<Page>
As filed with the Securities and Exchange Commission on January 28, 2002
REGISTRATION STATEMENT NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
DOV PHARMACEUTICAL, INC.
(Exact Name of Registrant as Specified in its Charter)
<Table>
DELAWARE 2834 22-3374365
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
</Table>
------------------------------
CONTINENTAL PLAZA
433 HACKENSACK AVENUE
HACKENSACK, NEW JERSEY 07601
(201) 968-0980
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive office)
------------------------------
ARNOLD S. LIPPA, PH.D.
CHIEF EXECUTIVE OFFICER
DOV PHARMACEUTICAL, INC.
CONTINENTAL PLAZA
433 HACKENSACK AVENUE
HACKENSACK, NEW JERSEY 07601
(201) 968-0980
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<Table>
STUART M. CABLE, P.C. ALEXANDER D. LYNCH, ESQ.
ANDREW F. VILES, P.C. NICOLE W. SEEVERS, ESQ.
J. ROBERT HORTON, ESQ. WILSON SONSINI GOODRICH & ROSATI
GOODWIN PROCTER LLP PROFESSIONAL CORPORATION
599 LEXINGTON AVE. 12 EAST 49TH STREET, 30TH FLOOR
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10017
(212) 813-8800 (212) 999-5800
</Table>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / / ________
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / / ________
------------------------------
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
TITLE OF EACH PROPOSED AMOUNT OF
CLASS OF SECURITIES MAXIMUM AGGREGATE REGISTRATION
TO BE REGISTERED OFFERING PRICE(1) FEE
Common Stock, $0.0001 par value per share $86,250,000 $7,935
</Table>
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
------------------------------
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT FILES A FURTHER
AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES
ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH
DATE AS THE SEC, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Page>
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<Page>
SUBJECT TO COMPLETION, DATED JANUARY 28, 2002
PROSPECTUS
SHARES
[LOGO]
COMMON STOCK
----------------------------------------------------------------
This is the initial public offering of DOV Pharmaceutical, Inc. We are offering
shares of our common stock.
Prior to this offering, there has been no public market for our common stock. We
estimate that the initial public offering price per share will be between
$ and $ . We have applied for quotation of our common stock on the
Nasdaq National Market under the symbol "DOVP."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. "RISK FACTORS" BEGIN ON PAGE 7.
<Table>
<Caption>
Per Share Total
--------- -----------
Initial public offering price............................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to DOV........................... $ $
</Table>
We have granted the underwriters a 30-day option to purchase up to shares
of common stock to cover over-allotments, if any.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Lehman Brothers and CIBC World Markets, on behalf of the underwriters, expect to
deliver the shares on or about , 2002.
- --------------------------------------------------------------------------------
JOINT BOOKRUNNING MANAGERS
LEHMAN BROTHERS CIBC WORLD MARKETS
LAZARD
FIDELITY CAPITAL MARKETS
, 2002
<Page>
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
--------
Prospectus Summary....................... 3
Risk Factors............................. 7
Special Note Regarding Forward-Looking
Statements............................. 22
Use of Proceeds.......................... 23
Dividend Policy.......................... 23
Capitalization........................... 24
Dilution................................. 25
Selected Financial Data.................. 27
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 28
</Table>
<Table>
<Caption>
PAGE
--------
Business................................. 35
Management............................... 53
Certain Transactions..................... 62
Principal Stockholders................... 63
Description of Capital Stock............. 66
Shares Eligible for Future Sale.......... 72
Underwriting............................. 74
Legal Matters............................ 77
Experts.................................. 77
Where You Can Find More Information...... 77
Index to Financial Statements............ F-1
</Table>
------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from or
additional to that contained in this prospectus. This prospectus is not an offer
to sell or a solicitation of an offer to buy our common stock in any
jurisdiction where it is unlawful. The information contained in this prospectus
is accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of common stock.
Until , 2002, 25 days after the date of this prospectus, all
dealers that buy, sell or trade our common stock, whether or not participating
in this offering, may be required to deliver a prospectus. This is in addition
to the dealers' obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
<Page>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY THE RISKS OF
INVESTING IN OUR COMMON STOCK DISCUSSED UNDER "RISK FACTORS."
DOV PHARMACEUTICAL, INC.
OUR COMPANY
We are a biopharmaceutical company focused on the discovery, in-licensing,
development and commercialization of novel drug candidates for central nervous
system, cardiovascular and urological disorders. We have five product candidates
in clinical trials addressing therapeutic indications with significant unmet
needs. Our product candidate for insomnia is currently in Phase III clinical
trials and our product candidates for the treatment of anxiety disorders and
pain are in Phase II clinical trials. Our product candidates for the treatment
of insomnia, anxiety and pain have demonstrated efficacy in Phase II clinical
trials. Our product candidate for the treatment of angina and hypertension is
currently in Phase I clinical trials and we intend to initiate Phase III
clinical trials by the end of 2002. Our product candidate for the treatment of
depression is currently in Phase I clinical trials. We also have four compounds
in preclinical development for the potential treatment of depression, panic
disorders, Parkinson's disease, attention deficit disorder and stress
incontinence.
Our core scientific expertise is in neurotransmitter receptors, ion channels
and transport proteins. These are subcellular structures that play fundamental
roles in many physiological processes. Our senior management team has
substantial experience in drug discovery and development. During their careers,
they have participated in the discovery and development of ten new drugs that
have been successfully brought to market. To enhance our drug development and
commercialization efforts, we have established collaborative agreements with
Elan Corporation, plc and Biovail Laboratories Incorporated, and have
sublicensed our product candidate for the treatment of insomnia to Neurocrine
Biosciences, Inc.
OUR PRODUCT CANDIDATES
NBI-34060--INSOMNIA. NBI-34060 is our product candidate for the treatment
of insomnia. Neurocrine is currently conducting a Phase III clinical program on
NBI-34060 that will involve approximately 2,200 subjects. Neurocrine has
completed 19 Phase I and Phase II clinical trials of NBI-34060 for efficacy and
safety involving more than 1,100 subjects. In Phase II trials, NBI-34060 has
been reported to be more potent than currently marketed sleep promoting
treatments and has shown reduced side effects compared to currently marketed
products such as Ambien. According to IMS Health, Inc., or IMS, U.S. sales of
prescription drugs for the treatment of insomnia exceeded $900 million in 2000.
We have sublicensed our development and commercialization rights in NBI-34060 to
Neurocrine in exchange for the right to receive milestone payments and royalties
on net sales, if any.
OCINAPLON--ANXIETY. Ocinaplon is our product candidate for the treatment of
anxiety disorders, including general anxiety disorder, or GAD. We have completed
seven Phase I clinical trials and one Phase II clinical trial on ocinaplon. In
the Phase II clinical trial, ocinaplon demonstrated a highly statistically
significant reduction of anxiety during the four-week study period using a
number of anxiety measurements, with statistically significant effects measured
as early as one week, a much shorter period than reported results for current
treatments. We are currently conducting a second Phase II clinical trial of
ocinaplon, which will involve 200 patients with GAD. We believe ocinaplon
addresses significant unmet needs for the treatment of anxiety disorders because
our Phase II clinical trial showed it to be at least as effective as what has
been reported for currently marketed treatments without their significant side
effects. IMS reports that U.S. sales of anti-anxiety drugs, excluding
antidepressants, exceeded $1.4 billion in 2000. We are developing ocinaplon
through our joint venture with Elan.
BICIFADINE--PAIN. Bicifadine is our product candidate for the treatment of
pain. Bicifadine has been evaluated in four Phase I and 14 Phase II clinical
trials involving over 1,000 patients. In five double-blind, placebo-controlled
Phase II clinical trials, bicifadine demonstrated a statistically significant
reduction of acute pain, in some cases comparable to or better than positive
controls such as codeine. In addition, bicifadine has displayed a favorable side
effect profile in all clinical trials. We recently began a 750-person Phase II
clinical trial of our controlled-release formulation of bicifadine to treat
acute dental pain. We also intend to initiate a Phase III clinical trial program
by the end of 2002.
3
<Page>
Depending on the results of these trials, we then intend to file a new drug
application with the FDA seeking approval for use of bicifadine to treat pain.
We believe bicifadine addresses significant unmet needs for the treatment of
pain because it is a non-narcotic that has shown efficacy in clinical trials
comparable to currently marketed treatments without the significant side effects
of non-narcotic treatments or the addiction and abuse potential associated with
narcotics. If ultimately approved, bicifadine would not be limited to use in the
pain models studied, but according to FDA guidelines, could be used to treat
pain generally. IMS reports that U.S. sales of narcotic and non-narcotic
analgesics exceeded $4.6 billion in 2000. We are developing bicifadine through
our joint venture with Elan.
DOV 216,303--DEPRESSION. DOV 216,303 is our lead product candidate for the
treatment of depression. DOV 216,303 affects all three of the neurotransmitters
that have been linked to depression: norepinephrine, serotonin and dopamine.
Both preclinical studies and clinical trials indicated that an antidepressant
drug affecting the action of all three of these neurotransmitters would be
expected to produce a faster onset of action and greater efficacy than
antidepressants affecting only one or two of them. No currently marketed
antidepressant, including Prozac, affects the action of all three of these
neurotransmitters. We recently completed a dose-escalating, double-blind,
placebo-controlled Phase I clinical trial aimed at evaluating the
pharmacokinetic properties and safety profile of single doses of DOV 216,303.
DOV 216,303 was rapidly absorbed following oral administration, with blood
levels proportional to the administered dose. No adverse effects were observed
after doses five to ten times projected therapeutic doses. We intend to initiate
a Phase Ib multiple dose-ranging clinical trial of DOV 216,303 by the end of
2002. According to IMS, U.S. sales of antidepressants were approximately
$9.6 billion in 2000. We have worldwide development and commercialization rights
with respect to this product candidate.
