contract, may not be able to maintain
adequate relationships with current or future suppliers of raw or intermediate
materials for use in manufacturing our products. If our current manufacturing
sources and suppliers are unable or unwilling to make these materials available
to us in required quantities or on acceptable terms, we would likely incur
significant costs and delays to qualify alternative manufacturing sources and
suppliers. If we are unable to identify and contract with alternative contract
manufacturers when needed, our business could be harmed.
IF WE ARE UNABLE TO BUILD SALES, MARKETING AND DISTRIBUTION CAPABILITIES OR
ENTER INTO AGREEMENTS WITH THIRD PARTIES TO PERFORM THESE FUNCTIONS, WE WILL NOT
BE ABLE TO COMMERCIALIZE ANY OF OUR PRODUCT CANDIDATES.
We currently have limited sales and marketing capabilities. In September
2000, we began marketing and promoting the product Nilandron(R) (nilutamide), a
hormonal therapy for advanced prostate cancer, under an agreement with Aventis.
We do not expect revenues from these activities to be significant. In order to
commercialize any of our product candidates, we must either internally develop
more extensive sales, marketing and distribution capabilities or make
arrangements with third parties to perform these services.
33
35
To market any of our drug products directly, we will have to successfully
develop a marketing and sales force with technical expertise and supporting
distribution capabilities or our business prospects would be impaired. To
promote any of our drug products through third parties, we would have to locate
suitable third parties for these functions and enter into agreements with them
on acceptable terms. If we enter into co-promotion or other licensing
arrangements, any product revenues would likely be lower than if we directly
marketed and sold our products, and any revenues we may receive would depend
upon the efforts of third parties, which efforts may not be successful. If these
third parties do not succeed in carrying out their contractual duties, our
business would suffer.
WE DEPEND ON KEY PERSONNEL; IF WE ARE NOT ABLE TO RETAIN THESE EMPLOYEES OR
RECRUIT ADDITIONAL QUALIFIED PERSONNEL, OUR BUSINESS WOULD BE HARMED.
Because of the specialized scientific nature of our business, we are highly
dependent upon qualified scientific, technical and managerial personnel. We also
rely on consultants and advisors to assist us in formulating our research and
development strategy. There is intense competition for qualified personnel in
the pharmaceutical field. Therefore, we may not be able to attract and retain
the qualified personnel or consultants necessary for the development of our
business. The loss of the services of existing personnel, as well as the failure
to recruit additional key scientific, technical and managerial personnel in a
timely manner, would harm our research and development programs and our
business. The law provides only limited protection against competition by key
employees who leave the company. We do not maintain key man life insurance on
any of our employees.
IF WE ENGAGE IN ANY ACQUISITION OR BUSINESS COMBINATION, WE WILL INCUR A VARIETY
OF RISKS THAT COULD ADVERSELY AFFECT OUR BUSINESS OPERATIONS.
From time to time we have considered, and we will continue to consider in
the future, if and when any appropriate opportunities become available,
strategic business initiatives intended to further the development of our
business. These initiatives may include acquiring businesses, technologies or
products or entering into a business combination with another company. If we do
pursue such a strategy, we could, among other things:
- issue equity securities that would dilute our stockholders' percentage
ownership;
- incur substantial debt, which may place constraints on our operations;
- spend substantial operational, financial and management resources in
integrating new businesses, technologies and products;
- assume substantial actual or contingent liabilities; or
- merge with, or otherwise enter into a business combination with, another
company, in which our stockholders would receive cash or shares of the
other company, or a combination of both, on terms that our stockholders
might not deem desirable.
- We are not in a position to predict what, if any, collaborations,
alliances or transactions may result or how, when or if they will have a
material effect on the Company or the development of our business.
WE MAY BE SUED FOR PRODUCT LIABILITY.
Because we are involved in the drug discovery and development process, our
business exposes us to potential product liability risks as our product
candidates are clinically tested and when and if our drug candidates are
commercialized. We may not be able to avoid product liability claims. This
applies not only to our own products but also to products that we may market for
others, including Nilandron(R) (nilutamide), which we market for Aventis.
Product liability insurance for the pharmaceutical industry is generally
expensive, if it is available at all. If we are unable to obtain sufficient
insurance coverage on reasonable terms or to otherwise protect against potential
product liability claims, we may be unable to commercialize our product
candidates. We currently have clinical trial liability insurance in the amount
of $10 million, but there can be no assurance that we will be able to maintain
such insurance or that such insurance is adequate. If a
34
36
plaintiff brings a successful product liability claim against us in excess of
our insurance coverage, if any, our business could be harmed.
WE MAY BE SUBJECT TO SUBSTANTIAL LIABILITIES IN CONNECTION WITH THE HANDLING AND
DISPOSAL OF HAZARDOUS MATERIALS.
Our research and development involves the controlled use of hazardous
materials, chemicals and various radioactive compounds. We cannot completely
eliminate the risk of accidental contamination or injury from these materials.
In the event of contamination or injury, for which we do not have liability
insurance coverage, we could be held liable for resulting damages, which could
exceed our resources. In addition, if we develop manufacturing capacity, we may
incur substantial costs in complying with environmental regulations.
Furthermore, we do not have mass tort insurance coverage or environmental
insurance coverage, so that liabilities resulting from claims involving our
handling or disposal of hazardous materials could severely damage our business.
OUR COMMON STOCK PRICE WILL LIKELY CONTINUE TO BE HIGHLY VOLATILE.
Our stock price, like the market price of the stock of other
development-stage pharmaceutical companies, has been highly volatile. Companies
may be sued when their stock price drops. Our stock price dropped substantially
after we made an announcement on February 1, 1999 that we anticipated a delay in
filing the NDA for Aptosyn(TM) (exisulind) for FAP. Our stock price also dropped
substantially on September 25, 2000 after we announced that the FDA had informed
us that the FDA was issuing a "not approvable" letter in connection with the
pending NDA for FAP. Our stock price has also fluctuated substantially in
response to statements which have appeared in the media. Other factors that may
have a significant impact on our stock price include:
- announcements of technical innovations or new commercial products by us
or our competitors;
- regulatory events relating to our product candidates;
- public concern as to the safety or other implications of pharmaceutical
products;
- patent or proprietary rights developments;
- results of preclinical studies or clinical trials;
- conditions affecting the pharmaceutical industry; and/or
- stock market conditions.
WE DO NOT INTEND TO PAY CASH DIVIDENDS.
We have never paid any cash dividends and do not anticipate paying cash
dividends in the foreseeable future.
OUR CERTIFICATE OF INCORPORATION, BYLAWS AND STOCKHOLDER RIGHTS PLAN, AND
CERTAIN PROVISIONS OF DELAWARE LAW, COULD DISCOURAGE A THIRD PARTY FROM MAKING A
TAKEOVER OFFER THAT COULD BE BENEFICIAL TO OUR STOCKHOLDERS.
Various provisions of our certificate of incorporation and bylaws and
Delaware law could delay or prevent a third party from acquiring shares of our
common stock or replacing members of our board of directors. Our certificate of
incorporation provides for the division of our board of directors into three
classes and for the ability of the board of directors to issue preferred stock
without stockholder approval. Under this authority, the board of directors
adopted, in December 1998, a stockholder rights plan, which could have the
effect of delaying or preventing us from consummating a transaction that would
result in a change of control, even if a change of control were in the best
interests of our stockholders. In addition, Delaware law restricts the ability
of stockholders to take action to acquire control of us through specified
business combination transactions.
These provisions may discourage a future acquisition of our company even if
our stockholders would receive an attractive value for their shares or if a
significant number of our stockholders believed such a
35
37
proposed transaction to be in their best interest. As a result, stockholders who
desire to participate in such a transaction may not have the opportunity to do
so.
ITEM 2. PROPERTIES
CPI leases approximately 40,000 square feet of laboratory and office space
in Horsham, Pennsylvania under a ten-year lease which expires in 2008 and which
contains two five-year renewal options.
ITEM 3. LEGAL PROCEEDINGS
In February and March of 1999, five different groups of stockholders filed
class actions in the United States District Court in Philadelphia against the
Company, and certain of its officers and directors alleging violations of
Section 11 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. The complaints alleged that the Company made
false and misleading statements about the efficacy and near-term
commercialization of the Company's lead drug candidate, exisulind. The cases
were consolidated on March 12, 1999, and a consolidated amended complaint which
asserts claims under Section 10(b) and 20(a) of the Securities Exchange Act of
1934 and SEC Rule 10-b5 was filed on June 28, 1999 seeking an unspecified amount
of damages on behalf of a class of persons who traded in the Company's
securities between October 7, 1998 and February 2, 1999. The defendants moved to
dismiss the complaint on September 21, 1999. The motion to dismiss was denied on
January 27, 2000. On February 10, 2000, defendants filed a motion for
reconsideration, or, in the alternative, certification for immediate appeal,
both of which were denied by the district court by order dated March 16, 2000.
The defendants answered the complaint on March 13, 2000. On May 24, 2000,
defendants filed a petition for writ of mandamus in the Court of Appeals for the
Third Circuit, requesting that the Court of Appeals review the district court's
denial of the motion to dismiss. The Court of Appeals denied the petition for
writ of mandamus on September 29, 2000. The parties are currently engaged in
discovery which we expect will be completed in the second quarter of 2001.
Dispositive motions and pretrial proceedings are to be filed shortly after
discovery ends. The Company denies any allegations of wrongdoing and intends to
vigorously defend the litigation.
On March 13, 2001, two stockholders filed a class action in the United
States District Court in Philadelphia against the Company, and certain of its
officers and directors alleging violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. The complaint was filed on behalf of persons
who purchased our securities from October 27, 1999 through September 22, 2000
and seeks an unspecified amount of damages on behalf of the class. Two identical
complaints on behalf of other stockholders have subsequently been filed. The
complaints allege that the Company made false and misleading statements about
the Company's drug candidate, exisulind. The Company denies any allegations of
wrongdoing and intends to vigorously defend the litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
36
38
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since November 4, 1998, the Company's Common Stock has traded on the Nasdaq
Stock Market(R) under the symbol CLPA. Prior to November 4, 1998, the Company's
Common Stock was not publicly traded. The following table sets forth for the
period indicated the high and low closing prices per share of Common Stock as
reported by the Nasdaq Stock Market(R).
2000 HIGH LOW
---- ------- -------
First Quarter..................................... $66.000 $ 9.000
Second Quarter.................................... $38.625 $17.625
Third Quarter..................................... $37.625 $ 7.016
Fourth Quarter.................................... $10.750 $ 3.250
1999
- --------------------------------------------------
First Quarter..................................... $27.250 $ 5.875
Second Quarter.................................... $14.000 $ 6.750
Third Quarter..................................... $14.438 $ 8.563
Fourth Quarter.................................... $11.750 $ 6.750
1998
- --------------------------------------------------
Fourth Quarter (commencing November 4, 1998)...... $22.000 $ 9.875
As of February 28, 2001, there were approximately 1,200 holders of record
of the Common Stock. This does not reflect beneficial stockholders who hold
their stock in nominee or "street" name through various brokerage firms.
During 2000, the Company did not sell any securities which were not
registered under the Securities Act of 1933 other than (a) 1,417,800 shares of
Common Stock issued for $18,445,051 pursuant to the exercise of previously
outstanding warrants which had been issued, and (b) a private placement of
Common Stock in November, 2000 of 3.2 million shares of Common Stock at $7.375
per share, representing net proceeds to the Company of $23.1 million and, for
each share purchased, a warrant exercisable until June 30, 2002, to purchase one
and thirty five one-hundredths shares of Common Stock at $12.00 per share, both
pursuant to the exemption provided by Section 4(2) of the Securities Act.
DIVIDENDS
The Company has never paid cash dividends on its Common Stock and does not
expect to pay cash dividends on its Common Stock for the foreseeable future.