DOV DILTIAZEM--ANGINA AND HYPERTENSION. DOV diltiazem, our proprietary
formulation of diltiazem, is our product candidate for the treatment of angina
and hypertension. DOV diltiazem combines an immediate release component with an
extended release component in order to reduce morning angina and give better
coverage throughout the day than currently marketed diltiazem products. Data
from Phase I clinical trials indicated that our formulation produced clinically
relevant blood levels within 30 minutes, and resulted in higher blood levels in
the morning than Tiazac, a currently marketed formulation of diltiazem for
chronic stable angina. We plan to begin a Phase III clinical trial by the end of
2002 comparing our formulation to placebo and another currently marketed
diltiazem formulation. IMS reports that U.S. sales of diltiazem were
$981 million in 2000. We are developing DOV diltiazem through our collaboration
with Biovail. Biovail will market DOV diltiazem while we have retained worldwide
co-promotion rights.
OUR STRATEGY
Key elements of our strategy are to:
- aggressively pursue development and commercialization of our lead product
candidates;
- expand our product portfolio with novel drug candidates that address unmet
needs in large, established markets;
- reduce clinical development and commercialization risk by building a
diversified product portfolio; and
- establish alliances with industry leaders to access their unique
technologies and capabilities.
OTHER INFORMATION
We incorporated in New Jersey in 1995 and reincorporated in Delaware in
2000. Our executive offices are located at 433 Hackensack Avenue, Hackensack,
New Jersey 07601. Our telephone number is (201) 968-0980. This prospectus
contains the trademarks and trade names of other entities that are the property
of their respective owners.
4
<Page>
THE OFFERING
<Table>
Common stock we are offering................. shares
Common stock to be outstanding after this
offering................................... shares
Use of proceeds.............................. For advancing our product candidates through
clinical trials and preclinical studies,
discovering or acquiring new product
candidates and for working capital and
general corporate purposes.
Proposed Nasdaq National Market symbol....... DOVP
</Table>
The number of shares of our common stock that will be outstanding after this
offering is based on 3,021,137 shares of common stock and 354,643 shares of
series B convertible nonvoting preferred stock outstanding on December 31, 2001,
and conversion of all outstanding shares of series C and series D redeemable
convertible preferred stock into a total of 2,790,000 shares of common stock
upon the completion of this offering. This calculation excludes:
- up to 2,064,234 shares of common stock issuable upon conversion of the
outstanding principal balance and accrued unpaid interest of the Elan
convertible exchangeable promissory note and the Elan convertible
promissory note, which we also refer to as the convertible line of credit,
as of December 31, 2001;
- any shares of common stock issuable upon exercise of the over-allotment
option granted to the underwriters;
- 1,502,000 shares of common stock issuable upon exercise of stock options
outstanding as of December 31, 2001;
- 490,500 shares of common stock available for future grant under our stock
option plans as of December 31, 2001; and
- 340,323 shares of common stock issuable upon exercise of warrants
outstanding as of December 31, 2001.
All of our outstanding series B nonvoting convertible preferred stock is
currently held by Elan. Shares of our series B preferred stock are convertible
into shares of our common stock on a one-for-one basis at any time at the option
of the holder. The holders of our series B preferred stock are entitled to elect
one member of our board of directors so long as, together with all their
holdings, they hold at least 10% of our outstanding capital stock. The series B
preferred stock is otherwise nonvoting and ranks on parity with our common stock
for all other purposes, including with respect to dividends and upon
liquidation. For a detailed description of the series B preferred stock, please
refer to the subheading "Series B Nonvoting Convertible Preferred Stock" under
"Description of Capital Stock."
Unless otherwise indicated, all information in this prospectus assumes
amendment and restatement of our charter and bylaws and conversion of all
outstanding shares of series C and series D preferred stock into shares of
common stock upon completion of this offering.
5
<Page>
SUMMARY FINANCIAL DATA
The following table summarizes our financial data and should be read
together with our financial statements and related notes, the "Selected
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this prospectus.
The pro forma net loss per share data reflect the conversion of our
series C preferred stock from the beginning of the year and series D preferred
stock from the dates of original issuance.
The pro forma balance sheet data reflect the automatic conversion of our
series C and series D preferred stock upon the closing of this offering.
The pro forma as adjusted balance sheet data reflect that conversion and
also the sale of shares of common stock in this offering after deducting
underwriting discounts and estimated offering expenses.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 2000 2001
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue................................................... $ -- $ -- $ 5,711
Operating expenses:
Royalty expense......................................... -- -- 1,111
General and administrative expense...................... 1,019 1,348 2,343
Research and development expense........................ 1,723 2,640 5,525
--------- --------- ---------
Loss from operations................................ (2,742) (3,988) (3,268)
Loss in investment in DOV Bermuda......................... (8,705) (1,318) (1,434)
Interest income........................................... 50 223 366
Interest expense.......................................... (581) (852) (1,728)
Other income, net......................................... -- -- 423
--------- --------- ---------
Net loss.................................................. (11,978) (5,935) (5,641)
--------- --------- ---------
Deemed dividend on conversion of series A preferred....... (12) -- --
Deemed dividend on issuance of series C preferred......... -- (49) --
Deemed dividend on issuance of series D preferred......... -- -- (97)
--------- --------- ---------
Net loss attributable to common stockholders.............. $ (11,990) $ (5,984) $ (5,738)
========= ========= =========
Basic and diluted net loss per share...................... $ (4.02) $ (1.99) $ (1.90)
========= ========= =========
Weighted average shares used in computing basic and
diluted net loss per share.............................. 2,979,346 3,010,801 3,021,075
Pro forma basic and diluted net loss per share............ $ (1.11)
=========
Weighted average shares used in computing pro forma basic
and diluted net loss per share.......................... 5,098,198
</Table>
<Table>
<Caption>
AS OF DECEMBER 31, 2001
------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
--------- --------- ------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 13,574 $ 13,574
Working capital........................................... 11,831 11,831
Total assets.............................................. 18,080 18,080
Long-term debt............................................ 12,796 12,796
Redeemable preferred stock................................ 14,838 --
Accumulated deficit....................................... (24,342) (24,342)
Total stockholders' (deficit) equity...................... (18,036) (3,198)
</Table>
6
<Page>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS AND ALL OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING OUR STOCK. ALTHOUGH WE HAVE
DESCRIBED BELOW THE RISKS WE CONSIDER MATERIAL, ADDITIONAL RISKS AND
UNCERTAINTIES NOT KNOWN TO US OR THAT WE NOW BELIEVE TO BE NON-MATERIAL COULD
ALSO IMPAIR OUR BUSINESS. IF ANY OF THE EVENTS COVERED BY THE FOLLOWING RISKS
OCCUR, OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD BE
HARMED. IN THAT CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND
YOU COULD LOSE SOME OR ALL OF THE VALUE OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE HAVE INCURRED LOSSES SINCE OUR INCEPTION AND EXPECT TO INCUR SIGNIFICANT
LOSSES FOR THE FORESEEABLE FUTURE, AND WE MAY NEVER REACH PROFITABILITY.
Since our inception in April 1995 through December 31, 2001, we have
incurred significant operating losses and, as of December 31, 2001, we had an
accumulated deficit of $24.3 million. We have not yet completed the development,
including obtaining regulatory approvals, of any product candidate and,
consequently, have not generated any revenues from the sale of products. Even if
we succeed in developing and commercializing one or more of our product
candidates, we may never achieve significant sales revenue and we expect to
incur operating losses for the foreseeable future. We also expect to continue to
incur significant operating expenses and capital expenditures and anticipate
that our expenses will increase substantially in the foreseeable future as we:
- conduct clinical trials;
- fund the operations of DOV (Bermuda), Ltd., or DOV Bermuda, our joint
venture with Elan;
- conduct research and development on existing and new product candidates;
- make milestone and royalty payments;
- seek regulatory approvals for our product candidates;
- commercialize our product candidates, if approved;
- hire additional clinical, scientific and management personnel;
- add operational, financial and management information systems and
personnel; and
- identify and in-license additional compounds or product candidates.
We need to generate significant revenue to achieve and maintain
profitability. We may not be able to generate sufficient revenue and we may
never be able to achieve or maintain profitability.
WE ARE DEPENDENT ON THE SUCCESSFUL OUTCOME OF CLINICAL TRIALS FOR OUR FIVE LEAD
PRODUCT CANDIDATES.
None of our product candidates is currently approved for sale by the United
States Food and Drug Administration, or FDA, or by any other regulatory agency
in the world, and our product candidates may never by approved for sale or
become commercially viable. Before obtaining regulatory approval for the sale of
our product candidates, they must be subjected to extensive preclinical and
clinical testing to demonstrate their safety and efficacy for humans. Our
success will depend on the success of our currently ongoing clinical trials and
subsequent clinical trials that have not yet begun.
There are a number of difficulties and risks associated with clinical
trials. The possibility exists that:
- we may discover that a product candidate may cause harmful side effects;
- we may discover that a product candidate does not exhibit the expected
therapeutic results in humans;
- results may not be statistically significant or predictive of results that
will be obtained from large-scale, advanced clinical trials;
7
<Page>
- we or the FDA may suspend the clinical trials of our product candidates;
- patient recruitment may be slower than expected; and
- patients may drop out of our clinical trials.
Given the uncertainty surrounding the regulatory and clinical trial process,
we may not be able to develop safe, commercially viable products. If we are
unable to successfully develop and commercialize any of our product candidates,
this would severely harm our business, impair our ability to generate revenues
and adversely impact our stock price.
WE MAY NOT RECEIVE REGULATORY APPROVALS FOR OUR PRODUCT CANDIDATES OR APPROVALS
MAY BE DELAYED.
Regulation by government authorities in the United States and foreign
countries is a significant factor in the development, manufacture and
commercialization of our product candidates and in our ongoing research and
development activities. All of our product candidates are in various stages of
research and development and we have not yet requested or received regulatory
approval to commercialize any product candidate from the FDA or any other
regulatory body.
In particular, human therapeutic products are subject to rigorous
preclinical testing, clinical trials and other approval procedures of the FDA
and similar regulatory authorities in foreign countries. The FDA regulates,
among other things, the development, testing, manufacture, safety, efficacy,
record keeping, labeling, storage, approval, advertising, promotion, sale and
distribution of biopharmaceutical products. Securing FDA approval requires the
submission of extensive preclinical and clinical data and supporting information
to the FDA for each therapeutic indication to establish the product candidate's
safety and efficacy. The approval process may take many years to complete and
may involve ongoing requirements for post-marketing studies. Any FDA or other
regulatory approval of our product candidates, once obtained, may be withdrawn.