37
39
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ -----------
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
REVENUES.......................... $ 329,694 $ -- $ -- $ -- $ --
EXPENSES:
Research and development........ 22,257,805 16,254,858 16,052,232 8,756,499 4,162,981
Selling, general and
administrative................ 7,246,582 4,849,162 4,253,537 1,967,057 663,030
------------ ------------ ------------ ------------ -----------
Operating loss.............. (29,174,693) (21,104,020) (20,305,769) (10,723,556) (4,826,011)
INTEREST INCOME, net.............. 2,257,885 1,470,298 960,333 426,644 90,807
------------ ------------ ------------ ------------ -----------
NET LOSS.......................... $(26,916,808) $(19,633,722) $(19,345,436) $(10,296,912) $(4,735,204)
============ ============ ============ ============ ===========
Basic and diluted net loss per
Common share.................. $ (0.96) $ (0.79) $ (3.04) $ (3.63) $ (1.83)
============ ============ ============ ============ ===========
Shares used in computing basic
and diluted net loss per
Common share.................. 28,003,649 24,772,256 6,369,006 2,838,814 2,587,552
============ ============ ============ ============ ===========
DECEMBER 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...... $ 49,528,407 $ 32,013,118 $ 37,232,404 $ 8,460,839 $ 644,790
Working capital (deficiency)... 46,191,753 29,106,239 33,804,194 5,384,546 (506,464)
Total assets................... 54,081,593 35,278,971 40,232,699 10,978,653 1,106,371
Long-term debt................. 457,800 33,917 159,897 9,259 62,424
Redeemable Preferred Stock..... -- -- -- 1,092,000 613
Common Stock................... 310,734 261,059 242,796 29,901 27,189
Convertible Preferred Stock.... -- -- -- 32,158,000 15,137,516
Deficit accumulated during the
development stage............ (91,880,302) (64,963,494) (45,329,772) (25,984,336) (15,687,424)
Total stockholders' equity
(deficit).................... $ 48,628,910 $ 31,462,742 $ 36,132,118 $ 6,622,429 $ (179,238)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cell Pathways, Inc. was incorporated in Delaware in July 1998 as a
subsidiary of, and, as of November 3, 1998, the successor to, a Delaware
corporation of the same name. As the context requires, the "Company" or "CPI" is
used herein to signify the successor and/or the predecessor corporations.
Certain statements in this report, and oral statements made in respect of
this report, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are those
which express plan, anticipation, intent, contingency or future development
and/or otherwise are not statements of historical fact. These statements are
subject to risks and uncertainties, known and unknown, which could cause actual
results and developments to differ materially from those expressed or implied in
such statements. Such risks and uncertainties relate to, among other factors,
the absence of approved products; history of operating losses and the need for
further financing; early stage of development; the costs, delays and
uncertainties inherent in science, basic pharmaceutical research, drug
development, clinical trials and the regulatory approval process, with respect
to both our current product candidates and our future product candidates, if
any; dependence on the development and market acceptance of Aptosyn()TM
(exisulind) for one or more significant disease indications; limitations on, or
absence of, the predictive value of data obtained in laboratory tests, animal
models and human clinical trials when planning additional steps in product
development; uncertainty of obtaining regulatory approval of any compound for
any disease indication; uncertainty and adversity arising from the action of the
U.S. Food and Drug Administration, or FDA, in issuing a "not approvable" letter
with respect to the New Drug Application, or NDA, submitted for Aptosyn(TM)
(exisulind) for the orphan drug condition of familial adenomatous polyposis, or
FAP, a rare
38
40
disease that puts those afflicted at high risk of developing colon cancer; the
timing and scope of any approval which might be received, or any failure to
receive approval, for any compound for any indication in the future; the
volatility of the market price of our Common Stock; acceptance of any product
candidates by physicians and providers of healthcare reimbursement; the actions
of competitors; the pace of technological changes in the biopharmaceutical
industry; dependence upon third parties; the validity, scope and enforceability
of patents; the risk of our pending class action securities litigations;
potential product liability claims; and availability of insurance.
These and other risks are detailed in our reports filed from time to time
under the Securities Act and/or the Securities Exchange Act, including the
sections entitled "Business," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Other Events" in
our annual reports on Form 10-K, quarterly reports on Form 10-Q and periodic
reports on Form 8-K and in such registration statements on Form S-3 as we may
file from time to time. You are encouraged to read these filings as they are
made. They are available over the Internet from the SEC in its EDGAR database at
http://www.sec.gov and from the Company. Be sure to read the "Risk Factors" in
Item 1 (and also the discussion of the related subject matters appearing in Item
1) of Form 10-K.
Given the uncertainties affecting pharmaceutical companies in the
development stage, you are cautioned not to place undue reliance on any such
forward-looking statements, any of which may turn out to be wrong due to
inaccurate assumptions, unknown risks, uncertainties or other factors. No
forward-looking statement can be guaranteed; actual future results may vary
materially.
Both forward-looking statements and statements of historic fact must be
understood in the context of the risks referred to above which characterize our
development stage business. We undertake no obligation to update or revise the
statements made herein or the risk factors that may relate thereto.
OVERVIEW
Cell Pathways, Inc. is a development stage pharmaceutical company focused
on the research, development and commercialization of products to prevent and
treat cancer. From the inception of the Company's business in 1990, operating
activities have related primarily to conducting research and development,
raising capital and recruiting personnel. The Company's initial investigational
new drug application ("IND") was filed with the U.S. Food and Drug
Administration ("FDA") in December 1993 for human clinical trials of the
Company's first product candidate, Aptosyn(TM). The Company filed an IND for its
second product candidate, CP461, in December 1998. In August 1999, the Company
submitted to the FDA a New Drug Application ("NDA") for Aptosyn(TM) for familial
adenomatous polyposis ("FAP"), an indication for which the Company had received
orphan drug designation. On September 25, 2000, the FDA issued a "not
approvable" letter noting deficiencies in the Company's NDA for Aptosyn(TM) for
FAP and finding the information provided as to the safety and efficacy of
Aptosyn(TM) to be inadequate for the FAP indication. The Company has notified
the FDA of its intention to amend the NDA and to meet with the FDA to discuss
the deficiencies and the need for additional data. The Company is evaluating the
FAP program, including the regulatory and competitive environment. The future of
the FAP program is uncertain. There can be no assurance that the Company will be
able to address the FDA concerns or that the FDA will ever approve the NDA for
FAP. The Company is currently focusing its development of Aptosyn(TM) and CP461
in various cancer indications.
On November 3, 1998, CPI completed a financing through the acquisition of
Tseng Labs, Inc. ("Tseng") (a publicly held company with no continuing
operations which, subsequent to the transaction, became a subsidiary of CPI), in
which CPI issued to Tseng stockholders approximately 5.5 million shares of CPI
Common Stock and received net proceeds of approximately $26.4 million. In
October 1999, the Company issued 1.555 million shares of Common Stock for net
proceeds of approximately $13.5 million. During the year ended December 31,
2000, the Company received approximately $23.1 million from the issuance of 3.2
million shares of Common Stock and approximately $20.8 million primarily from
the exercise of previously issued Common Stock warrants and options which
increased the Common Stock outstanding to 31.1 million shares.
39
41
In July 2000, the Company entered into an exclusive Marketing and Promotion
Agreement (the "Nilandron Agreement") with Aventis Pharmaceuticals, Inc. to
market Nilandron(R) (nilutamide) to urologists in the United States and Puerto
Rico for use in patients who suffer from prostate cancer. The Company began to
promote Nilandron(R) in September of 2000 through the use of a dedicated
third-party contract sales force. Under the terms of the Nilandron Agreement,
Cell Pathways is responsible for all marketing and promotion expenses and
receives a percentage of the gross margin on sales in excess of a
pre-established gross margin threshold.
The Company has not received any revenue from the sale of its products, and
none of its product candidates has been approved for marketing. The Company does
not anticipate that the revenues to the Company under the Nilandron Agreement
will be material. The Company's income has been limited to interest income from
investments and revenues from the Nilandron Agreement beginning in the fourth
quarter of 2000, and its primary source of capital has been the sale of its
equity securities, including the transaction with Tseng. Annual losses were
$26,916,808, $19,633,722 and $19,345,436 in 2000, 1999 and 1998, respectively.
As of December 31, 2000, CPI's accumulated deficit was $91,880,302 and its
unrestricted cash and cash equivalents were $49,528,407. The Company anticipates
that it will continue to incur additional operating losses for the next several
years and that it will need to raise additional capital to sustain its
operations. There can be no assurance that any of its product candidates will be
approved for marketing, that profitability will be attained or, if profitability
is achieved, that the Company will remain profitable on a quarterly or annual
basis in the future. The Company's operating results will fluctuate from quarter
to quarter. Some of these fluctuations may be significant and, as a result,
quarter to quarter comparisons may not be meaningful.
RESULTS OF OPERATIONS
Year Ended December 31, 2000 Compared with Year Ended December 31,
1999. Revenues related to the Nilandron Agreement were $329,694 for the year
ended December 31, 2000. The Company began promoting Nilandron(R) to urologists
in September 2000.
Total expenses for the year ended December 31, 2000 were $29,504,387, an
increase of $8,400,367 or 39.8% from the same period in 1999. Research and
development ("R&D") expenses for the year ended December 31, 2000 were
$22,257,805, an increase of $6,002,947 or 36.9% from the same period in 1999.
This increase was primarily due to purchases of research materials for
Aptosyn(TM) for clinical trials and anticipated commercial supply needs, an
increase in personnel, and expenses to support the development of Aptosyn(TM)
and CP461. Selling, general and administrative ("SG&A") expenses were $7,246,582
for the year ended December 31, 2000, an increase of $2,397,420 or 49.4% from
the same period in 1999. This increase was primarily due to expenses associated
with preparations for the commercialization of Aptosyn(TM) and expenses
associated with the hiring, training and support of a sales organization to
promote Nilandron(R).
Interest income, net of interest expense of $48,592, was $2,257,885 for the
year ended December 31, 2000, an increase of $787,587 or 53.6% from the same
period in 1999, primarily due to higher average cash balances.
Year Ended December 31, 1999 Compared with Year Ended December 31,
1998. Total expenses for the year ended December 31, 1999 were $21,104,020, an
increase of $798,251 or 3.9% from the same period in 1998. R&D expenses for the
year ended December 31, 1999 were $16,254,858, an increase of $202,626 or 1.2%
from the same period in 1998. This increase was primarily due to a planned
increase in personnel to support internal research activities, product
development of Aptosyn(TM) and CP461 and clinical trial management expenses.
SG&A expenses were $4,849,162 for the year ended December 31, 1999, an increase
of $595,625 or 14.0% from the same period in 1998. This increase was primarily
the result of expenses related to the commercialization preparations related to
Aptosyn(TM) and a planned increase in administrative personnel offset partially
by a one-time charge of $715,000 recorded in the first half of 1998 for expenses
related to a planned initial public offering which was not undertaken.
Interest income, net of interest expense of $29,991, was $1,470,298 for the
year ended December 31, 1999, an increase of $509,965 or 53.1% from the same
period in 1998, primarily due to higher average cash
40
42
balances resulting from the transaction with Tseng in November 1998, which
resulted in net proceeds of approximately $26.4 million and the private
placement of Common Stock in October 1999, which resulted in net proceeds of
approximately $13.5 million.
LIQUIDITY AND CAPITAL RESOURCES
CPI has financed its operations since inception primarily with the net
proceeds received from the sale of equity securities, including the transaction
with Tseng. Financing activities have generated net proceeds of approximately
$140.4 million from inception through December 31, 2000.
At December 31, 2000, CPI had cash and cash equivalents of $49,528,407
(excluding restricted cash of $676,216). CPI's cash position increased
$17,515,289 for the year ended December 31, 2000, primarily reflecting the
proceeds from a private placement of Common Stock and warrants in November 2000
which generated net proceeds of approximately $23.1 million, proceeds from the
exercise of Series G and Common Stock warrants resulting in approximately $18.4
million and proceeds from the exercise of Common Stock options and the issuance
of Common Stock under the Employee Stock Purchase Plan resulting in a total of
approximately $2.4 million, offset partially by the net cash outflow in
operations of approximately $26.4 million. CPI invests its excess cash primarily
in low risk, highly liquid money market funds and U.S. government treasuries.
CPI has $676,216 in a restricted account pledged for a security deposit under
the lease of its Horsham, Pennsylvania facility, and as security to a letter of
credit for a portion of a software lease commitment.
In November 2000, the Company sold 3,200,000 shares of Common Stock in a
private placement, mainly to institutional investors at a price of $7.375 per
share, resulting in net proceeds of approximately $23,116,000. With each share
of Common Stock purchased, the Company issued a warrant to purchase one and
thirty five one-hundredths (1.35) shares of the Company's Common Stock at $12.00
per share. The warrants are exercisable until June 30, 2002. The Company paid
one of the placement agents a fee of $413,800 and another placement agent
warrants to purchase 73,750 shares of Common Stock at an exercise price of
$12.00 per share as a fee. In addition, the Company has an agreement to grant
warrants to the placement agents of the private placement equal to 5.0% of the
total warrants exercised by the purchasers which the respective placement agents
brought to the offering. Under the agreement, warrants to purchase up to 109,499
shares of Common Stock may be issued. The warrants issued to the placement
agents are exercisable until the later of (i) June 30, 2002 or (ii) 30 days
after the exercise of the warrants by the purchasers.
During 2000, the Company secured an $800,000 equipment loan for the
financing of past and future acquisitions of laboratory and office equipment.
This loan is payable over a thirty six month period and is secured by the
respective laboratory and office equipment. During 2000, the Company made
payments of $100,285 toward the repayment of principal.
In 2000, the Company purchased approximately $489,770 in laboratory,
computer and office equipment, office furniture and leasehold improvements for
its research laboratories and offices in its Horsham facility.
CPI leases approximately 40,000 square feet of laboratory and office space
in Horsham, Pennsylvania under a ten-year lease which expires in 2008 and which
contains two five-year renewal options. The Company believes its facilities will
be adequate for the foreseeable future.
In February and March of 1999, five different groups of stockholders filed
class actions in the United States District Court in Philadelphia against the
Company, and certain of its officers and directors alleging violations of
Section 11 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. (See Note 13 of Notes to Consolidated Financial
Statements included elsewhere in this report.) The Company denies any
allegations of wrongdoing and intends to vigorously defend the litigation.
On March 13, 2001, two stockholders filed a class action in the United
States District Court in Philadelphia against the Company, and certain of its
officers and directors, alleging violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. The complaint was filed on behalf of persons
who purchased our securities from October 27, 1999 through September 22, 2000.
Two identical complaints
41
43
on behalf of other stockholders have subsequently been filed. The complaints
allege that the Company made false and misleading statements about the Company's
drug candidate, exisulind. The Company denies any allegations of wrongdoing and
intends to vigorously defend the litigation.
CPI anticipates the annual expenditures for preclinical studies, clinical
trials, product development, research, selling and marketing, and general and
administrative expenses will increase significantly in future years. CPI
anticipates that it will need to raise additional capital. There can be no
assurance that CPI will be able to successfully complete the clinical
development of Aptosyn(TM) for any indication, that the FDA will grant approval
with respect to any indication within the time frame expected, if at all, that
the other developments or expansions in CPI's research, development and
commercialization programs will ultimately lead to revenues for the Company.
CPI cannot predict the date of its first product approval, if any, the rate
of revenue generated from initial product sales, if achieved, or the level of
expense which may be associated with such initial product sales. The Company
anticipates that it will require additional financing in the future to continue
its research and development programs. Until such time as CPI is able to
generate sufficient revenue from product sales, if ever, CPI plans to finance
its anticipated growth and development largely through equity or debt financing
and/or strategic or corporate alliances. CPI believes, based on its current
operating plans, that its existing cash and cash equivalents balance of
approximately $49.5 million as of December 31, 2000, together with interest
earned on this balance, will provide sufficient working capital to sustain
operations into the second half of 2002. However, there can be no assurance that
the Company will not require additional funding prior to that time, as the
Company must adapt to changing circumstances arising from within the Company's
programs as well as from outside the Company. There can be no assurance that
additional equity or debt financing or corporate collaborations will be
available on terms acceptable to CPI, if at all. Any additional equity financing
would be dilutive to stockholders. Debt financing, if available, may include
restrictive covenants. Corporate alliances would generally require the Company
to give up certain marketing rights or other rights to its potential products
and technology. If additional funds should be needed but are not available, CPI
may be required to modify its operations significantly or to obtain funds by
entering into collaborative arrangements or other arrangements on unfavorable
terms. The failure by CPI to raise capital on acceptable terms if and when
needed would have a material adverse effect on CPI's business, financial
condition and results of operations.
INFLATION
CPI does not believe that inflation has had any significant impact on CPI's
business to date.
INCOME TAXES
As of December 31, 2000, CPI has net operating loss carryforwards ("NOLs")
for income tax purposes available to offset future federal income tax, subject
to limitations for alternative minimum tax. In addition, the Company has other
significant deferred tax assets which will also offset future income tax. As the
Company has not yet achieved profitable operations, management believes the tax
assets do not satisfy the realization criteria of Statement of Financial
Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes" and
therefore the Company has recorded a valuation allowance for the entire amount
of its net tax asset as of December 31, 2000. (See Note 12 of Notes to
Consolidated Financial Statements included elsewhere in this report.)
The Tax Reform Act of 1986 contains provisions that may limit the NOLs
available to be used in any given year upon the occurrence of certain events,
including significant changes in ownership interest. A change in ownership of a
company of greater than 50% within a three-year period results in an annual
limitation on CPI's ability to utilize its NOLs from tax periods prior to the
ownership change. CPI believes that the transaction with Tseng triggered such
limitation. However, CPI does not expect such limitation to have a significant
impact on its operations.
42
44
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133 -- an
amendment of FASB Statement No. 133," which must be adopted by the Company in
the year ending December 31, 2001, provides a comprehensive and consistent
standard for the recognition and measurement of derivatives and hedging
activities. As the Company does not currently hold derivative instruments or
engage in hedging activities, the adoption of this pronouncement will have no
impact on the Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 draws on existing accounting rules and provides specific guidance
on revenue recognition of up-front non-refundable license fees. As the Company
has not had any license fee revenue, the adoption of SAB 101 did not have any
impact on the Company's financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. The Company's exposure to market risk for changes in
interest rates primarily relates to the Company's investment portfolio. The
Company is averse to principal loss and seeks to limit default risk, market risk
and reinvestment risk. In particular, the Company does not use derivative
financial instruments in its investment portfolio, places its investments with
high quality issuers and, except for investments with the U.S. Government,
limits the amount of credit exposure to any one issuer. The Company mitigates
default risk by investing in only the safest and highest credit quality
securities, predominantly those of the U.S. Government, and by positioning its
portfolio to respond appropriately to a significant reduction in a credit rating
of any investment issuer, guarantor or depository. The portfolio includes only
marketable securities with active secondary or resale markets to ensure
portfolio liquidity and has historically been invested in securities which have
original maturities of less than three months to ensure principal preservation.
As of December 31, 2000 and 1999, the Company was invested in U.S. Government
securities and money market funds, which were classified as cash equivalents in
the Company's financial statements. The investments had principal (or notional)
amounts of $49,528,407 and $32,013,118, respectively, which were equal to their
fair value, average interest rates of 5.9% and 4.8%, respectively, and
maturities of less than three months.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Registrant's financial statements and notes thereto, together with the
Report of Independent Public Accountants thereon, appear at pages F-1 through
F-20 of this report and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
43
45
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The information required by Item 10 for directors of the Company is
contained in the Company's definitive Proxy Statement with respect to the
Company's Annual Meeting of Stockholders, to be filed with the Securities and
Exchange Commission within 120 days following the end of the Company's fiscal
year, and is incorporated herein by reference thereto.
(b) The information required by Item 10 for Executive Officers of the
Company is set forth in Part 1 of this report and is incorporated herein by
reference thereto.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is contained in the Company's
definitive Proxy Statement with respect to the Company's Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission within 120
days following the end of the Company's fiscal year, and is incorporated herein
by reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is contained in the Company's
definitive Proxy Statement with respect to the Company's Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission within 120
days following the end of the Company's fiscal year, and is incorporated herein
by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is contained in the Company's
definitive Proxy Statement with respect to the Company's Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission within 120
days following the end of the Company's fiscal year, and is incorporated herein
by reference thereto.
44
46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)
1. LIST OF FINANCIAL STATEMENTS
See page F-1 of this report, which includes an index to
consolidated financial statements.
2. LIST OF FINANCIAL STATEMENT SCHEDULES
None.
3. LIST OF EXHIBITS
3.1 Certificate of Incorporation as amended November 2, 1998
(incorporated by reference to Exhibit 3.1 to the
Registrant's Report on Form 10-K for 1998 filed with the
Securities and Exchange Commission (the "1998 10-K")).
3.2 Amendment to Certificate of Incorporation by way of
Certificate of Designation, Preferences and Rights of Series
A Junior Participating Preferred Stock (incorporated by
reference to Exhibit 3.2 to the 1998 10-K).
3.3 Amendment to Certificate of Incorporation increasing the
number of authorized shares of Common Stock and Preferred
Stock (incorporated by reference to Exhibit 3.3 to
Registrant's Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on August 2, 2000).
3.4 Bylaws of Cell Pathways, Inc. (incorporated by reference to
Exhibit 3.2 to the Registrant's Registration Statement on
Form S-4 (No. 333-59557) filed with the Securities and
Exchange Commission on July 22, 1998 (the "July 1998 S4")).
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
4.2 Specimen certificate of Registrant (incorporated by
reference to Exhibit 4.2 to the July 1998 S-4).
4.3 Rights Agreement dated as of December 3, 1998 between
Registrant and Registrar and Transfer Company (incorporated
by reference to Exhibit 4 to the Registrant's Current Report
on Form 8-K filed with the Securities and Exchange
Commission on December 18, 1998).
4.4 Form of Warrant issued in Private Placement, October 13,
1999 (incorporated by reference to Exhibit 4.1 to
Registrant's Registration Statement on Form S-3 (No.
333-93811), filed with the Securities and Exchange
Commission on December 29, 1999 (the "December 1999 S-3")).
4.5 Form of Warrant issued in Private Placement, November 9,
2000 (incorporated by reference to Exhibit 4 to Registrant's
Registration Statement on Form S-3 (No. 333-50514), filed
with the Securities and Exchange Commission on November 22,
2000 (the "November 2000 S-3")).
10.2 Lease, dated June 25, 1998, between Cell Pathways, Inc. and
ARE-702 Electronic Drive, L.P. (incorporated by reference to
Exhibit 10.2 to the July 1998 S-4).
10.3 Research and License Agreement, dated June 26, 1991, between
Cell Pathways, Inc. and the University of Arizona, as
amended (incorporated by reference to Exhibit 10.23 to
Registrant's Registration Statement on Form S-1 (No.
333-37557), filed October 9, 1997, or amendments thereto
(the "October 1997 S-1")).
10.4 Form of Purchase Agreement in Private Placement, October 13,
1999 (incorporated by reference to Exhibit 10.1 to the
December 1999 S-3).
10.5 Form of Purchase Agreement in Private Placement, November 9,
2000 (incorporated by reference to Exhibit 10.1 to the
November 2000 S-3).
45
47
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.6 1997 Equity Incentive Plan of Cell Pathways, Inc, as
amended.
10.7 Form of Incentive Stock Option Agreement.
10.8 Form of Non-Qualified Stock Option Agreement.
10.9 1997 Non-Employee Director Stock Option Plan of Cell
Pathways, Inc. (incorporated by reference to Exhibit 10.5 to
the July 1998 S-4).
10.10 Form of Stock Option Agreement (incorporated by reference to
Exhibit 10.6 to the July 1998 S-4).
10.11 1997 Employee Stock Purchase Plan of Cell Pathways, Inc.
(incorporated by reference to Exhibit 10.28 to the October
1997 S-1).
10.12 1995 Stock Award Plan of Cell Pathways, Inc. (incorporated
by reference to Exhibit 10.6 to the October 1997 S-1).
10.13 Employment Agreement, dated October 12, 1996, between Cell
Pathways, Inc. and Robert J. Towarnicki (incorporated by
reference to Exhibit 10.13 to the October 1997 S-1).
10.14 Change in Control Agreement, dated as of November 30, 2000,
between Cell Pathways, Inc. and Robert J. Towarnicki.
10.15 Employment Agreement, dated February 1, 1993, between Cell
Pathways, Inc. and Rifat Pamukcu (incorporated by reference
to Exhibit 10.17 to the October 1997 S-1).
10.16 Change in Control Agreement, dated as of November 30, 2000,
between Cell Pathways, Inc. and Rifat Pamukcu.
10.17 Employment Agreement, dated as of October 12, 2000, between
Cell Pathways, Inc. and Martha E. Manning.
10.18 Change in Control Agreement, dated as of November 30, 2000,
between Cell Pathways, Inc. and Martha E. Manning.
10.19 Employment Agreement, dated as of July 12 2000, between Cell
Pathways, Inc. and Robert E. Bellet, M.D.
10.20 Change in Control Agreement, dated as of November 30, 2000,
between Cell Pathways, Inc. and Robert E. Bellet, M.D.
10.21 Employment Agreement, dated as of November 6, 1997, between
Cell Pathways, Inc. and Brian J. Hayden.
10.22 Change in Control Agreement, dated as of November 30, 2000,
between Cell Pathways, Inc. and Brian J. Hayden.
10.23 Employment Agreement, dated as of November 29, 2000, between
Cell Pathways, Inc. and Lloyd Glenn.
10.24 Change in Control Agreement, dated as of November 30, 2000,
between Cell Pathways, Inc. and Lloyd Glenn.
10.25 Memorandum of Employment, dated January 1, 1993, between
Cell Pathways, Inc. and Richard H. Troy (incorporated by
reference to Exhibit 10.19 to the October 1997 S-1).
10.26 Severance Agreement, dated April 17, 1998, between Tseng
Labs, Inc. and John J. Gibbons (incorporated by reference to
Exhibit 10.17 to the July 1998 S-4).