If our product candidates are marketed abroad, they will also be subject to
extensive regulation by foreign governments.
Any failure to receive the regulatory approvals necessary to commercialize
our product candidates would have a material adverse effect on our business. The
process of obtaining these approvals and the subsequent compliance with
appropriate federal and state statutes and regulations require spending
substantial time and financial resources. If we, or our collaborators or
licensees, fail to obtain or maintain or encounter delays in obtaining or
maintaining regulatory approvals, it could adversely affect the marketing of any
product candidates we develop, our ability to receive product or royalty
revenues and our liquidity and capital resources.
OUR OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS THAT MAY CAUSE OUR STOCK PRICE
TO DECLINE.
Our revenue is unpredictable and has fluctuated significantly from
year-to-year and quarter-to-quarter and will likely continue to be highly
volatile. We believe that period-to-period comparisons of our past operating
results are not good indicators of our future performance and should not be
relied on to predict our future results. For example, in 2000 we recorded no
revenue while in 2001 we had $5.7 million in revenue, primarily as a result of
license fees from Biovail and a milestone payment from Neurocrine. In the
future, our operating results in a particular period may not meet the
expectations of securities analysts or investors, which may result in a decline
in the market price of our common stock.
WE RELY ENTIRELY ON THE EFFORTS OF NEUROCRINE FOR THE DEVELOPMENT, DESIGN AND
IMPLEMENTATION OF CLINICAL TRIALS, REGULATORY APPROVAL AND COMMERCIALIZATION OF
OUR INSOMNIA COMPOUND, NBI-34060.
In 1998, we sublicensed NBI-34060 to Neurocrine without retaining any
material rights other than the right to receive milestone payments and royalties
on product sales, if any. The clinical development, design and implementation of
clinical trials, the preparation of filings for FDA approval and, if approved,
the subsequent commercialization of NBI-34060, and all other matters relating to
NBI-34060, are entirely within the control of Neurocrine. We will have no
control over this process and, as a result,
8
<Page>
our ability to receive any revenue from NBI-34060 is entirely dependent on the
success of Neurocrine's efforts. Neurocrine may fail or otherwise decide not to
devote the resources necessary to successfully commercialize NBI-34060. In
addition, in our description of NBI-34060 in this prospectus, including under
the captions "Prospectus Summary" and "Business--Products Under
Development--Central Nervous System--Insomnia and Anxiety--NBI-34060," we rely
solely on Neurocrine's public statements. These statements include statements
regarding the design, status and results of Neurocrine's clinical trials and
preclinical studies of NBI-34060, Neurocrine's plans regarding future
development and Neurocrine's beliefs as to the mechanism of action of NBI-34060.
Neurocrine has not communicated with us regarding NBI-34060 and we are not able
to independently verify whether such statements are accurate or complete.
WE DEPEND ON COLLABORATIONS WITH THIRD PARTIES, WHICH MAY REDUCE OUR PRODUCT
REVENUES OR RESTRICT OUR ABILITY TO DEVELOP AND COMMERCIALIZE OUR PRODUCTS.
Our efforts to develop, obtain regulatory approval for and commercialize our
existing and any future product candidates depend upon our ability to enter into
and maintain license and collaborative agreements with others. Currently, we
have license or collaborative agreements with Elan, Biovail, Neurocrine and
Wyeth-Ayerst, formerly American Cyanamid Company. The identification of new
compounds or product candidates and the future development and commercialization
of them may require us to enter into license or collaborative agreements with
others, including pharmaceutical companies and research institutions.
Under our collaborative agreements, we have granted rights, including
marketing rights, to our collaborators. These agreements contain covenants
restricting our product development efforts or business in the future and have
involved, among other things, the issuance of debt and equity securities,
limitations on our ability to license our product candidates to third parties
and restrictions on our ability to compete. Agreements for the acquisition of
new compounds or product candidates typically require us to pay license fees,
milestone payments and royalties on sales.
We may not be able to maintain our existing license or collaborative
agreements, or we may not be able to enter into future agreements with third
parties on terms acceptable to us, or at all. If we fail to maintain our
existing agreements or establish new agreements as necessary, we could be
required to undertake development, manufacturing or commercialization activities
solely at our own expense. This would significantly increase our capital
requirements and may delay the commercialization of our product candidates and
realization of sales revenues.
We are subject to a number of risks associated with our license and
collaborative agreements:
- we do not have day-to-day control over the activities of our licensees or
collaborators;
- our licensees or collaborators may not fulfill their obligations to us;
- our licensees or collaborators may have conflicts of interest, which could
give rise to loyalty or scheduling problems or limit our ability to form
collaborations with other potential partners;
- we may not receive the contemplated or expected benefits from our license
or collaborative agreements;
- business combinations and changes in a licensee's or collaborative party's
business strategy may adversely affect their willingness or ability to
complete their obligations to us;
- our licensees or collaborators may utilize our proprietary information in
such a way as to invite litigation that could jeopardize or potentially
invalidate our proprietary information or expose us to potential
liability;
- our licensees or collaborators may fail to maintain or defend our
intellectual property rights; and
- our licensees or collaborators may develop or have rights to competing
products or product candidates and withdraw support or cease to perform
work on our products.
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These factors could lead to delays in the development, manufacture or
commercialization of our product candidates, and disagreements with our
licensees or collaborators could require or result in litigation or arbitration,
which could be time-consuming and expensive. Our success will depend upon the
success and performance of these third parties.
CURRENT FEDERAL LITIGATION INVOLVING OUR DOV DILTIAZEM PATENT CALLS THE VALIDITY
OF OUR PATENT INTO QUESTION AND HAS GIVEN RISE TO A FORMAL INVESTIGATION BY THE
FTC OF BIOVAIL'S USE OF OUR PATENT.
Following the license of our DOV diltiazem patent to Biovail, Biovail listed
it in the FDA's APPROVED DRUG PRODUCTS WITH THERAPEUTIC EQUIVALENCE EVALUATION
book, commonly known as the "Orange Book," thereby claiming that the patent
claims the drug, Tiazac, covered by Biovail's new drug application, or NDA,
20-401. The effect of this filing was to temporarily prevent Biovail's potential
competitor, Andrx Pharmaceuticals, Inc., from obtaining FDA approval of its
abbreviated new drug application for a generic version of Tiazac and marketing
that generic drug. Litigation in Florida federal court between Andrx and Biovail
ensued. We are not a party to the litigation.
In the litigation, Andrx has sought relief under various causes of action,
including violations of antitrust laws and patent invalidity. While many of
Andrx's claims were dismissed by the court in September 2001, some of Andrx's
claims were not. The surviving claims include:
- various conspiracy and monopolization claims under the Sherman Antitrust
Act and a related claim to invalidate the license agreement;
- a request for a declaration that Andrx's generic drug does not infringe
the DOV diltiazem patent; and
- a request for a declaration that the patent covering DOV diltiazem is
invalid.
Andrx's motion for summary judgment on the latter two open claims was denied
by the court in November 2001. We cannot tell you with any reasonable degree of
assurance what the ultimate outcome of the case will be. If Andrx's generic
version of Tiazac is eventually approved by the FDA and marketed for sale, it
will become a competitor in the market with Biovail's Tiazac. It is unclear at
this stage what further legal action, if any, Andrx may take. Andrx could pursue
its claims to have our license, research and development agreement with Biovail
invalidated based upon its assertions of alleged violations under the Sherman
Antitrust Act, or Andrx could pursue its counterclaims that the DOV diltiazem
patent is invalid or that its generic drug does not infringe the DOV diltiazem
patent. These options are not intended as a summary of all litigation
alternatives available to Andrx and Biovail.
Litigation is inherently uncertain and can have unexpected results with
unexpected effects. The court's September 2001 opinion, while dismissing some
claims, advances other claims against Biovail implicating the DOV diltiazem
patent and could be viewed as increasing the risk to us that any one or more of
the following could occur:
- If the Biovail license agreement is invalidated as Andrx seeks, this would
eliminate our right to receive clinical development payments, and
milestone and royalty payments, that might have become payable to us under
the agreement.
- We may be responsible for a portion of Biovail's legal expenses under the
terms of the Biovail license agreement, capped at $1.5 million, with
regard to litigating Biovail's claim that Andrx's generic drug infringes
the DOV diltiazem patent.
- If, as a result of a court ruling, the DOV diltiazem patent is declared
invalid, it may have the same effect as if our license agreement with
Biovail were invalidated, as well as the loss of any other potential value
that could have been derived from the DOV diltiazem patent.
Related to the Andrx/Biovail litigation, on March 8, 2001, following a
request for investigation by Andrx, we received a letter from the Federal Trade
Commission, or FTC, stating that it was conducting
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a nonpublic investigation to determine whether Biovail Corporation or any other
person is engaging in unfair methods of competition in violation of the Federal
Trade Commission Act, and that the primary focus is the legality of Biovail's
recent Orange Book listing of the DOV diltiazem patent. The stated purpose of
the FTC letter was to seek from us, on a voluntary, confidential basis,
disclosure to the FTC of certain requested information related to the Biovail
license agreement. In July 2001, the FTC issued a formal subpoena to us
requesting the same information it previously requested in its March 8, 2001
letter, but stating that we could treat our prior production of documents
responsive to its informal request as satisfying the formal request. We have
cooperated with the FTC in its requests. Although each letter stated that it
should not be viewed as an accusation of wrongdoing, we cannot assure you as to
any course of action the FTC may take with respect to its investigation.