22.1 Subsidiaries.
23.1 Consent of Arthur Andersen LLP.
(b) REPORT ON FORM 8-K
None
46
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CELL PATHWAYS, INC.
By: /s/ ROBERT J. TOWARNICKI
---------------------------------------
Robert J. Towarnicki
President and Chief Executive Officer
March 28, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROBERT J. TOWARNICKI Chairman of the Board of Directors, March 28, 2001
- ------------------------------------------------ President and Chief Executive
(Robert J. Towarnicki) Officer
(Principal Executive Officer)
/s/ WILLIAM A. BOEGER Director March 28, 2001
- ------------------------------------------------
(William A. Boeger)
/s/ JOHN J. GIBBONS Director March 28, 2001
- ------------------------------------------------
(John J. Gibbons)
/s/ THOMAS M. GIBSON Director March 28, 2001
- ------------------------------------------------
(Thomas M. Gibson)
/s/ RIFAT PAMUKCU Director, Executive Vice President March 28, 2001
- ------------------------------------------------ and Chief Scientific Officer
(Rifat Pamukcu)
/s/ JUDITH A. HEMBERGER Director March 28, 2001
- ------------------------------------------------
(Judith A. Hemberger)
/s/ BRUCE R. ROSS Director March 28, 2001
- ------------------------------------------------
(Bruce R. Ross)
/s/ LOUIS M. WEINER Director March 28, 2001
- ------------------------------------------------
(Louis M. Weiner)
/s/ BRIAN J. HAYDEN Chief Financial Officer and Vice March 28, 2001
- ------------------------------------------------ President, Finance (Principal
(Brian J. Hayden) Financial and Accounting Officer)
47
49
CELL PATHWAYS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998 and for the period from
inception (August 10, 1990) to December 31, 2000.......... F-4
Consolidated Statement of Stockholders' Equity (Deficit) and
Partners' Investment for the period from inception (August
10, 1990) to December 31, 2000............................ F-5 to F-9
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 and the period from
inception (August 10, 1990) to December 31, 2000.......... F-10
Notes to Consolidated Financial Statements.................. F-11 to F-20
F-1
50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cell Pathways, Inc.:
We have audited the accompanying consolidated balance sheets of Cell
Pathways, Inc. (a Delaware corporation in the development stage) and
subsidiaries as of December 31, 2000 and 1999 and the related consolidated
statements of operations, stockholders' equity (deficit) and partners'
investment, and cash flows for each of the three years in the period ended
December 31, 2000 and for the period from inception (August 10, 1990) to
December 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cell Pathways, Inc. and
subsidiaries as of December 31, 2000 and 1999 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 and for the period from inception (August 10, 1990) to
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/S/ ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
February 2, 2001
F-2
51
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------
2000 1999
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 49,528,407 $ 32,013,118
Accounts receivable....................................... 329,694 --
Prepaid expenses and other................................ 1,328,535 875,433
------------- ------------
Total current assets................................... 51,186,636 32,888,551
EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS, Net........ 1,183,287 1,519,655
RESTRICTED CASH............................................. 676,216 640,110
NOTES RECEIVABLE FROM OFFICERS.............................. 642,256 --
OTHER ASSETS................................................ 393,198 230,655
------------- ------------
$ 54,081,593 $ 35,278,971
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of note payable........................... $ 241,915 $ --
Current installments of obligation under capital lease.... 38,218 146,260
Accounts payable.......................................... 1,033,202 1,510,569
Accrued compensation...................................... 256,565 669,597
Other accrued liabilities................................. 3,424,983 1,455,886
------------- ------------
Total current liabilities.............................. 4,994,883 3,782,312
------------- ------------
NOTE PAYABLE................................................ 457,800 --
------------- ------------
OBLIGATION UNDER CAPITAL LEASE.............................. -- 33,917
------------- ------------
COMMITMENTS AND CONTINGENCIES (NOTE 13)
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 10,000,000 shares
authorized; none issued and outstanding................... -- --
Common Stock $.01 par value, 150,000,000 shares authorized;
31,073,457 and 26,105,894 shares issued and outstanding... 310,734 261,059
Additional paid-in capital.................................. 140,235,478 96,202,177
Stock subscription receivable from issuance of Common
Stock..................................................... (37,000) (37,000)
Deficit accumulated during the development stage............ (91,880,302) (64,963,494)
------------- ------------
Total stockholders' equity............................. 48,628,910 31,462,742
------------- ------------
$ 54,081,593 $ 35,278,971
============= ============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-3
52
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD
YEAR ENDED DECEMBER 31, FROM INCEPTION
------------------------------------------ (AUGUST 10, 1990)
2000 1999 1998 TO DECEMBER 31, 2000
------------ ------------ ------------ --------------------
REVENUES.......................... $ 329,694 $ -- $ -- $ 329,694
EXPENSES:
Research and development........ 22,257,805 16,254,858 16,052,232 75,640,993
Selling, general and
administrative............... 7,246,582 4,849,162 4,253,537 21,921,789
------------ ------------ ------------ ------------
Operating loss............... (29,174,693) (21,104,020) (20,305,769) (97,233,088)
INTEREST INCOME, Net.............. 2,257,885 1,470,298 960,333 5,352,786
------------ ------------ ------------ ------------
NET LOSS.......................... $(26,916,808) $(19,633,722) $(19,345,436) $(91,880,302)
============ ============ ============ ============
Basic and diluted net loss per
Common share.................... $ (0.96) $ (0.79) $ (3.04)
============ ============ ============
Shares used in computing basic and
diluted net loss per Common
share........................... 28,003,649 24,772,256 6,369,006
============ ============ ============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-4
53
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS'
INVESTMENT
FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO DECEMBER 31, 2000
REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
PARTNERS' --------------- -------------------- ------------------- PAID-IN
INVESTMENT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- ------ ------ ------- ---------- --------- ------- ----------
BALANCE, Inception (August 10, 1990)... $ -- -- $ -- -- $ -- -- $ -- $ --
Partner cash contributions in September
1990 for Class A Partnership Units.... 406,000 -- -- -- -- -- -- --
Partner contribution of interest in
research grant in September 1990 for
Class A Partnership Units, at
historical cost....................... 48,638 -- -- -- -- -- -- --
Net loss............................... -- -- -- -- -- -- -- --
----------- ------ ---- ------- ---------- --------- ------- --------
BALANCE, December 31, 1990............. 454,638 -- -- -- -- -- -- --
Partner cash contributions in March
1991 for Class A Partnership Units.... 406,000 -- -- -- -- -- -- --
Partner cash contributions in December
1991 for Class B Partnership Units.... 896,563 -- -- -- -- -- -- --
Net loss............................... -- -- -- -- -- -- -- --
----------- ------ ---- ------- ---------- --------- ------- --------
BALANCE, December 31, 1991............. 1,757,201 -- -- -- -- -- -- --
Partner cash contributions in January
and April 1992 for Class B Partnership
Units................................. 21,812 -- -- -- -- -- -- --
Partner cash contributions in December
1992 for Class B Partnership Units.... 133,300 -- -- -- -- -- -- --
Partner cash contributions in December
1992 for Class C Partnership Units.... 1,540,000 -- -- -- -- -- -- --
Partner cash contributions in December
1992 for Class D Partnership Units.... 1,475,027 -- -- -- -- -- -- --
Net loss............................... -- -- -- -- -- -- -- --
----------- ------ ---- ------- ---------- --------- ------- --------
BALANCE, December 31, 1992............. 4,927,340 -- -- -- -- -- -- --
Partner cash contributions in January
1993 to March 1993 for Class D
Partnership Units..................... 385,015 -- -- -- -- -- -- --
Exchange of interests in the
Partnership in September 1993 for
872,000 shares of Series A Convertible
Preferred Stock....................... (812,000) -- -- 872,400 812,000 -- -- --
Exchange of interests in the
Partnership in September 1993 for
848,100 shares of Series B Convertible
Preferred Stock....................... (868,000) -- -- 848,100 868,000 -- -- --
Exchange of interests in the
Partnership in September 1993 for
700,000 shares of Series C Convertible
Preferred Stock....................... (1,540,000) -- -- 700,000 1,540,000 -- -- --
Exchange of interests in the
Partnership in September 1993 for
616,808 shares of Series D Convertible
Preferred Stock....................... (1,860,042) -- -- 616,808 1,860,042 -- -- --
Exchange of interests in the
Partnership in September 1993 for
61,250 shares of Redeemable Preferred
Stock................................. (613) 61,250 613 -- -- -- -- --
Exchange of interests in the
Partnership in September 1993 for
2,279,500 shares of Common Stock...... (231,700) -- -- -- -- 2,279,500 22,795 208,905
Net loss............................... $ -- -- $ -- -- $ -- -- $ -- $ --
----------- ------ ---- ------- ---------- --------- ------- --------
STOCK STOCK
SUBSCRIPTION SUBSCRIPTION
RECEIVABLE RECEIVABLE DEFICIT
FROM FROM ACCUMULATED
ISSUANCE OF ISSUANCE OF DURING THE
CONVERTIBLE COMMON DEVELOPMENT
PREFERRED STOCK STOCK STOCK
--------------- ------------ -----------
BALANCE, Inception (August 10, 1990)... $ -- $ -- $ --
Partner cash contributions in September
1990 for Class A Partnership Units.... -- -- --
Partner contribution of interest in
research grant in September 1990 for
Class A Partnership Units, at
historical cost....................... -- -- --
Net loss............................... -- -- (252,116)
------ ------ -----------
BALANCE, December 31, 1990............. -- -- (252,116)
Partner cash contributions in March
1991 for Class A Partnership Units.... -- -- --
Partner cash contributions in December
1991 for Class B Partnership Units.... -- -- --
Net loss............................... -- -- (738,204)
------ ------ -----------
BALANCE, December 31, 1991............. -- -- (990,320)
Partner cash contributions in January
and April 1992 for Class B Partnership
Units................................. -- -- --
Partner cash contributions in December
1992 for Class B Partnership Units.... -- -- --
Partner cash contributions in December
1992 for Class C Partnership Units.... -- -- --
Partner cash contributions in December
1992 for Class D Partnership Units.... -- -- --
Net loss............................... -- -- (1,391,531)
------ ------ -----------
BALANCE, December 31, 1992............. -- -- (2,381,851)
Partner cash contributions in January
1993 to March 1993 for Class D
Partnership Units..................... -- -- --
Exchange of interests in the
Partnership in September 1993 for
872,000 shares of Series A Convertible
Preferred Stock....................... -- -- --
Exchange of interests in the
Partnership in September 1993 for
848,100 shares of Series B Convertible
Preferred Stock....................... -- -- --
Exchange of interests in the
Partnership in September 1993 for
700,000 shares of Series C Convertible
Preferred Stock....................... -- -- --
Exchange of interests in the
Partnership in September 1993 for
616,808 shares of Series D Convertible
Preferred Stock....................... -- -- --
Exchange of interests in the
Partnership in September 1993 for
61,250 shares of Redeemable Preferred
Stock................................. -- -- --
Exchange of interests in the
Partnership in September 1993 for
2,279,500 shares of Common Stock...... -- -- --
Net loss............................... $ -- $ -- $(2,269,099)
------ ------ -----------
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement
F-5
54
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS'
INVESTMENT -- (CONTINUED)
FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO DECEMBER 31, 2000
REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
PARTNERS' --------------- ----------------------- ------------------- PAID-IN
INVESTMENT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- ------ ------ --------- ----------- --------- ------- ----------
BALANCE, December 31, 1993............. $ -- 61,250 $613 3,037,308 $ 5,080,042 2,279,500 $22,795 $208,905
Issuance of Common Stock for services
valued at $0.41 per share............. -- -- -- -- -- 16,667 167 6,667
Issuance of 542,761 shares of Series E
Convertible Preferred Stock for cash
at $4.10 per share.................... -- -- -- 542,761 2,225,320 -- -- --
Net loss............................... -- -- -- -- -- -- -- --
----------- ------ ---- --------- ----------- --------- ------- --------
BALANCE, December 31, 1994............. -- 61,250 613 3,580,069 7,305,362 2,296,167 22,962 215,572
Issuance of 1,121,800 shares of Series
E Convertible Preferred Stock for cash
at $3.15 per share.................... -- -- -- 1,121,800 3,533,670 -- -- --
Issuance of 163,701 shares of Series E
Convertible Preferred Stock to effect
the price change from $4.10 to
$3.15................................. -- -- -- 163,701 -- -- -- --
Conversion of bridge notes payable plus
interest to 253,633 shares of Series E
Convertible Preferred Stock at a price
of $3.15 per share.................... -- -- -- 253,633 800,199 -- -- --
Net loss............................... -- -- -- -- -- -- -- --
----------- ------ ---- --------- ----------- --------- ------- --------
BALANCE, December 31, 1995............. -- 61,250 613 5,119,203 11,639,231 2,296,167 22,962 215,572
Issuance of 887,661 shares of Series E
Convertible Preferred Stock for cash
at $3.15 per share, net of offering
costs of $298,313..................... -- -- -- 887,661 2,497,819 -- -- --
Collection of Series E Convertible
Preferred Stock subscription
receivable............................ -- -- -- -- -- -- -- --
Issuance of 270,270 shares of Series F
Convertible Preferred Stock for cash
at $3.70 per share.................... -- -- -- 270,270 1,000,000 -- -- --
Issuance of 185,000 shares of Common
Stock in February 1996 as bonuses to
officers and employees valued at $0.32
per share............................. -- -- -- -- -- 185,000 1,850 57,350
Issuance of 14,828 shares of Common
Stock in May 1996 for consulting
services, valued at $0.32 per share... -- -- -- -- -- 14,828 148 4,596
Exercise of warrants to purchase 148
shares of Series E Convertible
Preferred Stock at $3.15 per share.... -- -- -- 148 466 -- -- --
Exercise of options to purchase Common
Stock at $0.32 per share.............. -- -- -- -- -- 222,850 2,229 69,084
Net loss............................... $ -- -- $ -- -- $ -- -- $ -- $ --
----------- ------ ---- --------- ----------- --------- ------- --------
STOCK STOCK
SUBSCRIPTION SUBSCRIPTION
RECEIVABLE RECEIVABLE DEFICIT
FROM FROM ACCUMULATED
ISSUANCE OF ISSUANCE OF DURING THE
CONVERTIBLE COMMON DEVELOPMENT
PREFERRED STOCK STOCK STOCK
--------------- ------------ ------------
BALANCE, December 31, 1993............. $ -- $ -- $ (4,650,950)
Issuance of Common Stock for services
valued at $0.41 per share............. -- -- --
Issuance of 542,761 shares of Series E
Convertible Preferred Stock for cash
at $4.10 per share.................... (23,501) -- --
Net loss............................... -- -- (3,110,446)
-------- ------ ------------
BALANCE, December 31, 1994............. (23,501) -- (7,761,396)
Issuance of 1,121,800 shares of Series
E Convertible Preferred Stock for cash
at $3.15 per share.................... (125) -- --
Issuance of 163,701 shares of Series E
Convertible Preferred Stock to effect
the price change from $4.10 to
$3.15................................. -- -- --
Conversion of bridge notes payable plus
interest to 253,633 shares of Series E
Convertible Preferred Stock at a price
of $3.15 per share.................... -- -- --
Net loss............................... -- -- (3,190,824)
-------- ------ ------------
BALANCE, December 31, 1995............. (23,626) -- (10,952,220)
Issuance of 887,661 shares of Series E
Convertible Preferred Stock for cash
at $3.15 per share, net of offering
costs of $298,313..................... -- -- --
Collection of Series E Convertible
Preferred Stock subscription
receivable............................ 20,505 -- --
Issuance of 270,270 shares of Series F
Convertible Preferred Stock for cash
at $3.70 per share.................... -- -- --
Issuance of 185,000 shares of Common
Stock in February 1996 as bonuses to
officers and employees valued at $0.32
per share............................. -- -- --
Issuance of 14,828 shares of Common
Stock in May 1996 for consulting
services, valued at $0.32 per share... -- -- --
Exercise of warrants to purchase 148
shares of Series E Convertible
Preferred Stock at $3.15 per share.... -- -- --
Exercise of options to purchase Common
Stock at $0.32 per share.............. -- -- --
Net loss............................... $ -- $ -- $ (4,735,204)
-------- ------ ------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
F-6
55
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS'
INVESTMENT -- (CONTINUED)
FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO DECEMBER 31, 2000
REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
PARTNERS' ------------------- --------------------- -------------------
INVESTMENT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------ ---------- ------- ----------- --------- -------
BALANCE, December 31, 1996............. $ -- 61,250 $ 613 6,277,282 $15,137,516 2,718,845 $27,189
Issuance of 4,538,675 shares of Series
F Convertible Preferred Stock for cash
at $3.70 per share, net of offering
costs of $249,239..................... -- -- -- 4,538,675 16,547,859 -- --
Exercise of warrants to purchase
149,462 shares of Series E Convertible
Preferred Stock at $3.15 per share.... -- -- -- 149,462 470,805 -- --
Exercise of warrants to purchase 492
shares of Series F Convertible
Preferred Stock at $3.70 per share.... -- -- -- 492 1,820 -- --
Cashless exercise of warrants to
purchase 2,476 shares of Series E
Convertible Preferred Stock........... -- -- -- 2,476 -- -- --
Exercise of options by employees and
directors at $0.32 - $0.50 per
share................................. -- -- -- -- -- 251,250 2,512
Issuance of Common Stock to director at
$3.70 per share....................... -- -- -- -- -- 10,000 100
Issuance of Common Stock to consultant
at $3.70 per share.................... -- -- -- -- -- 10,000 100
Collection of stock subscription
receivable............................ -- -- -- -- -- -- --
Provision for redemption of Redeemable
Preferred Stock....................... -- -- 1,091,387 -- -- -- --
Net loss............................... $ -- -- $ -- -- $ -- -- $ --
----------- ------ ---------- ------- ----------- --------- -------
STOCK STOCK
SUBSCRIPTION SUBSCRIPTION
RECEIVABLE RECEIVABLE DEFICIT
FROM FROM ACCUMULATED
ADDITIONAL ISSUANCE OF ISSUANCE OF DURING THE
PAID-IN CONVERTIBLE COMMON DEVELOPMENT
CAPITAL PREFERRED STOCK STOCK STOCK
---------- --------------- ------------ ------------
BALANCE, December 31, 1996............. $346,602 $(3,121) $ -- $(15,687,424)
Issuance of 4,538,675 shares of Series
F Convertible Preferred Stock for cash
at $3.70 per share, net of offering
costs of $249,239..................... -- -- -- --
Exercise of warrants to purchase
149,462 shares of Series E Convertible
Preferred Stock at $3.15 per share.... -- -- -- --
Exercise of warrants to purchase 492
shares of Series F Convertible
Preferred Stock at $3.70 per share.... -- -- -- --
Cashless exercise of warrants to
purchase 2,476 shares of Series E
Convertible Preferred Stock........... -- -- -- --
Exercise of options by employees and
directors at $0.32 - $0.50 per
share................................. 109,462 -- -- --
Issuance of Common Stock to director at
$3.70 per share....................... 36,900 -- (37,000) --
Issuance of Common Stock to consultant
at $3.70 per share.................... 36,900 -- -- --
Collection of stock subscription
receivable............................ -- 3,121 -- --
Provision for redemption of Redeemable
Preferred Stock....................... (74,000) -- -- --
Net loss............................... $ -- $ -- $ -- $(10,296,912)
-------- ------- -------- ------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
F-7
56
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS'
INVESTMENT -- (CONTINUED)
FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO DECEMBER 31, 2000
REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
PARTNERS' --------------------- -------------------------- ---------------------
INVESTMENT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------- ----------- ----------- ------------ ---------- --------
BALANCE, December 31, 1997............. $ -- 61,250 $ 1,092,000 10,968,387 $ 32,158,000 2,990,095 $ 29,901
Issuance of 4,645,879 shares of Series
G Convertible Preferred Stock at $4.75
per Share, net of offering costs of
$663,921.............................. -- -- -- 4,645,879 21,404,004 -- --
Exercise of warrants to purchase 65,076
shares of Series E Convertible
Preferred Stock at $3.15 per share.... -- -- -- 65,076 204,987 -- --
Exercise of options by employees at
$0.32 - $8.09 per share............... -- -- -- -- -- 65,500 655
Redemption of Redeemable Preferred
Stock for $546,051 and 33,052 shares
of Common Stock....................... -- (61,250) (1,092,000) -- -- 33,052 331
Conversion of Preferred Stock to Common
Stock triggered by the transaction
with Tseng Labs, Inc. ................ -- -- -- (15,679,342) (53,766,991) 15,679,342 156,793
Issuance of Common Stock in exchange
for the Common Stock of Tseng Labs,
Inc., net of transaction costs of
$1,907,354............................ -- -- -- -- -- 5,510,772 55,108
Exercise of Series F warrants to
purchase 150 shares of Common Stock at
$3.70 per share....................... -- -- -- -- -- 150 2
Exercise of Series G warrants to
purchase 615 shares of Common Stock at
$4.75 per share....................... -- -- -- -- -- 615 6
Non-employee stock option expense...... -- -- -- -- -- -- --
Net loss............................... -- -- -- -- -- -- --
----------- ------- ----------- ----------- ------------ ---------- --------
BALANCE, December 31, 1998............. -- -- -- -- -- 24,279,526 242,796
Exercise of options by employees at
$0.32 - $8.09......................... -- -- -- -- -- 48,061 481
Exercise of Series F warrants to
purchase 125,201 shares of Common
Stock at $3.70 per share.............. -- -- -- -- -- 125,201 1,252
Exercise of Series G warrants to
purchase 79,378 shares of Common Stock
at $4.75 per share.................... -- -- -- -- -- 79,378 793
Issuance of 1,555,000 shares of Common
Stock at $9.00 per share, net of
offering costs of $415,855............ -- -- -- -- -- 1,555,000 15,550
Issuance of 18,728 shares of Common
Stock at $6.32 - $9.67 under the
Employee Stock Purchase Plan.......... -- -- -- -- -- 18,728 187
Non-employee stock option expense...... -- -- -- -- -- -- --
Net loss............................... $ -- -- $ -- -- $ -- -- $ --
----------- ------- ----------- ----------- ------------ ---------- --------
STOCK STOCK
SUBSCRIPTION SUBSCRIPTION
RECEIVABLE RECEIVABLE DEFICIT
FROM FROM ACCUMULATED
ADDITIONAL ISSUANCE OF ISSUANCE OF DURING THE
PAID-IN CONVERTIBLE COMMON DEVELOPMENT
CAPITAL PREFERRED STOCK STOCK STOCK
----------- --------------- ------------ ------------
BALANCE, December 31, 1997............. $ 455,864 $ -- $(37,000) $(25,984,336)
Issuance of 4,645,879 shares of Series
G Convertible Preferred Stock at $4.75
per Share, net of offering costs of
$663,921.............................. -- -- -- --
Exercise of warrants to purchase 65,076
shares of Series E Convertible
Preferred Stock at $3.15 per share.... -- -- -- --
Exercise of options by employees at
$0.32 - $8.09 per share............... 262,739 -- -- --
Redemption of Redeemable Preferred
Stock for $546,051 and 33,052 shares
of Common Stock....................... 545,618 -- -- --
Conversion of Preferred Stock to Common
Stock triggered by the transaction
with Tseng Labs, Inc. ................ 53,610,198 -- -- --
Issuance of Common Stock in exchange
for the Common Stock of Tseng Labs,
Inc., net of transaction costs of
$1,907,354............................ 26,364,894 -- -- --
Exercise of Series F warrants to
purchase 150 shares of Common Stock at
$3.70 per share....................... 553 -- -- --
Exercise of Series G warrants to
purchase 615 shares of Common Stock at
$4.75 per share....................... 2,915 -- -- --
Non-employee stock option expense...... 13,313 -- -- --
Net loss............................... -- -- -- (19,345,436)
----------- ------ -------- ------------
BALANCE, December 31, 1998............. 81,256,094 -- (37,000) (45,329,772)
Exercise of options by employees at
$0.32 - $8.09......................... 276,260 -- -- --
Exercise of Series F warrants to
purchase 125,201 shares of Common
Stock at $3.70 per share.............. 461,992 -- -- --
Exercise of Series G warrants to
purchase 79,378 shares of Common Stock
at $4.75 per share.................... 376,252 -- -- --
Issuance of 1,555,000 shares of Common
Stock at $9.00 per share, net of
offering costs of $415,855............ 13,563,595 -- -- --
Issuance of 18,728 shares of Common
Stock at $6.32 - $9.67 under the
Employee Stock Purchase Plan.......... 170,933 -- -- --
Non-employee stock option expense...... 97,051 -- -- --
Net loss............................... $ -- $ -- $ -- $(19,633,722)
----------- ------ -------- ------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
F-8
57
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS'
INVESTMENT -- (CONTINUED)
FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO DECEMBER 31, 2000
REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
PARTNERS' --------------- -------------------- --------------------- PAID-IN
INVESTMENT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------ ------ ------- ---------- ---------- -------- ------------
BALANCE, December 31, 1999............. $ -- -- $ -- -- $ -- 26,105,894 $261,059 $ 96,202,177
Exercise of options by employees at
$0.32 - $24.10........................ -- -- -- -- -- 324,202 3,242 2,013,365
Exercise of Common Stock warrants to
purchase 1,270,000 shares of Common
Stock at $6.60 and $14.00 per share... -- -- -- -- -- 1,270,000 12,700 17,730,300
Exercise of Series G warrants to
purchase 147,800 shares of Common
Stock at $4.75 per share.............. -- -- -- -- -- 147,800 1,478 700,573
Issuance of 3,200,000 shares of Common
Stock at $7.375 per share, net of
offering costs of $478,896............ -- -- -- -- -- 3,200,000 32,000 23,089,104
Issuance of 25,561 shares of Common
Stock at $7.92, $9.66 and $22.10 under