In December 2001, the FTC staff advised us informally that it intends to
seek a formal complaint against Biovail, charging it with violations of the
Federal Trade Commission Act and other counts. Initially, we were advised that
we would also be a named defendant, not for alleged wrongdoing, but for remedy
purposes only since the FTC would be seeking a revision of the contract and
wanted both contract parties to be present for that purpose. We have met with
the FTC staff and agreed informally not to object to a court order, if the FTC
achieves one, that changes Biovail's license to use our patent from exclusive to
non-exclusive insofar as it is used to manufacture and market a drug that is
approved for sale under Biovail's NDA 20-401 and any amendments to that
application relating to Tiazac. In return, the FTC would not name us as a
defendant in the case against Biovail. This means, if the Biovail license
agreement change is made, that the Biovail angina or hypertension drug developed
under the collaborative arrangement with us would, in order to be protected by
an exclusive patent license, have to contain an immediate release component and
be sold under an NDA other than NDA 20-401. We believe this is the intent of the
license agreement. We cannot, however, assure you that this informal agreement
with the FTC staff will be documented to its satisfaction and approved by the
FTC. Nor can we assure you that such an agreement will not reduce the value to
us of the Biovail license agreement.
THE BUSINESS PURPOSES OF OUR JOINT VENTURE WITH ELAN AND OUR LICENSE, RESEARCH
AND DEVELOPMENT AGREEMENT WITH BIOVAIL COULD BE FRUSTRATED BY POTENTIAL VOTING
DEADLOCKS.
We have agreed with Elan that major decisions relating to our joint venture
will be made through mutual consent despite our 80.1% ownership position. As a
result, deadlocks may occur on major business issues relating to the development
of ocinaplon and bicifadine. We have also agreed with Biovail that all major
decisions, including budget and other financial decisions, must be decided by
majority vote of the members of a joint oversight committee, which is comprised
of an equal number of members from both parties. Accordingly, deadlocks may
occur on major items of business relating to the development of DOV diltiazem.
Under these circumstances, our ability to move forward with clinical development
of either one or all three of these product candidates may be delayed. These
contractual voting provisions with Elan and Biovail could lead to delays in the
development of these product candidates.
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OUR 80.1% OWNERSHIP IN THE ELAN JOINT VENTURE MAY BE SIGNIFICANTLY REDUCED.
In connection with our joint venture with Elan, we issued to Elan an
$8.0 million convertible exchangeable promissory note. The outstanding principal
balance, including accrued unpaid interest, is convertible into shares of our
common stock. In the alternative, Elan may elect to exchange the outstanding
principal balance of the note for equity in the joint venture sufficient to
increase its overall ownership interest equal to ours. If Elan elects to
exchange its note, our interest in any profits the joint venture may receive
from ocinaplon and bicifadine will be significantly reduced. Elan's ownership
could increase further if we fail to meet our future joint venture funding
requirements.
IF CERTAIN TECHNOLOGICAL COMPETITORS OF ELAN ACQUIRE AT LEAST TEN PERCENT OF OUR
VOTING STOCK OR TRIGGER OTHER CHANGE OF CONTROL CLAUSES, ELAN MAY, AT ITS
OPTION, TERMINATE ITS LICENSE AGREEMENT WITH THE JOINT VENTURE, WHICH COULD LEAD
TO A TERMINATION OF THE JOINT VENTURE ITSELF.
Under the Elan joint venture agreements, Elan has certain change of control
rights that, if triggered, would permit it to terminate the license agreement
under which Elan granted the right to use its proprietary release technologies
to the joint venture. This could also lead to a termination of our license
agreement with the joint venture and a termination of the joint venture.
Some of Elan's change of control termination protections are triggered if a
named technological competitor of Elan:
- directly or indirectly acquires ten percent or more of our or the joint
venture's voting stock, or otherwise controls or influences our or the
joint venture's management or business; or
- enters into any joint venture, collaborative, license or other agreement
with us or the joint venture to the extent that the competitor is
materially engaged in our or the joint venture's business or development.
In January 2001, we entered into our license, research and development
agreement with Biovail, a named technological competitor of Elan. We do not
believe that Elan's consent to that agreement was required since Biovail is not
materially engaged in our business or development, and we do not believe that
Elan is entitled to terminate its license agreement with the joint venture as a
result of our entering into the Biovail license agreement without Elan's
consent. Nonetheless, we sought consent from Elan, which Elan refused to grant.
While Elan has not asserted that its consent was required, objected to our
entering into the Biovail license agreement or threatened to terminate its
license agreement with the joint venture, it has stated that it reserves its
rights with respect to this issue. If Elan seeks to terminate its agreement
based on our failure to obtain its consent, we cannot assure you that a court
would not ultimately permit such termination. Upon such an event, our ability to
successfully develop ocinaplon and bicifadine may be impaired.
THE INDEPENDENT CLINICAL INVESTIGATORS AND CONTRACT RESEARCH ORGANIZATIONS THAT
WE RELY UPON TO CONDUCT OUR CLINICAL TRIALS MAY NOT BE DILIGENT, CAREFUL OR
TIMELY.
We depend on independent clinical investigators and contract research
organizations to conduct our clinical trials. Contract research organizations
also assist us in the collection and analysis of our data. The investigators and
contract research organizations are not our employees and we cannot control,
other than by contract, the amount of resources, including time, that they
devote to our product candidates. If independent investigators fail to devote
sufficient resources to the development of our product candidates, or if their
performance is substandard, it will delay the approval and commercialization of
our product candidates. Further, the FDA requires that we comply with standards,
commonly referred to as good clinical practice, for conducting, recording and
reporting clinical trials to assure that data and reported results are credible
and accurate and that the rights, integrity and confidentiality of trial
subjects are protected. If our independent clinical investigators and contract
research organizations fail to comply with good clinical practice, the results
of our clinical trials could be called into question and the clinical
development of our product candidates could be delayed.
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Failure of clinical investigators or contract research organizations to meet
their obligations to us or comply with good clinical practice procedures could
adversely affect the clinical development of our product candidates and harm our
business.
WE HAVE NO MANUFACTURING CAPABILITIES AND CONTRACTING WITH THIRD-PARTY
MANUFACTURERS COULD NEGATIVELY IMPACT OUR ABILITY TO OBTAIN REGULATORY APPROVALS
AND COMMERCIALIZE OUR PRODUCT CANDIDATES.
We rely on third-party manufacturers to produce the product candidates we
use in our clinical trials. We intend to continue to rely on third parties to
manufacture the products we intend to sell. We do not have any manufacturing
experience, nor do we have any manufacturing facilities. If we are unable to
obtain or retain third-party manufacturers, we will not be able to effectively
conduct our clinical trials or ultimately commercialize our products.
Third-party manufacturers may not comply with FDA regulations, or other
regulatory requirements relating to the manufacturing of our products, including
compliance with good manufacturing practice, or GMP. This requires that the
methods, facilities or controls used for a drug product's manufacture,
processing, packing or holding follow rules and guidelines to meet certain
safety requirements and to ensure the drug has the represented identity and
strength, and meets its represented quality and purity characteristics. The
risks associated with our reliance on third-party contractors include the
following:
- Contract manufacturers may encounter difficulties in achieving volume
production, quality control and quality assurance, and also may experience
shortages in qualified personnel. As a result, our contract manufacturers
might not be able to meet our clinical development schedules or adequately
manufacture our products in commercial quantities when required.
- Switching manufacturers may be difficult because the number of potential
manufacturers is limited. It may be difficult or impossible for us to find
a replacement manufacturer quickly or on terms acceptable to us, or at
all.
- Our contract manufacturers may not remain in the contract manufacturing
business for the time required to successfully produce, store and
distribute our products.
- Our contract manufacturers are subject to ongoing periodic, unannounced
inspection by the FDA, the Drug Enforcement Agency and corresponding state
agencies to ensure strict compliance with, among other things, GMP, in
addition to other governmental regulations and corresponding foreign
standards. We do not have control over, other than through contract,
third-party manufacturers' compliance with these regulations and
standards.
- If we need to change manufacturers, the FDA and corresponding foreign
regulatory agencies must approve these manufacturers in advance, which
will involve testing and additional inspections to ensure compliance with
FDA regulations and standards.
Dependence upon third parties for the manufacture of our product candidates
may harm our profit margin, if any, or the sale of our products and our ability
to develop and deliver products on a timely and competitive basis.
IF WE ARE UNABLE TO CREATE SALES, MARKETING AND DISTRIBUTION CAPABILITIES, OR
ENTER INTO AGREEMENTS WITH THIRD PARTIES TO PERFORM THESE FUNCTIONS, WE WILL NOT
BE ABLE TO COMMERCIALIZE OUR PRODUCT CANDIDATES.
We do not have any sales, marketing or distribution capabilities. In order
to commercialize our product candidates, if any are approved, we must either
acquire or internally develop sales, marketing and distribution capabilities or
make arrangements with third parties to perform these services for us. If we
obtain FDA approval for our existing product candidates, we intend to rely on
relationships with one or more pharmaceutical companies or other third parties
with established distribution systems and direct sales forces to market our
product candidates. If we decide to market any of our product candidates
directly, we must either acquire or internally develop a marketing and sales
force with technical expertise and with supporting distribution capabilities.
The acquisition or development of a sales and distribution infrastructure would
require substantial resources, which may divert the attention
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of our management and key personnel, and negatively impact our product
development efforts. Moreover, we may not be able to establish in-house sales
and distribution capabilities or relationships with third parties. To the extent
we enter into co-promotion or other licensing agreements, our product revenues
are likely to be lower than if we directly marketed and sold our product
candidates, and any revenue we receive will depend upon the efforts of third
parties, which may not be successful.
OUR BUSINESS STRATEGY IS BASED UPON MARKET ASSUMPTIONS THAT COULD PROVE TO BE
INCORRECT, OR CHANGE OR FLUCTUATE, LEADING TO OUR INABILITY TO SUCCESSFULLY
DEVELOP OR ACHIEVE COMMERCIALIZATION OF OUR PRODUCT CANDIDATES.
We have formulated our business strategy regarding opportunities in the
pharmaceutical drug development field based upon our experience in the industry,
the size of the pharmaceutical drug markets addressing central nervous system,
cardiovascular and urological disorders and the estimated royalties for
licensing or sharing of profits of our drug candidates. There can be no
assurance that our assessments regarding these or a variety of other projections
will prove correct. Our success will depend upon many factors, including factors
that may be beyond our control or that cannot be predicted, evaluated or
quantified at this time. Further, we cannot assure you that we or our
collaborators or licensees will be successful in obtaining market acceptance of
any of our product candidates or generate sufficient revenues to support our
development programs. If we have made incorrect market assumptions or if we fail
to address market changes on a timely basis, we may be unable to successfully
develop or achieve commercialization of our product candidates.
IF WE CANNOT RAISE ADDITIONAL FUNDING, WE MAY BE UNABLE TO COMPLETE DEVELOPMENT
OF OUR PRODUCT CANDIDATES.
At December 31, 2001, we had cash and cash equivalents of $13.6 million. We
currently have no commitments or arrangements for any financing apart from the
approximately $4.6 million that remains available under the Elan convertible
promissory note, which we also refer to as the convertible line of credit, to
fund the research and development of ocinaplon and bicifadine. We will require
additional funding in order to continue our research and development programs,
including preclinical testing and clinical trials of our product candidates, for
operating expenses, and to pursue regulatory approvals for our product
candidates. Lack of funding could adversely affect our ability to pursue our
business. We cannot assure you that financing will be available on terms
acceptable to us, if at all. We may continue to seek additional capital through
public or private financing or collaborative agreements. If adequate funds are
not available, we may be required to curtail significantly or eliminate one or
more of our product development programs.
THE SUCCESS OF OUR BUSINESS DEPENDS UPON THE MEMBERS OF OUR SENIOR MANAGEMENT
TEAM, OUR SCIENTIFIC STAFF AND OUR ABILITY TO CONTINUE TO ATTRACT AND RETAIN
QUALIFIED SCIENTIFIC, TECHNICAL AND BUSINESS PERSONNEL.
We are dependent on the members of our senior management team, in
particular, our Chief Executive Officer, Dr. Arnold Lippa, our President,
Dr. Bernard Beer, our Senior Vice President and Chief Scientific Officer,
Dr. Phil Skolnick and our Vice President of Drug Development, Mr. Stephen Petti,
for our business success. Moreover, because of the specialized scientific and
technical nature of our business, we are also highly dependent upon our
scientific staff, the members of our scientific advisory board and our continued
ability to attract and retain qualified scientific, technical and business
development personnel. Drs. Lippa and Beer each hold a substantial amount of
vested common stock not subject to repurchase in the event of termination. We do
not carry key man life insurance on the lives of any of our key personnel. There
is intense competition for human resources, including management in the
scientific fields in which we operate and there can be no assurance that we will
be able to attract and retain qualified personnel necessary for the successful
development of our product candidates, and any expansion into areas and
activities requiring additional expertise. In addition, there can be no
assurance that such personnel or resources will be available when needed. The
loss of the
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services of Drs. Lippa, Beer, Skolnick or Mr. Petti, or other key personnel,
could severely harm our business.
BECAUSE SOME OF OUR PATENTS WITH RESPECT TO SOME OF OUR PRODUCT CANDIDATES HAVE
EXPIRED OR WILL EXPIRE IN THE NEAR TERM, WE MAY BE REQUIRED TO RELY SOLELY ON
THE HATCH-WAXMAN ACT FOR MARKET EXCLUSIVITY.
A number of patents that we licensed from Wyeth-Ayerst have expired,
including the patent that provides protection for the use of DOV 216,303 for the
treatment of depression and the use of bicifadine for the treatment of pain. In
addition, our patent covering ocinaplon and NBI-34060 is due to expire in
June 2003. We currently have patents protecting intermediates useful in the
manufacture of ocinaplon that are not due to expire until 2007, and we have
applied for additional patents relating to ocinaplon. In addition, Neurocrine
has stated that it has filed nine U.S. and foreign patent applications on
NBI-34060. Regardless of these efforts, these patents and patent applications,
if approved, may not afford us adequate protection against generic versions of
our product candidates or other competitive products. In the event we achieve
regulatory approval to market any of our product candidates, including
bicifadine, DOV 216,303 or ocinaplon, and we are unable to obtain adequate
patent protection for the ultimate marketed product, we will be required to rely
to a greater extent on the United States Drug Price Competition and Patent Term
Restoration Act of 1984, or the Hatch-Waxman Act, and applicable foreign
legislation, to achieve market exclusivity. The Hatch-Waxman Act generally
provides for marketing exclusivity to the first applicant to gain approval for a
particular drug by prohibiting filing of an abbreviated new drug application, or
ANDA, by a generic competitor for up to five years after the drug is first
approved. The Hatch-Waxman Act, however, also accelerates the approval process
for generic competitors using the same active ingredients once the period of
statutory exclusivity has expired and may in practice encourage more aggressive
legal challenges to the patents protecting approved drugs. In addition, because
some of our patents have expired, third parties may develop competing product
candidates using our product compounds and if they obtain regulatory approval
for those products prior to us, we would be barred from seeking an ANDA for
those products under the Hatch-Waxman Act for the applicable statutory
exclusivity period.
OUR BUSINESS ACTIVITIES REQUIRE COMPLIANCE WITH ENVIRONMENTAL LAWS, WHICH IF
VIOLATED COULD RESULT IN SIGNIFICANT FINES AND WORK STOPPAGE.
Our research and development programs, and the manufacturing operations and
disposal procedures of our contractors and collaborators, are affected by
federal, state, local and foreign environmental laws. Although we intend to use
reasonable efforts to comply with applicable environmental laws, our contractors
and collaborators may not comply with these laws. Failure to comply with
environmental laws could result in significant fines and work stoppage, and may
harm our business.
WE INTEND TO PURSUE A RAPID GROWTH STRATEGY, WHICH COULD GIVE RISE TO
DIFFICULTIES IN MANAGING AND FUNDING OUR BUSINESS.
We intend to pursue a strategy of growth and will seek to aggressively
develop our current product candidates and acquire new product candidates. In
the event of rapid growth in our operations, we will require additional
personnel and may need to improve our operational, financial and management
information systems. The hiring of additional personnel and improvements to our
existing systems may require additional funds not provided by this offering. In
addition, because we lack experience in marketing, distributing and selling
pharmaceutical products, we may have difficulty managing such growth in our
operations. We cannot assure you that we will be able to obtain the personnel
required to achieve such growth or that we will be able to obtain and maintain
all regulatory approvals and comply with all applicable laws, regulations and
licensing requirements that may be necessary as a result of such growth.
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OUR OFFICERS AND DIRECTORS, FOLLOWING THIS OFFERING, WILL OWN OR BE AFFILIATED
WITH OTHERS WHO OWN A SUBSTANTIAL PERCENTAGE OF OUR VOTING SECURITIES, ENOUGH TO
CONTROL OR DETERMINE THE OUTCOME OF ANY MATTER SUBMITTED TO OUR STOCKHOLDERS FOR
APPROVAL.
Following this offering, our current officers and directors, who in the
aggregate currently own or are affiliated with investors who own 3,295,000
shares of our common stock, will own or be affiliated with investors who will
own approximately % of the shares of our common stock, assuming conversion of
all outstanding shares of preferred stock. Accordingly, these insider
stockholders and their affiliates will have sufficient voting power to
effectively control the election of our board of directors, direct the
appointment of our officers and, in general, determine the outcome of any
corporate transaction or similar matters submitted to our stockholders for
majority approval.
OUR BYLAWS REQUIRE US TO INDEMNIFY OUR OFFICERS AND DIRECTORS TO THE FULLEST
EXTENT PERMITTED BY LAW, WHICH MAY OBLIGATE US TO MAKE SUBSTANTIAL PAYMENTS AND
IN SOME INSTANCES PAYMENTS IN ADVANCE OF JUDICIAL RESOLUTION OF ENTITLEMENT.
Our bylaws require that we indemnify our directors, officers and scientific
advisory board members, and permit us to indemnify our other employees and
agents, to the fullest extent permitted by the Delaware corporate law. This
could require us, with some legally prescribed exceptions, to indemnify our
directors, officers and scientific advisory board members against any and all
expenses, judgments, penalties, fines and amounts reasonably paid in defense or
settlement in connection with an action, suit or proceeding. For directors, our
bylaws require us to pay in advance of final disposition all expenses including
attorneys' fees incurred by them in connection with any action, suit or
proceeding relating to their status or actions as directors. Advance payment of
legal expenses is discretionary for officers, scientific advisory board members
and other employees or agents. We may make these advance payments provided that
they are preceded or accompanied by an undertaking on behalf of the indemnified
party to repay all advances if it is ultimately determined that he or she is not
entitled to be indemnified by us. Accordingly, we may incur expenses to meet
these indemnification obligations, including expenses that in hindsight are not
qualified for reimbursement and possibly not subject to recovery as a practical
matter.
PROVISIONS OF DELAWARE LAW AND OUR CHARTER AND BY-LAWS MAY MAKE A TAKEOVER MORE
DIFFICULT.
Provisions of our certificate of incorporation and by-laws and in the
Delaware corporate law may make it difficult and expensive for a third party to
pursue a tender offer, change in control or takeover attempt that is opposed by
our management and board of directors. Public stockholders who might desire to
participate in such a transaction may not have an opportunity to do so. We also
have a staggered board of directors that makes it difficult for stockholders to
change the composition of our board of directors in any one year. These
anti-takeover provisions could substantially impede the ability of public
stockholders to change our management and board of directors.
RISKS RELATED TO OUR INDUSTRY
WE FACE INTENSE COMPETITION AND IF WE ARE UNABLE TO COMPETE EFFECTIVELY, THE
DEMAND FOR OUR PRODUCTS, IF ANY, MAY BE REDUCED.
The pharmaceutical industry is highly competitive and marked by a number of
established, large pharmaceutical companies, as well as smaller emerging
companies, whose activities are directly focused on our target markets and areas
of expertise. We face and will continue to face competition in the discovery,
in-licensing, development and commercialization of our product candidates, which
could severely impact our ability to generate revenue or achieve significant
market acceptance of our product candidates. Furthermore, new developments,
including the development of other drug technologies and methods of preventing
the incidence of disease, occur in the pharmaceutical industry at a rapid pace.
These developments may render our product candidates or technologies obsolete or
noncompetitive.
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For a specific listing of competitive drugs and pharmaceutical companies in our
market segments, please refer to the text in the "Business" section under the
subheading "Competition."
We are focused on developing product candidates for the treatment of central
nervous system, cardiovascular and urological disorders, and we have a number of
competitors. If one or more of their products or programs are successful, the
market for our product candidates may be reduced or eliminated.