the Employee Stock Purchase Plan...... -- -- -- -- -- 25,561 255 346,396
Non-employee stock option expense...... -- -- -- -- -- -- -- 153,563
Net loss............................... -- -- -- -- -- -- -- --
---------- ------ ---- ------- ---------- ---------- -------- ------------
BALANCE, December 31, 2000............. $ -- -- $ -- -- $ -- 31,073,457 $310,734 $140,235,478
========== ====== ==== ======= ========== ========== ======== ============
STOCK STOCK
SUBSCRIPTION SUBSCRIPTION
RECEIVABLE RECEIVABLE DEFICIT
FROM FROM ACCUMULATED
ISSUANCE OF ISSUANCE OF DURING THE
CONVERTIBLE COMMON DEVELOPMENT
PREFERRED STOCK STOCK STOCK
--------------- ------------ ------------
BALANCE, December 31, 1999............. $ -- $(37,000) $(64,963,494)
Exercise of options by employees at
$0.32 - $24.10........................ -- -- --
Exercise of Common Stock warrants to
purchase 1,270,000 shares of Common
Stock at $6.60 and $14.00 per share... -- -- --
Exercise of Series G warrants to
purchase 147,800 shares of Common
Stock at $4.75 per share.............. -- -- --
Issuance of 3,200,000 shares of Common
Stock at $7.375 per share, net of
offering costs of $478,896............ -- -- --
Issuance of 25,561 shares of Common
Stock at $7.92, $9.66 and $22.10 under
the Employee Stock Purchase Plan...... -- -- --
Non-employee stock option expense...... -- -- --
Net loss............................... -- -- (26,916,808)
------ -------- ------------
BALANCE, December 31, 2000............. $ -- $(37,000) $(91,880,302)
====== ======== ============
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
F-9
58
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM
INCEPTION
YEAR ENDED DECEMBER 31, (AUGUST 10,
------------------------------------------ 1990) TO
2000 1999 1998 DECEMBER 31, 2000
------------ ------------ ------------ -----------------
OPERATING ACTIVITIES:
Net loss.................................. $(26,916,808) $(19,633,722) $(19,345,436) $(91,880,302)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation expense and amortization..... 826,138 532,549 255,197 1,746,704
Issuance of Common Stock for services
rendered................................ -- -- -- 48,578
Issuance of Common Stock options for
services rendered....................... 153,563 97,051 13,313 263,927
Provision for redemption of Redeemable
Preferred Stock......................... -- -- -- 1,017,387
Write-off of deferred offering costs...... -- -- 469,515 469,515
Increase in accounts receivable........... (329,694) -- -- (329,694)
Other..................................... -- -- -- 68,399
Increase in prepaid and other current
assets.................................. (453,102) (362,959) (15,176) (1,009,909)
(Increase) decrease in other assets....... (162,543) 128,360 (208,248) (242,431)
Increase (decrease) in accounts payable
and accrued liabilities................. 1,078,698 (158,372) (1,558,774) 2,093,759
------------ ------------ ------------ ------------
Net cash flows used in operating
activities............................ (25,803,748) (19,397,093) (20,389,609) (87,754,067)
------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of equipment and leasehold
improvements............................ (489,770) (518,570) (2,624,383) (5,408,140)
Sale of leasehold improvements............ -- -- 3,000,000 3,000,000
Increase in notes receivable from
officers................................ (642,256) -- -- (642,256)
Cash paid for deposits.................... -- (16,000) (6,329) (50,767)
------------ ------------ ------------ ------------
Net cash flows provided by (used in)
investing activities.................. (1,132,026) (534,570) 369,288 (3,101,163)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock,
net of related offering costs........... 23,121,104 13,579,145 -- 36,700,249
Proceeds from issuance of Common Stock
under the Employee Stock Purchase
Plan.................................... 346,651 171,120 -- 517,771
Proceeds from issuance of Convertible
Preferred Stock, net of related offering
costs................................... -- -- 21,404,004 47,185,046
Proceeds from the transaction with Tseng
Labs, Inc............................... -- -- 27,966,372 27,966,372
Proceeds from exercise of Series E, F,G
and Common Stock warrants to purchase
stock................................... 18,445,051 840,289 208,463 19,966,894
Decrease in stockholder receivable........ -- -- -- 23,626
Cash received for Common Stock options
exercised............................... 2,016,607 276,741 263,394 2,740,029
Redemption of Redeemable Preferred
Stock................................... -- -- (546,051) (546,051)
Proceeds from bridge loan................. -- -- -- 791,000
Partner cash contributions................ -- -- -- 5,312,355
Increase in restricted cash............... (36,106) (28,938) (412,580) (676,216)
Principal payments under capital lease
obligation.............................. (141,959) (125,980) (29,214) (297,153)
Proceeds from borrowings.................. 800,000 -- -- 950,000
Repayment of borrowings................... (100,285) -- (62,502) (250,285)
------------ ------------ ------------ ------------
Net cash flows provided by financing
activities......................... 44,451,063 14,712,377 48,791,886 140,383,637
------------ ------------ ------------ ------------
F-10
59
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
PERIOD FROM
INCEPTION
YEAR ENDED DECEMBER 31, (AUGUST 10,
------------------------------------------ 1990) TO
2000 1999 1998 DECEMBER 31, 2000
------------ ------------ ------------ -----------------
Net increase (decrease) in cash and cash
equivalents............................... 17,515,289 (5,219,286) 28,771,565 49,528,407
CASH AND CASH EQUIVALENTS, beginning of
period.................................... 32,013,118 37,232,404 8,460,839 --
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period.... $ 49,528,407 $ 32,013,118 $ 37,232,404 $ 49,528,407
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING ACTIVITIES:
Accrual of leasehold improvements payable... $ -- $ -- $ -- $ 848,000
============ ============ ============ ============
Accrual of deferred offering costs.......... $ -- $ -- $ -- $ 441,375
============ ============ ============ ============
Conversion of partners' investment to
Preferred Stock........................... $ -- $ -- $ -- $ 5,312,355
============ ============ ============ ============
Conversion of bridge loan to Convertible
Preferred Stock........................... $ -- $ -- $ -- $ 791,000
============ ============ ============ ============
Conversion of Convertible Preferred Stock
for Common Stock.......................... $ -- $ -- $ 53,766,991 $ 53,766,991
============ ============ ============ ============
Issuance of Convertible Preferred Stock to
investment advisors....................... $ -- $ -- $ 425,742 $ 540,742
============ ============ ============ ============
Issuance of Common Stock as payment of
Management bonus.......................... $ -- $ -- $ -- $ 59,200
============ ============ ============ ============
Redemption of Redeemable Preferred Stock for
Common Stock.............................. $ -- $ -- $ 545,949 $ 545,949
============ ============ ============ ============
Sale of Common Stock in exchange for stock
subscription receivable................... $ -- $ -- $ -- $ 37,000
============ ============ ============ ============
Sale of Convertible Preferred Stock in
exchange for stock subscription
receivable................................ $ -- $ -- $ -- $ 23,626
============ ============ ============ ============
Issuance of Common Stock as payment for
accounts payable.......................... $ -- $ -- $ -- $ 48,578
============ ============ ============ ============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-11
60
CELL PATHWAYS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. ORGANIZATION AND BASIS OF PRESENTATION:
Cell Pathways, Inc. was incorporated in Delaware in July 1998 as a
subsidiary of, and as of November 3, 1998 successor to, a Delaware corporation
of the same name. As the context requires, "Company" is used herein to signify
the successor and/or the predecessor corporations (See Note 3).
The Company is a development stage pharmaceutical company focused on the
research, development and commercialization of products to prevent and treat
cancer. The Company has not generated any revenues from the development of its
products to date, nor is there any assurance of any future revenues from the
development of its products. The Company's intended products are subject to long
development cycles and there is no assurance the Company will be able to
successfully develop, manufacture, obtain regulatory approval for or market its
products. During the period required to develop its products, the Company plans
to continue to finance operations through debt and equity financing and
corporate alliances. There is no assurance, however, that such additional
funding will be available on terms acceptable to the Company, if at all. The
Company will continue to be considered in the development stage until such time
as it generates significant revenues from its principal operations. As of
December 31, 2000, the Company had a deficit accumulated during the development
stage of $91,880,302.
On November 3, 1998, the Company completed a financing through the
acquisition of Tseng Labs, Inc. ("Tseng") (a publicly held company) in which the
Company issued to Tseng stockholders approximately 5.5 million shares of the
Company's Common Stock and received net proceeds of approximately $26.4 million
(See Note 3). The accompanying financial statements include the accounts of the
Company from inception (August 10, 1990) and the accounts of Tseng after
November 3, 1998.
In July 2000, the Company entered into an exclusive Marketing and Promotion
Agreement (the "Nilandron Agreement") with Aventis Pharmaceuticals, Inc. to
market Nilandron(R) (nilutamide) to urologists in the United States and Puerto
Rico for use in patients who suffer from prostate cancer. The Company began to
market and promote Nilandron(R) in September 2000 through the use of a dedicated
third-party sales force. Under the terms of the Nilandron Agreement, the Company
is responsible for all marketing and promotion expenses and will receive a
percentage of the gross margin on sales in excess of a pre-established gross
margin threshold. For the year ended December 31, 2000, the Company recognized
revenue under the Nilandron Agreement of $329,694 related to the results of the
sales efforts for September through December 2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated.
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from such estimates.
F-12
61
CELL PATHWAYS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Cash, Cash Equivalents and Restricted Cash
For purposes of the statements of cash flows, the Company considers all
highly liquid instruments with an original maturity of three months or less to
be cash equivalents. As of December 31, 2000 and December 31, 1999,
approximately $676,000 and $640,000, respectively, of cash and cash equivalents
were restricted to secure letters of credit for security deposits on the
Company's leases (See Note 13). As of December 31, 2000, approximately $41.9
million of the Company's cash and cash equivalents were invested in US
government securities at one financial institution.
Equipment, Furniture and Leasehold Improvements
Equipment, furniture and leasehold improvements are recorded at cost.
Depreciation of equipment and furniture is provided on the straight-line method
over estimated useful lives of two to seven years. Leasehold improvements are
amortized over the shorter of the useful life or the life of the related lease.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses and debt
instruments. The carrying values of these assets and liabilities are considered
to be representative of their respective fair values.
Revenue Recognition
The Company recognizes revenue under the Nilandron Agreement as marketing
services are performed.
Research and Development
Costs incurred in connection with research and development activities are
expensed as incurred.
Supplemental Cash Flow Information
For the years ended December 31, 2000, 1999 and 1998, the Company paid
interest of $48,592, $29,991 and $11,689, respectively, and paid no income
taxes.
Stock Compensation
The Company accounts for stock option grants in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the Company's stock option plans, options are granted at the
fair market value on the date of the grant, and therefore no compensation
expense is recognized for stock options granted to employees. In 1996, the
Company adopted the disclosure provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation."
Basic and Diluted Net Loss Per Common Share
The Company provides basic and diluted net loss per Common share pursuant
to SFAS No. 128, "Earnings per Share." SFAS No. 128 requires dual presentation
of basic and diluted net loss per Common share. "Basic" net loss per Common
share equals net loss divided by the weighted average Common shares outstanding
during the period. "Diluted" net loss per Common share equals net loss divided
by the sum of the weighted average Common shares outstanding during the period
plus Common stock equivalents. The Company's basic and diluted net loss per
share amounts are the same since the assumed exercise of stock options and
warrants are anti-dilutive due to the Company's losses. The amount of Common
Stock equivalents
F-13
62
CELL PATHWAYS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
excluded from the calculation of diluted net loss per share was 5,445,620,
3,640,842 and 2,128,424 during the years ended December 31, 2000, 1999 and 1998,
respectively.