Compared to us, many of our competitors and potential competitors have
substantially greater:
- capital resources;
- research and development resources, including personnel and technology;
- regulatory experience;
- preclinical study and clinical testing experience; and
- manufacturing, distribution and marketing experience.
As a result of these factors, our competitors may obtain regulatory approval
of their products more rapidly than us. Our competitors may obtain patent
protection or other intellectual property rights that limit our ability to
develop or commercialize our product candidates or technologies. Our competitors
may also develop drugs that are more effective, useful and less costly than ours
and may also be more successful than us and our collaborators or licensees in
manufacturing and marketing their products.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, OUR COMPETITORS COULD
DEVELOP AND MARKET PRODUCTS BASED ON OUR DISCOVERIES, WHICH MAY REDUCE DEMAND
FOR OUR PRODUCT CANDIDATES.
To a substantial degree, our success will depend on the following
intellectual property achievements:
- our ability to obtain patent protection for our proprietary technologies
and product candidates, as well as our ability to preserve our trade
secrets;
- the ability of our collaborators and licensees to obtain patent protection
for their proprietary technologies and product candidates covered by our
agreements, as well as their ability to preserve related trade secrets;
and
- our ability to prevent third parties from infringing upon our proprietary
rights, as well as the ability of our collaborators and licensees to
accomplish the same.
Because of the substantial length of time and expense associated with
bringing new products through the development and regulatory approval processes
in order to reach the marketplace, the pharmaceutical industry places
considerable importance on obtaining patent and trade secret protection for new
technologies, products and processes. Accordingly, we, either alone or together
with our collaborators or licensees, intend to seek patent protection for our
proprietary technologies and product candidates. The risk exists, however, that
these patents may be unobtainable and that the breadth of the claims in a
patent, if obtained, may not provide adequate protection of our, or our
collaborators' or licensees', proprietary technologies or product candidates.
We also rely upon unpatented trade secrets and improvements, unpatented
know-how and continuing technological innovation to develop and maintain our
competitive position, which we seek to protect, in part, by confidentiality
agreements with our collaborators, licensees, employees and consultants. We also
have confidentiality and invention or patent assignment agreements with our
employees and some of, but not all, our collaborators and consultants. If our
employees, collaborators or consultants breach these agreements, we may not have
adequate remedies for any such breach, and our trade secrets may otherwise
become known to or independently discovered by our competitors.
In addition, although we own or otherwise have certain rights to a number of
patents, the issuance of a patent is not conclusive as to its validity or
enforceability, and third parties may challenge the validity or enforceability
of our patents or the patents of our collaborators or licensees. We cannot
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assure you how much protection, if any, will be given to our patents if we
attempt to enforce them or if they are challenged in court or in other
proceedings. It is possible that a competitor may successfully challenge our
patents, or the patents of our collaborators or licensees, or that challenges
will result in elimination of patent claims and therefore limitations of
coverage. Moreover, competitors may infringe our patents, the patents of our
collaborators or licensees, or successfully avoid them through design
innovation. To prevent infringement or unauthorized use, we may need to file
infringement claims, which are expensive and time-consuming. In addition, in an
infringement proceeding, a court may decide that a patent of ours is not valid
or is unenforceable, or may refuse to stop the other party from using the
technology at issue on the ground that our patents do not cover its technology.
In addition, interference proceedings brought by the United States Patent and
Trademark Office, or USPTO, may be necessary to determine the priority of
inventions with respect to our patent applications or those of our collaborators
or licensees. Litigation or interference proceedings may fail and, even if
successful, may result in substantial costs and be a distraction to management.
We cannot assure you that we, or our collaborators or licensees, will be able to
prevent misappropriation of our respective proprietary rights, particularly in
countries where the laws may not protect such rights as fully as in the United
States.
THE INTELLECTUAL PROPERTY OF OUR COMPETITORS OR OTHER THIRD PARTIES MAY PREVENT
US FROM DEVELOPING OR COMMERCIALIZING OUR PRODUCT CANDIDATES.
Our product candidates and the technologies we use in our research may
inadvertently infringe the patents or violate the proprietary rights of third
parties. In addition, other parties conduct their research and development
efforts in segments where we, or our collaborators or licensees, focus research
and development activities. We cannot assure you that third parties will not
assert patent or other intellectual property infringement claims against us, or
our collaborators or licensees, with respect to technologies used in potential
product candidates. Any claims that might be brought against us relating to
infringement of patents may cause us to incur significant expenses and, if
successfully asserted against us, may cause us to pay substantial damages. Even
if we were to prevail, any litigation could be costly and time-consuming and
could divert the attention of our management and key personnel from our business
operations. In addition, any patent claims brought against our collaborators or
licensees could affect their ability to carry out their obligations to us.
Furthermore, as a result of a patent infringement suit brought against us, or
our collaborators or licensees, the development, manufacture or potential sale
of product candidates claimed to infringe a third party's intellectual property
may have to stop or be delayed, unless that party is willing to grant certain
rights to use its intellectual property. In such cases, we may be required to
obtain licenses to patents or proprietary rights of others in order to continue
to commercialize our product candidates. We may not, however, be able to obtain
any licenses required under any patents or proprietary rights of third parties
on acceptable terms, or at all. Even if we, or our collaborators or licensees,
were able to obtain rights to a third party's intellectual property, these
rights may be non-exclusive, thereby giving our competitors potential access to
the same intellectual property. Ultimately, we may be unable to commercialize
some of our potential products or may have to cease some of our business
operations as a result of patent infringement claims, which could severely harm
our business.
18
<Page>
DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCT CANDIDATES DEPEND IN PART ON
THE AVAILABILITY OF RAW MATERIALS, WHICH MAY NOT ALWAYS BE IN ABUNDANCE OR
AVAILABLE AT PRICES ACCEPTABLE TO US.
Testing and development as well as the ultimate manufacturing and
commercialization of our product candidates rely upon raw materials that can be
purchased worldwide in the ordinary course of business from numerous suppliers.
In general, these materials are widely available from multiple sources. We do
not, however, have long-term arrangements with any supplier and we cannot assure
you that necessary materials will remain in abundance or that we will continue
to secure necessary materials at the prices or delivery terms currently
available or acceptable to us.
OUR ABILITY TO RECEIVE ROYALTIES AND PROFITS FROM PRODUCT SALES DEPENDS IN PART
UPON FEDERAL AND STATE LEGISLATION AND THE AVAILABILITY OF REIMBURSEMENT FOR THE
USE OF OUR PRODUCTS FROM THIRD-PARTY PAYORS, FOR WHICH WE MAY OR MAY NOT
QUALIFY.
Our royalties or profits will be heavily dependent upon the availability of
reimbursement for the use of our products from third-party health care payors,
both in the United States and in foreign markets. The health care industry and
these third-party payors are experiencing a trend toward containing or reducing
the costs of health care through various means, including lowering reimbursement
rates and negotiating reduced payment schedules with service providers for drug
products. These cost containment efforts could adversely affect the market
acceptance of our product candidates and may also harm our business. There can
be no assurance that we will be able to offset any of or all the payment
reductions that may occur.
Reimbursement by a third-party payor may depend upon a number of factors,
including the third-party payor's determination that use of a product is:
- safe, effective and medically necessary;
- appropriate for the specific patient;
- cost-effective; and
- neither experimental nor investigational.
Since reimbursement approval is required from each third-party payor
individually, seeking this approval is a time-consuming and costly process.
Third-party payors may require cost-benefit analysis data from us in order to
demonstrate the cost-effectiveness of any product we might bring to market. We
cannot assure you that we will be able to provide data sufficient to gain
acceptance with respect to reimbursement. There also exists substantial
uncertainty concerning third-party reimbursement for the use of any drug product
incorporating new technology. We cannot assure you that third-party
reimbursement will be available for our product candidates utilizing new
technology, or that any reimbursement authorization, if obtained, will be
adequate.
We anticipate a continued number of federal and state proposals to implement
government control of pricing and profitability of prescription drugs. In
addition, increasing emphasis on managed health care will continue to place
pressure on the pricing of drug products. Cost control initiatives could
decrease the price that we receive for any products and could seriously harm our
business. We cannot assure you that action taken by federal and state
governments with regard to health care reform will not seriously harm our
business. Furthermore, health care reimbursement systems vary from country to
country, and there can be no assurance that third-party reimbursement will be
made available for our products under any other reimbursement system.
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<Page>
WE FACE POTENTIAL PRODUCT LIABILITY EXPOSURE, AND IF SUCCESSFUL CLAIMS ARE
BROUGHT AGAINST US, WE MAY INCUR SUBSTANTIAL LIABILITY FOR A PRODUCT AND MAY
HAVE TO LIMIT ITS COMMERCIALIZATION.
The use of our product candidates in clinical trials and the sale of any
approved products may expose us to a substantial risk of product liability
claims and the adverse publicity resulting from such claims. These claims might
be brought against us by consumers, health care providers, pharmaceutical
companies or others selling our products. If we cannot successfully defend
ourselves against these claims, we may incur substantial losses or expenses, or
be required to limit the commercialization of our product candidates. We have
obtained limited product liability insurance coverage for our clinical trials in
the amount of $3.0 million per occurrence and $3.0 million in the aggregate. Our
insurance coverage, however, may not reimburse us or may not be sufficient to
reimburse us for any expenses or losses we may suffer. Moreover, insurance
coverage is becoming increasingly expensive, and we may not be able to maintain
insurance coverage at a reasonable cost or in sufficient amounts to protect us
against losses due to liability. We intend to expand our insurance coverage to
include the sale of commercial products if we obtain marketing approval for our
product candidates in development, but we may be unable to obtain commercially
reasonable product liability insurance for any products approved for marketing.
On occasion, large judgments have been awarded in class action lawsuits based on
drugs that had unanticipated side effects. A successful product liability claim
or series of claims brought against us would decrease our cash and could cause
our stock price to fall.
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE IS LIKELY TO BE VOLATILE AND THE MARKET PRICE OF OUR COMMON
STOCK AFTER THIS OFFERING MAY DROP BELOW THE PRICE YOU PAY.
Prior to this offering, there has been no public market for our common stock
and an active public market for our common stock may not develop or continue
after this offering. If you purchase shares of our common stock in this
offering, you will not pay a price established in a public marketplace. Rather,
you will pay the price that we negotiate with the underwriters, which may not be
indicative of market prices.
Market prices for securities of biopharmaceutical companies have been
particularly volatile. Some of the factors that may cause the market price of
our common stock to fluctuate include:
- results of clinical trials conducted by us or on our behalf, or by our
competitors;
- developments concerning our collaborators or licensees;
- regulatory developments in the United States and foreign countries;
- developments or disputes concerning patents or other proprietary rights;
- changes in estimates or recommendations by securities analysts;
- public concern over our drugs;
- litigation;
- future sales of our common stock;
- general market conditions;
- changes in the structure of health care payment systems;
- failure of any of our product candidates, if approved, to achieve
commercial success;
- economic and other external factors or other disasters or crises; and
- period-to-period fluctuations in our financial results.
20
<Page>
If any of the risks relating to this offering occurs, it could cause our
stock price to fall and may expose us to class action lawsuits that, even if
unsuccessful, could be costly to defend and a distraction to management.
THE GENERAL BUSINESS CLIMATE IS UNCERTAIN AND WE DO NOT KNOW HOW THIS WILL
IMPACT OUR BUSINESS OR OUR STOCK PRICE.
Over the past 18 months, there have been dramatic changes in economic
conditions and the general business climate has been negatively impacted.
Indices of the U.S. stock markets have fallen significantly and consumer
confidence has waned. Accordingly, it is generally accepted that the United
States is in a recession. Compounding the general unease about the current
business climate are the still unknown economic and political impacts,
long-term, of the September 11, 2001 terrorist attack and hostilities in
Afghanistan and elsewhere. We are unable to predict how any of these factors may
affect our business or stock price.
AS A RESULT OF PRIOR SALES OF OUR EQUITY SECURITIES AND THE ISSUANCE OF
CONVERTIBLE DEBT INSTRUMENTS AT PRICES LOWER THAN THE PRICE IN THIS OFFERING,
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR
SHARES.
The offering price of our common stock is substantially higher than the net
tangible book value per share of our outstanding common stock. As a result,
investors purchasing common stock in this offering will incur immediate and
substantial dilution in the net tangible book value of their common stock. We
have also issued options and warrants to acquire common stock, as well as debt
instruments that are convertible into common stock, at prices significantly
below the public offering price. There will be further dilution to investors if
these outstanding options and warrants are exercised or if the outstanding debt
instruments are converted.
EVEN THOUGH WE HAVE SPECIFIED THE GENERAL USES TO WHICH WE INTEND TO APPLY THE
PROCEEDS OF THIS OFFERING, WE RETAIN THE RIGHT TO REALLOCATE THOSE PROCEEDS AS
WE DEEM NECESSARY.
We intend to use the net proceeds from this offering to advance our product
candidates through clinical trials and preclinical studies, for discovering or
acquiring new product candidates and for working capital and general corporate
purposes. We may use a portion of the net proceeds for potential acquisitions of
or investments in product candidates, technologies or businesses. We have not
yet determined the amount of the net proceeds to be used specifically for each
of these purposes. Investors will be relying on the judgment of management
regarding the application of net offering proceeds.
FUTURE SALES OF OUR COMMON STOCK COULD CAUSE THE MARKET PRICE OF OUR COMMON
STOCK TO DECLINE.
The market price of our common stock could decline due to sales of a large
number of shares in the market after this offering or the perception that such
sales could occur, including sales or distributions of shares by our large
stockholders. These sales or the potential for these sales could also make it
more difficult for us to sell equity securities in the future.
21
<Page>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any expressed or implied by these forward-looking statements.
While we believe we have a reasonable basis for each forward-looking statement,
we caution you that these statements are based on a combination of facts and
factors currently known by us and projections of the future, about which we
cannot be certain or even relatively certain. Many factors affect our ability to
achieve our objectives and to successfully develop and commercialize our product
candidates including our ability to:
- obtain substantial additional funds;
- obtain and maintain all necessary patents or licenses;
- demonstrate the safety and efficacy of product candidates at each stage of
development;
- meet applicable regulatory standards and receive required regulatory
approvals;
- meet obligations and required milestones under our license and other
agreements; and
- produce drug candidates in commercial quantities at reasonable costs and
compete successfully against other products and companies.
In addition, you should refer to "Risk Factors" for a discussion of the
other factors that may cause our actual results to differ materially from our
forward-looking statements. As a result of these factors, there can be no
assurance that the forward-looking statements in this prospectus will prove to
be accurate and if they prove to be inaccurate, the inaccuracy may be material.
In light of the significant uncertainties in these forward-looking statements,
these statements should not be regarded as a representation or warranty by us or
any other person that our objectives and plans will be achieved in any specified
time frame, if at all. Actual results will surely differ from projected results
and such differences may be material.
You should read this prospectus completely. In some cases, you can identify
forward-looking statements by the following words: "may," "will," "should,"
"expect," "intend," "plan," "anticipate," "believe," "estimate," "predict,"
"potential," "continue" or the negative of these terms or other comparable
terminology. We may not update these forward-looking statements, even though our
situation may change in the future. We qualify all our forward-looking
statements by these cautionary statements.
22
<Page>
USE OF PROCEEDS
We estimate that the net proceeds from our sale of shares of our
common stock in this offering will be approximately $ million, and $
million if the underwriters' over-allotment option is exercised in full,
assuming an initial public offering price of $ per share and after
deducting the underwriting discounts and commissions and our estimated offering
expenses. We intend to use the net proceeds of this offering to advance our
product candidates through clinical trials and preclinical studies, discover or
acquire new product candidates and for working capital and general corporate
purposes. We may use a portion of the net proceeds to acquire, license or invest
in product candidates, technologies or businesses that are complementary to our
own, although no acquisitions, licenses or investments are planned or being
negotiated as of the date of this prospectus, and no portion of the net proceeds
has been allocated for any specific acquisition, license or investment. Pending
these uses, we will invest the net proceeds in investment-grade,
interest-bearing securities.
The principal purpose of this offering is to increase our capitalization and
financial flexibility. As of the date of this prospectus, we cannot specify with
certainty all the particular uses for the net proceeds we will have, or the
specific amounts that may be allocated to the uses described above. Accordingly,
our management will have broad discretion in the allocation and use of the net
proceeds from this offering.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. We
currently intend to retain our future earnings, if any, to finance the expansion
of our business and do not expect to pay any dividends in the foreseeable
future. Payment of future cash dividends, if any, will be at the discretion of
our board of directors after taking into account various factors, including our
financial condition, operating results, current and anticipated cash needs and
plans for expansion, and restrictions imposed by lenders, if any.
23
<Page>
CAPITALIZATION
The following table describes our capitalization as of December 31, 2001:
- on an actual basis;
- on a pro forma basis to give effect to the conversion of all outstanding
shares of series C and series D preferred stock into an aggregate of
2,790,000 shares of common stock;
- on a pro forma as adjusted basis to also reflect the sale of shares
of common stock by us in this offering at an assumed initial public
offering price of $ per share, after deducting underwriting discounts
and commissions and our estimated expenses.
You should read this table in conjunction with "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and related notes included elsewhere in
this prospectus.
<Table>
<Caption>
AS OF DECEMBER 31, 2001
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
Long-term debt, net of current maturities................... $12,796 $12,796
Redeemable preferred stock, $1.00 par value per share:
Series C, 1,750,000 shares authorized, issued and
outstanding, actual; none authorized, issued or
outstanding, pro forma and pro forma as adjusted........ 6,021 --
Series D, 1,400,000 shares authorized, 1,040,000 shares
issued and outstanding, actual; none authorized, issued
or outstanding, pro forma and pro forma as adjusted..... 8,817 --
Series B convertible preferred stock, $1.00 par value per
share; 354,643 shares authorized, issued and outstanding,
actual, pro forma and pro forma as adjusted............... 355 355
Undesignated preferred stock, $1.00 par value per share;
6,495,357 shares authorized, no shares issued and
outstanding, actual, pro forma and pro forma as
adjusted..................................................
Common stock, $0.0001 par value per share; 30,000,000 shares
authorized, 3,021,137 shares issued and outstanding,
actual; shares authorized, 5,811,137 shares issued and
outstanding pro forma; and shares authorized and
shares issued and outstanding pro forma as adjusted.... -- 1
Additional paid-in capital.................................. 6,759 21,596
Accumulated deficit......................................... (24,342) (24,342)
Unearned compensation....................................... (808) (808)
------- ------- -------
Total stockholders' (deficit) equity...................... (18,036) (3,198)
------- ------- -------
Total capitalization.................................... $ 9,598 $ 9,598
======= ======= =======
</Table>
The preceding table excludes:
- up to 2,064,234 shares of common stock issuable upon conversion of the
outstanding principal balance and accrued unpaid interest of the Elan
convertible exchangeable promissory note and the Elan convertible line of
credit as of December 31, 2001;
- any shares of common stock issuable upon exercise of the over-allotment
option granted to the underwriters;
- 1,502,000 shares of common stock issuable upon exercise of stock options
outstanding as of December 31, 2001;
- 490,500 shares of common stock available for future grant under our stock
option plans as of December 31, 2001; and
- 340,323 shares of common stock issuable upon exercise of warrants
outstanding as of December 31, 2001.
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<Page>
DILUTION
As of December 31, 2001, we had a pro forma net tangible book value of
$(3,198,000), or $(0.55) per share of common stock. Pro forma net tangible book
value per share is equal to our total tangible assets less total liabilities,
divided by the pro forma number of shares of our outstanding common stock,
counting as outstanding the shares of common stock underlying all outstanding
preferred stock. After giving effect to the issuance of shares of common
stock offered hereby at an assumed initial public offering price of $ per
share, and after deducting the estimated underwriting discounts and commissions
and our estimated offering expenses, our pro forma net tangible book value as
adjusted as of December 31, 2001, will be approximately $ , or
approximately $ per pro forma share of common stock. This represents an
immediate increase in pro forma net tangible book value of $ per share to
our existing stockholders and an immediate dilution of $ per share to new
investors in this offering. If the initial public offering price is higher or
lower than $ per share, the dilution to new stockholders will be higher or
lower, respectively. The following table illustrates this per share dilution:
<Table>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share before this
offering................................................ $
Increase per share attributable to new investors.......... $
Pro forma net tangible book value per share after this
offering.................................................. $
Dilution per share to new investors......................... $
</Table>
The following table summarizes, on a pro forma basis as of , the
difference between existing stockholders and the new investors with respect to
the number of shares of common stock purchased, the total consideration paid and
the average price per share paid. The table assumes that the initial public
offering price will be $ .