Comprehensive Income
The Company follows the provisions of SFAS No. 130, "Reporting
Comprehensive Income" which establishes standards for reporting and display of
comprehensive income (loss) in a full set of general-purpose financial
statements. Comprehensive income (loss) is defined as the total of net income
(loss) and all other non-owner changes in equity. For all years presented, the
Company's comprehensive loss consists only of the Company's net loss.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133 -- an
amendment of FASB Statement No. 133," which must be adopted by the Company in
the year ending December 31, 2001, provides a comprehensive and consistent
standard for the recognition and measurement of derivatives and hedging
activities. As the Company does not currently hold derivative instruments or
engage in hedging activities, the adoption of this pronouncement will have no
impact on the Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 draws on existing accounting rules and provides specific guidance
on revenue recognition of up-front non-refundable license fees. As the Company
has not had any license fee revenue, the adoption of SAB 101 did not have any
impact on the Company's financial position or results of operations.
3. TRANSACTION WITH TSENG:
In June 1998, Cell Pathways, Inc., a Delaware corporation, and Tseng, a
Utah corporation, entered into an agreement and plan of reorganization (the
"Reorganization Agreement"). The Reorganization Agreement provided for (i) the
formation of Cell Pathways Holding, Inc., a Delaware corporation ("CPHI"), (ii)
the merger of Tseng Sub, Inc., a wholly-owned subsidiary of CPHI, with and into
Tseng, (iii) the merger of CPI Sub, Inc., a wholly-owned subsidiary of CPHI,
with and into Cell Pathways, Inc. and (iv) the issuance of approximately 23% of
the then outstanding shares of the Common Stock of CPHI to the Tseng
stockholders and approximately 77% of the then outstanding shares of the Common
Stock of CPHI to the Cell Pathways, Inc. stockholders. In connection with this
transaction, the Company raised net proceeds of approximately $26.4 million (See
Note 1). As a result of the aforementioned transactions, Tseng and Cell
Pathways, Inc., subsequently renamed Cell Pathways Pharmaceuticals, Inc.
("CPP"), became wholly-owned subsidiaries of CPHI, subsequently renamed Cell
Pathways, Inc. ("CPI"). The transaction closed November 3, 1998 and was
accounted for as a reorganization of CPP into CPI with the sale of approximately
23% of CPI Common Stock in exchange for Tseng's net assets. The historical
financial statements of the combined Company are the historical financial
statements of CPP.
F-14
63
CELL PATHWAYS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS:
Equipment, furniture and leasehold improvements consisted of the following:
DECEMBER 31,
------------------------
2000 1999
----------- ----------
Furniture and fixtures.............................. $ 341,411 $ 287,539
Computer equipment and software..................... 1,019,861 827,165
Laboratory equipment................................ 1,428,397 1,267,624
Office equipment.................................... 14,203 7,225
Leasehold improvements.............................. 126,119 50,668
----------- ----------
2,929,991 2,440,221
Less accumulated depreciation and amortization...... (1,746,704) (920,566)
----------- ----------
$ 1,183,287 $1,519,655
=========== ==========
5. NOTES RECEIVABLE FROM OFFICERS:
During the year ended December 31, 2000, the Company made loans to certain
of its officers that totaled $632,954. As of December 31, 2000, the loans are
still outstanding and are recorded on the balance sheet at their principal
amount plus accrued interest. The loans bear interest at a rate of 6% annually,
are repayable upon the earlier of termination or five years from the date of
issuance and are secured by subordinate mortgages on real property.
6. OTHER ACCRUED LIABILITIES:
Other accrued liabilities consisted of the following:
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Accrued research materials........................... $1,500,000 $ --
Accrued consultant fees.............................. 130,409 333,430
Accrued research expenses............................ 786,127 326,740
Accrued sales contract and taxes..................... 390,983 104,534
Other................................................ 617,464 691,182
---------- ----------
$3,424,983 $1,455,886
========== ==========
7. STOCKHOLDERS' EQUITY:
During the year ended December 31, 2000, the Company increased its
authorized shares of Preferred Stock from 5,000,000 to 10,000,000 shares, and
increased its authorized shares of Common Stock from 70,000,000 to 150,000,000
shares.
In November 2000, the Company sold 3,200,000 shares of Common Stock in a
private placement, mainly to institutional investors at a price of $7.375 per
share, resulting in net proceeds of approximately $23,116,000. With each share
of Common Stock purchased, the Company issued a warrant to purchase one and
thirty five one-hundredths (1.35) shares of the Company's Common Stock at $12.00
per share. The warrants are exercisable until June 30, 2002. The Company paid
one of the placement agents a fee of $413,800 and another placement agent
warrants to purchase 73,750 shares of Common Stock at an exercise price of
$12.00 per share as a fee. In addition, the Company has an agreement to grant
warrants to the placement agents of the private placement equal to 5.0% of the
total warrants exercised by the purchasers which the respective placement agents
brought to the offering. Under the agreement, warrants to purchase up to 109,499
shares of Common
F-15
64
CELL PATHWAYS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. STOCKHOLDERS' EQUITY -- (CONTINUED)
Stock may be issued. The warrants issued to the placement agents are exercisable
until the later of (i) June 30, 2002 or (ii) 30 days after the exercise of the
warrants by the purchasers.
In October 1999, the Company sold 1,555,000 shares of Common Stock in a
private placement to institutional investors at a price of $9.00 per share,
resulting in net proceeds of approximately $13,579,000. With each share of
Common Stock purchased, the Company issued one warrant for the purchase of the
Company's Common Stock at $14.00 per share. As of December 31, 2000, 1,230,000
warrants were exercised by the purchasers for total proceeds of $17,220,000 and
an additional 35,000 warrants were exercised by the placement agent as their
fee, for total proceeds of $490,000. All unexercised warrants expired on
December 31, 2000.
In April through June 1998, the Company issued 4,645,879 shares of Series G
Convertible Preferred Stock ("Series G") and warrants to purchase 227,793 shares
of Series G at $4.75 per share, resulting in net proceeds to the Company of
approximately $21,404,000. All warrants were exercised prior to their expiration
date of May 1, 2000.
In November 1998, in conjunction with the transaction with Tseng (see Note
3), each share of Series A, B, C, D, E, F and G Convertible Preferred Stock was
converted into one share of CPI Common Stock.
8. REDEEMABLE PREFERRED STOCK:
Prior to redemption, the Redeemable Preferred Stock carried no vote and no
dividend and was mandatorily redeemable in an aggregate amount of $1,092,000 in
cash and/or freely transferable Common Stock upon the closing of any firm
commitment underwritten public offering of Common Stock. In November 1998,
immediately prior to the transaction with Tseng, the Company redeemed the
Redeemable Preferred Stock for $546,051 and 33,052 shares of Common Stock. The
Company recorded a provision for the redemption of the Redeemable Preferred
Stock during the third quarter of 1997 as Company preparations for an initial
public offering of Common Stock made it probable that the Company would redeem
the Redeemable Preferred Stock.
9. STOCKHOLDERS' RIGHTS PLAN:
On December 3, 1998, the Company's Board of Directors authorized the
adoption of a stockholders' rights plan. Under the plan, rights to purchase
stock, at a rate of one right for each share of Common Stock held, were
distributed to holders of record on December 15, 1998 and automatically attach
to shares issued thereafter. Under the plan, the rights attach to the Common
Stock and are not represented by separate rights certificates until, and
generally become exercisable only after, a person or group (i) acquires 15% or
more of the Company's outstanding Common Stock or (ii) commences a tender offer
that would result in such a person or group owning 15% or more of the Company's
Common Stock. When the rights first become exercisable, a holder will be
entitled to buy from the Company a unit consisting of one one-hundredth of a
share of Series A Junior Participating Preferred Stock of the Company at a
purchase price of $90. However, if any person acquires 15% or more of the
Company's Common Stock other than pursuant to a qualified offer, each right not
owned by a 15% or more stockholder would become exercisable for Common Stock of
the Company (or in certain circumstances, other consideration) having a market
value equal to twice the exercise price of the right. The rights expire on
December 14, 2008, except as otherwise provided in the plan.
10. STOCK OPTIONS, WARRANTS AND PURCHASE PLAN:
The Company's 1993 Stock Option Plan, which was amended and renamed in 1997
the 1997 Equity Incentive Plan (the "Plan") and subsequently amended in 2000,
authorizes the Company to grant to eligible employees, directors and consultants
Common Stock, stock appreciation rights, or options to purchase up to 5,600,000
shares of Common Stock, including all grants since inception of the Plan in
1993. As of
F-16
65
CELL PATHWAYS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK OPTIONS, WARRANTS AND PURCHASE PLAN -- (CONTINUED)
December 31, 2000, 1,936,829 shares of Common Stock remained eligible for future
grants under the Plan. The Board of Directors sets the rate at which the options
become exercisable and determines when the options expire, subject to the
limitations described below. Options granted through June 1999 may, to the
extent vested, be exercised up to ten years following the date of grant. Options
granted after June 1999 may, to the extent vested, be exercised up to the
earlier of ten years from the date of grant or 90 days after termination of
services. All options will generally become exercisable in the event the Company
is sold or has other significant changes in ownership. Generally, options to
employees vest ratably over a four-year period. Options granted under the Plan
through July 1997 may be immediately exercisable, but any unvested shares
exercised are held by the Company and are subject to reacquisition by the
Company should employment terminate prior to completion of applicable vesting
periods.
In October 1997, the Board of Directors adopted and the stockholders
approved the 1997 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan") covering an aggregate of 453,925 shares of Common Stock. Pursuant to the
terms of the Directors' Plan, each person who first becomes a non-employee
Director automatically shall be granted an option to purchase 18,157 shares of
Common Stock (the "Inaugural Grant"). On the date of each annual stockholders
meeting commencing with the meeting in 1998, each non-employee Director who has
served at least one full year as a director is automatically granted an option
to purchase 5,447 shares of Common Stock (the "Anniversary Grant"). In addition,
the Company granted options to purchase 27,235 shares of Common Stock at the
inception of the plan. Options subject to an Inaugural Grant under the
Directors' Plan will vest in three equal, annual installments commencing on the
first anniversary of the date of the grant of the option. Options subject to an
Anniversary Grant under the Directors' Plan will vest in full on the first
anniversary of the grant date of the option. In addition, certain grants made at
the inception of the Directors' Plan vested on March 31, 1998. The vesting of
all options under the Directors' Plan is conditioned on the continued service of
the recipient as a director, employee or consultant of the Company or any
affiliate of the Company. As of December 31, 2000, 272,357 shares of Common
Stock remained eligible for future option grants under the Directors' Plan.
In November 1998, the Company assumed the Tseng Labs, Inc. 1991 Stock
Option Plan, the Tseng Labs, Inc. 1991 Special Directors Stock Option Plan and
the Tseng Labs, Inc. 1995 Stock Option Plan (collectively the "Tseng Plans").
The Company assumed the plans in order to administer the remaining options
outstanding as of November 4, 1998. The Company has terminated any right to
grant further options under the Tseng Plans.
The Company accounts for stock options granted to employees under the Plan
in accordance with the intrinsic value method provided for under APB Opinion No.
25. Under the Plan, options may be granted at the fair market value on the date
of the grant and therefore no compensation expense is, or has been, recognized
in respect of stock options awarded to employees. In accordance with the
provisions of SFAS No. 123, the Company discloses fair value compensation cost
in respect of employee stock options using the Black-Scholes
F-17
66
CELL PATHWAYS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK OPTIONS, WARRANTS AND PURCHASE PLAN -- (CONTINUED)
option pricing model. Had compensation cost for the Plan been recognized in the
income statements under SFAS No. 123, the Company's net loss would have
increased to the following pro forma amounts:
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
Net loss:
As reported...................... $(26,916,808) $(19,633,722) $(19,345,436)
============ ============ ============
Pro forma........................ $(30,420,337) $(20,398,272) $(19,643,828)
============ ============ ============
Basic and diluted net loss per
Common Share:
As reported...................... $ (0.96) $ (0.79) $ (3.04)
============ ============ ============
Pro forma........................ $ (1.09) $ (0.82) $ (3.08)
============ ============ ============
The pro forma disclosures made above do not reflect options granted prior
to January 1, 1995 and, therefore, may not be representative of pro forma
compensation cost in future years. The weighted average fair value of the stock
options granted during 2000, 1999 and 1998 was $10.01, $6.64 and $1.93,
respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions:
2000 1999 1998
------- ------- -------
Risk-free interest rate............................ 5.22% 6.56% 6.15%
Expected dividend yield............................ 0% 0% 0%
Expected life...................................... 6 years 6 years 6 years
Expected volatility................................ 195% 75% .45%
Information relative to the Company's stock options under all plans is as
follows:
WEIGHTED
AVERAGE
EXERCISE PRICE EXERCISE PRICE AGGREGATE
OPTIONS (PER SHARE) (PER SHARE) PROCEEDS
--------- -------------- -------------- -----------
BALANCE AS OF DECEMBER 31, 1996........... 476,000 $0.32 - $ 0.50 $0.39 $ 183,819
Granted................................. 455,021 1.00 - 4.75 3.47 1,578,000
Exercised............................... (251,250) 0.32 - 0.50 0.45 (111,974)
Forfeited............................... (63,500) 0.32 - 3.70 0.85 (54,120)
--------- -------------- -----------
BALANCE AS OF DECEMBER 31, 1997........... 616,271 0.32 - 3.70 2.59 1,595,725
Granted................................. 719,298 4.75 - 12.13 6.39 4,599,069
Tseng options assumed................... 512,480 3.79 - 24.10 8.10 4,151,701
Exercised............................... (65,500) 0.32 - 8.09 4.02 (263,394)
Forfeited............................... (11,500) 0.32 - 6.60 0.39 (4,525)
--------- -------------- -----------
BALANCE AS OF DECEMBER 31, 1998........... 1,771,049 0.32 - 24.10 5.69 10,078,576
Granted................................. 179,679 6.81 - 11.00 9.35 1,679,132
Exercised............................... (48,061) 0.32 - 8.09 5.76 (276,741)
Forfeited............................... (9,000) 6.60 - 12.13 7.11 (63,974)
--------- -------------- -----------
F-18
67
CELL PATHWAYS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK OPTIONS, WARRANTS AND PURCHASE PLAN -- (CONTINUED)
WEIGHTED
AVERAGE
EXERCISE PRICE EXERCISE PRICE AGGREGATE
OPTIONS (PER SHARE) (PER SHARE) PROCEEDS
--------- -------------- -------------- -----------
BALANCE AS OF DECEMBER 31, 1999........... 1,893,667 0.32 - 24.10 6.03 11,416,993
Granted................................. 1,919,682 5.45 - 49.88 10.26 19,700,719
Exercised............................... (324,202) 0.32 - 24.10 6.24 (2,021,610)
Forfeited............................... (56,501) 4.13 - 25.94 10.54 (595,571)
--------- -------------- -----------
BALANCE AS OF DECEMBER 31, 2000........... 3,432,646 $0.32 - $49.88 $8.30 $28,500,531
========= ============== ----- ===========
The weighted average remaining contractual life of all options outstanding
at December 31, 2000 is 8.2 years.
The following table summarizes information about the Company's stock
options outstanding and exercisable at December 31, 2000 based upon each
exercise price:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -----------------------------
NUMBER OF WEIGHTED WEIGHTED WEIGHTED
OPTIONS AVERAGE AVERAGE NUMBER AVERAGE
OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
AT DECEMBER 31, CONTRACTUAL PRICE AT DECEMBER 31, PRICE
RANGE OF EXERCISE PRICES 2000 LIFE IN YEARS (PER SHARE) 2000 (PER SHARE)
------------------------ ------------------- ------------- ----------- --------------- -----------
$ 0.32 - $ 1.00............. 167,500 5.7 $0.64 167,500 $0.64
3.70 - 3.79............. 277,972 5.5 3.72 277,972 3.72
4.75 - 5.45............. 1,391,947 9.6 5.38 86,639 4.75
6.60 - 6.81............. 607,832 7.5 6.61 337,280 6.60
7.63 - 9.03............. 371,373 5.7 8.37 192,954 8.24
9.25 - 12.13............. 331,367 8.6 11.92 40,552 10.81
24.00 - 32.13............. 229,155 9.1 27.20 3,632 22.13
$36.25 - $49.88............. 55,500 9.2 46.11 -- --
---------
3,432,646 $8.30 1,106,529 $5.57
========= ----- ========= -----
In October 1997, the Board of Directors adopted and the stockholders
approved the Employee Stock Purchase Plan (the "Purchase Plan") covering an
aggregate of 544,710 shares of Common Stock. Under the Purchase Plan, the Board
may authorize participation by eligible employees, including officers, in
periodic offerings following the adoption of the Purchase Plan. The offering
period for any offering will be no longer than 27 months.
As of November 4, 1998, employees became eligible to participate in the
Purchase Plan if they are employed by the Company or an affiliate of the Company
designated by the Board. Employees who participate in an offering can have up to
15% of their earnings withheld pursuant to the Purchase Plan and applied, on
specified dates determined by the Board, to the purchase of shares of Common
Stock. The price of Common Stock purchased under the Purchase Plan will be not
less than 85% of the lower of the fair market value of the Common Stock on the
commencement date of each offering period or the relevant purchase date.
Employees may end their participation in the offering at any time during the
offering period, and participation ends automatically on termination of
employment with the Company. The Purchase Plan will terminate at the Board's
direction. As of December 31, 2000, the Company has issued 44,289 shares under
the Purchase Plan.
In 2000, the Company, in conjunction with the private placement of Common
Stock, issued warrants to purchase 4,320,000 shares of Common Stock at an
exercise price of $12.00 per share. As of December 31, 2000, these warrants were
still outstanding. The Company also made an agreement to grant warrants to the
placement agents of the private placement equal to 5.0% of the total warrants
exercised by the purchasers
F-19
68
CELL PATHWAYS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK OPTIONS, WARRANTS AND PURCHASE PLAN -- (CONTINUED)
which the placement agent brought to the offering. Under the agreement, warrants
to purchase up to 109,499 shares of Common Stock may be issued at an exercise
price of $12.00 per share. The Company also paid one of the placement agents a
fee of 73,750 shares of Common Stock warrants at an exercise price of $12.00 per
share. The warrants issued to the placement agent are exercisable until the
later of (i) June 30, 2002 or (ii) 30 days after the exercise of the warrants by
the purchasers.
11. DEBT:
During 2000, the Company financed certain fixed asset purchases with a note
payable of $800,000, secured by certain laboratory and office equipment. The
note bears interest at 13.8% and is repayable in monthly payments of principal
and interest of $26,959 over 36 months.
As of December 31, 2000, the remaining principal payments were as follows:
2001........................................................ $241,915
2002........................................................ 277,470
2003........................................................ 180,330
--------
699,715
Less - current portion...................................... (241,915)
--------
$457,800
========
12. INCOME TAXES:
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." As of December 31, 2000, the Company had
approximately $64,638,000 of net operating loss carryforwards ("NOLs") for
income tax purposes available to offset future federal income tax, subject to
limitations for alternative minimum tax. The NOLs are subject to examination by
the tax authorities and expire between 2008 and 2020.
Prior to its conversion into corporate form, the business had accumulated
losses totaling approximately $3,900,000. For tax purposes these losses were
distributed to the partners in accordance with the provisions of the partnership
agreement of the Company's predecessor partnership. Thus, these losses, while
included in the financial statements of the Company, are not available to offset
future taxable income, if any, of the Company.
The Tax Reform Act of 1986 contains provisions that may limit the NOLs
available to be used in any given year upon the occurrence of certain events,
including significant changes in ownership interest. A change in ownership of a
company of greater than 50% within a three-year period results in an annual
limitation on the Company's ability to utilize its NOLs from tax periods prior
to the ownership change. The Company believes that the transaction with Tseng
(See Note 3) triggered such limitation. However, the Company does not expect
such limitation to have a significant impact on its operations.
F-20
69
CELL PATHWAYS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. INCOME TAXES -- (CONTINUED)
The components of the net deferred income tax asset at December 31, 2000
and 1999 were as follows:
DECEMBER 31,
-------------------------
2000 1999
----------- -----------
Gross deferred tax asset:
Net operating loss carryforwards................... $25,078,000 $18,748,000
Capitalized research and development
expenditures..................................... 2,102,000 2,465,000
Capitalized start-up costs......................... 7,610,000 4,449,000
Accruals not currently deductible.................. 499,000 194,000
Other.............................................. 2,152,000 39,000
----------- -----------
37,441,000 25,895,000
Gross deferred tax liabilities:
Other.............................................. -- (3,000)
Less valuation allowance........................... (37,441,000) (25,892,000)
----------- -----------
$ -- $ --
=========== ===========
The Company has not yet achieved profitable operations. Accordingly,
management believes the tax assets as of December 31, 2000 do not satisfy the
realization criteria set forth in SFAS No. 109 and has recorded a valuation
allowance for the entire net tax asset.
13. COMMITMENTS AND CONTINGENCIES:
Leases
In June 1998, the Company entered into a ten-year lease for office and
laboratory space in Horsham, Pennsylvania. This lease contains two five-year
renewal terms.
In 1998, the Company also entered into a 30-month capital lease agreement
to lease software to be used in the research and development activities of the
Company. The software acquired under the lease at a cost of $335,371 less
accumulated amortization of $324,192 is included in equipment in the
accompanying consolidated balance sheets as of December 31, 2000. The interest
rate on this capital lease is 12%.
Aggregate minimum annual payments under the Company's lease commitments are
as follows as of December 31, 2000:
CAPITAL OPERATING
LEASES LEASES
------- ----------
2001................................................... $38,985 $ 903,000
2002................................................... -- 927,000
2003................................................... -- 955,000
2004................................................... -- 964,000
2005................................................... -- 993,000
Thereafter............................................. -- 2,610,000
------- ----------
Total minimum lease payments................. 38,985 $7,352,000
==========
Less: Interest......................................... (767)
-------
Present value of net minimum lease payments............ $38,218
=======
Rental expense under the operating leases and other month-to-month leases
entered into by the Company totaled approximately $1,118,166, $939,000 and
$815,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
F-21
70
CELL PATHWAYS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
Contracts
The Company contracts with a number of university-based researchers and
commercial vendors who provide various research, clinical and product
development activities. Such arrangements are generally cancelable at any time.
Litigation
In February and March of 1999, five different groups of stockholders filed
class actions in the United States District Court in Philadelphia against the
Company, and certain of its officers and directors, alleging violations of
Section 11 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. The complaints alleged that the Company made
false and misleading statements about the efficacy and near-term
commercialization of the Company's lead drug candidate, exisulind. The cases
were consolidated in March, 1999, and a consolidated amended complaint which
asserts claims under Section 10(b) and 20(a) of the Securities Exchange Act of
1934 and SEC Rule 10-b5 was filed on June 28, 1999 seeking an unspecified amount
of damages on behalf of a class of persons who traded in the Company's
securities between October 7, 1998 and February 2, 1999. The defendants moved to
dismiss the complaint on September 21, 1999. The motion to dismiss was denied on
January 27, 2000. On February 10, 2000, defendants filed a motion for
reconsideration, or, in the alternative, certification for immediate appeal,
both of which were denied by the district court by order dated March 16, 2000.
The defendants answered the complaint on March 13, 2000. On May 24, 2000,
defendants filed a petition for writ of mandamus in the Court of Appeals for the
Third Circuit, requesting that the Court of Appeals review the district court's
denial of the motion to dismiss. The Court of Appeals denied the petition for
writ of mandamus on September 29, 2000. On December 29, 2000, the Court entered,
on its own motion, a scheduling order requiring that the parties are to complete
all discovery by April 9, 2001. The Court further ordered that the parties
submit dispositive motions and their joint pretrial order by April 30, 2001. The
Company denies any allegations of wrongdoing and intends to vigorously defend
the litigation.
F-22
71
CELL PATHWAYS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for the years ended December 31, 2000
and 1999 is as follows:
2000
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------
Revenues.................................. $ -- $ -- $ -- $ 329,694
Research and development expenses......... 5,379,962 5,237,800 5,909,609 5,730,434
Selling, general and administrative
expenses................................ 1,631,211 2,455,667 2,098,450 1,061,254
----------- ----------- ----------- -----------
Operating Loss.......................... (7,011,173) (7,693,467) (8,008,059) (6,461,994)
Interest Income, net...................... 474,201 539,756 528,642 715,286
----------- ----------- ----------- -----------
Net loss.................................. $(6,536,972) $(7,153,711) $(7,479,417) $(5,746,708)
=========== =========== =========== ===========
Basic and diluted net loss per Common
share................................... $ (0.24) $ (0.26) $ (0.27) $ (0.19)
=========== =========== =========== ===========
1999
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------
Revenues.................................. $ -- $ -- $ -- $ --
Research and development expenses......... 4,527,893 3,590,342 3,526,994 4,609,629
Selling, general and administrative
expenses................................ 1,144,544 1,067,752 1,245,987 1,390,879
----------- ----------- ----------- -----------
Operating Loss.......................... (5,672,437) (4,658,094) (4,772,981) (6,000,508)
Interest Income, net...................... 367,846 325,383 322,265 454,804
----------- ----------- ----------- -----------
Net loss.................................. $(5,304,591) $(4,332,711) $(4,450,716) $(5,545,704)
=========== =========== =========== ===========
Basic and diluted net loss per Common
share................................... $ (0.22) $ (0.18) $ (0.18) $ (0.21)
=========== =========== =========== ===========
F-23