<Table>
<Caption>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- -------- -------- -------- ---------
Existing stockholders............................ % %
New investors....................................
------- ----- ------- -----
Total.......................................... 100% 100%
======= ===== ======= =====
</Table>
The discussion and table exclude:
- up to 2,064,234 shares of common stock issuable upon conversion of the
outstanding principal balance and accrued unpaid interest of the Elan
convertible exchangeable promissory note and the Elan convertible line of
credit, at December 31, 2001;
- any shares of common stock issuable upon exercise of the over-allotment
option granted to the underwriters;
- 1,502,000 shares of common stock issuable upon exercise of stock options
outstanding as of December 31, 2001;
- 490,500 shares of common stock available for future grant under our stock
option plans as of December 31, 2001; and
- 340,323 shares of common stock issuable upon exercise of warrants
outstanding as of December 31, 2001.
If the underwriters' over-allotment option is exercised in full, the shares
held by existing stockholders will decrease to % of the total number of shares
of common stock outstanding after this offering, and the number of shares held
by new investors will increase to , or % of the
25
<Page>
total number of shares of common stock outstanding after this offering. To the
extent the outstanding options and warrants are exercised and the Elan
convertible exchangeable promissory note and the convertible line of credit are
converted, there will be further dilution to new investors. If all of these
options and warrants had been exercised and Elan convertible exchangeable
promissory note and the convertible line of credit converted as of December 31,
2001, net tangible book value per share after this offering would be $ and
total dilution per share to new investors would be $ .
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<Page>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our
financial statements and related notes and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other financial
data included elsewhere in this prospectus.
The following tables present selected financial data at and for the years
ended December 31, 1997, 1998, 1999, 2000 and 2001. The statement of operations
data for the years ended December 31, 1999, 2000 and 2001, and the balance sheet
data at December 31, 2000 and 2001 have been derived from our audited financial
statements included elsewhere in this prospectus. The balance sheet data at
December 31, 1999 have been derived from our audited financial statements not
included in this prospectus. The statement of operations data for the years
ended December 31, 1997 and 1998 and the balance sheet data at December 31, 1997
and 1998 have been derived from our unaudited financial statements not included
in this prospectus.
The pro forma net loss per share data reflects the conversion of our
series C preferred stock from the beginning of the year and series D preferred
stock from the dates of original issuance.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1998 1999 2000 2001
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue.................................... $ 452 $ 83 $ -- $ -- $ 5,711
Operating expenses:
Royalty expense.......................... -- -- -- -- 1,111
General and administrative expense....... 92 253 1,019 1,348 2,343
Research and development expense......... 434 538 1,723 2,640 5,525
---------- ---------- ---------- ---------- ----------
Loss from operations................. (74) (708) (2,742) (3,988) (3,268)
Loss in investment in DOV Bermuda.......... -- -- (8,705) (1,318) (1,434)
Interest income............................ -- -- 50 223 366
Interest expense........................... (1) (4) (581) (852) (1,728)
Other income, net.......................... -- 5 -- -- 423
---------- ---------- ---------- ---------- ----------
Net loss................................... (75) (707) (11,978) (5,935) (5,641)
Deemed dividend on conversion of series A
preferred................................ -- -- (12) -- --
Deemed dividend on issuance of series C
preferred................................ -- -- -- (49) --
Deemed dividend on issuance of series D
preferred................................ -- -- -- -- (97)
---------- ---------- ---------- ---------- ----------
Net loss attributable to common
stockholders............................. $ (75) $ (707) $ (11,990) $ (5,984) $ (5,738)
========== ========== ========== ========== ==========
Basic and diluted net loss per share....... $ (0.03) $ (0.27) $ (4.02) $ (1.99) $ (1.90)
========== ========== ========== ========== ==========
Weighted average shares used in computing
basic and diluted net loss per share..... 2,580,000 2,580,000 2,979,346 3,010,801 3,021,075
Pro forma basic and diluted net loss per
share.................................... $ (1.11)
==========
Weighted average shares used in computing
pro forma basic and diluted net loss per
share.................................... 5,098,198
</Table>
<Table>
<Caption>
AS OF DECEMBER 31,
--------------------------------------------------------------
1997 1998 1999 2000 2001
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 41 $ 97 $ 1,060 $ 4,263 $ 13,574
Working capital............................ (13) (344) 643 3,237 11,831
Total assets............................... 74 210 1,790 5,550 18,080
Long-term debt............................. -- -- 9,906 11,866 12,796
Redeemable preferred stock................. -- 440 -- 6,021 14,838
Accumulated deficit........................ (83) (790) (12,768) (18,702) (24,342)
Total stockholders' (deficit) equity....... 3 (674) (8,894) (14,022) (18,036)
</Table>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THIS DISCUSSION TOGETHER WITH OUR FINANCIAL STATEMENTS AND
RELATED NOTES AND OTHER FINANCIAL INFORMATION INCLUDED IN THIS PROSPECTUS.
We are focused on the discovery, in-licensing, development and
commercialization of novel drug candidates for the treatment of central nervous
system, cardiovascular and urological disorders. In 1998, we licensed four of
our product candidates from Wyeth-Ayerst: NBI-34060, bicifadine, ocinaplon and
DOV 216,303. We sublicensed NBI-34060 to Neurocrine in 1998 in exchange for the
right to receive payments upon the achievement of certain clinical development
milestones and royalties based on product sales, if any. We are developing
bicifadine and ocinaplon through DOV (Bermuda), Ltd., or DOV Bermuda, our joint
venture with Elan. DOV diltiazem is being developed through our collaboration
with Biovail, which we entered into in January 2001.
Since our inception, we have incurred significant operating losses and we
expect to do so for the foreseeable future. As of December 31, 2001, we had an
accumulated deficit of $24.3 million. We have depended upon equity and debt
financings and license fee and milestone payments from our collaborative
partners and licensees to fund our research and product development programs and
expect to do so for the foreseeable future.
We have a limited history of operations and anticipate that our quarterly
results of operations will fluctuate for several reasons, including the timing
and extent of our research and development efforts, the timing and extent of our
adding new employees and infrastructure, the timing of milestone, license fee
and royalty payments and the timing and outcome of regulatory approvals.
Our revenue has consisted primarily of license fees and milestone payments
from our collaborative partners and licensees. We record revenue on an accrual
basis when amounts are considered collectible. Revenues received in advance of
performance obligations, or in cases where we have a continuing obligation to
perform services, are deferred and amortized over the performance period.
Revenues from milestone payments that represent the culmination of a separate
earnings process are recorded when the milestone is achieved. Contract revenues
are recorded as the services are performed. License and milestone revenue are
typically not consistent or recurring in nature. Our revenue has fluctuated from
year-to-year and quarter-to-quarter and will likely continue to be highly
volatile.
Our operating expenses consist primarily of royalty expense, costs
associated with research and development and general and administrative costs
associated with our operations. Royalty expense consists of royalty and
milestone payments accrued under our license agreement with Wyeth-Ayerst.
Research and development expense consists primarily of compensation and other
related costs of our personnel dedicated to research and development activities,
as well as outside professional fees related to clinical trials and preclinical
studies. Research and development expense also includes our expenses related to
development activities of DOV Bermuda. General and administrative expense
consists primarily of the costs of our senior management, finance and
administrative staff, business insurance and professional fees. We expect our
research and development expense to increase significantly as we expand our
clinical trial activities for our product candidates and develop additional
product candidates. Expansion of our operations and costs associated with being
a public reporting entity will also increase our general and administrative
expense.
Loss in investment in DOV Bermuda represents a portion of our 80.1% share of
DOV Bermuda's recorded loss. In January 1999, we entered into a joint venture
with Elan. As part of the transaction, we formed DOV Bermuda to develop
controlled release formulations of ocinaplon and bicifadine. While we own 80.1%
of the outstanding common stock of DOV Bermuda, Elan has retained significant
minority investor rights that are treated as "participating rights" as defined
in Emerging Issues Task Force Consensus, or EITF, No. 96-16 "Investor's
Accounting for an Investee When the Investor Has a
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<Page>
Majority of the Voting Interest but the Minority Shareholder or Shareholders
Have Certain Approval or Veto Rights." Therefore, we do not consolidate the
financial statements of DOV Bermuda, but instead account for our investment in
DOV Bermuda under the equity method of accounting. We record our 80.1% share in
the loss of DOV Bermuda in two lines in our statement of operations. For the
portion of the loss which relates to the clinical development work we are
performing for DOV Bermuda, we record research and development expense. We
report our remaining share of the loss of DOV Bermuda as loss in investment in
DOV Bermuda, which represents primarily the formulation development work being
done by our joint venture partner, Elan, on behalf of DOV Bermuda. DOV Bermuda's
loss is primarily related to the research and development expenses incurred to
conduct clinical trials for ocinaplon and bicifadine. These expenses include
payments to Elan and us for contract research services that, in Elan's case,
includes a mark up. Elan and we intend to fund DOV Bermuda on a pro rata basis
based on our respective percentage ownership interests.
Elan agreed to lend us $8.0 million in the form of a convertible
exchangeable promissory note to fund our investment in DOV Bermuda. Elan has the
right to convert the outstanding principal amount of this note at any time,
together with accrued unpaid interest, into shares of our common stock at $6.44
per share. Alternatively, Elan can exchange the principal portion of the note
for an additional equity interest in DOV Bermuda such that our equity interests
would be equal. We are accounting for this exchange feature in accordance with
EITF 86-28 "Accounting Implications of Indexed Debt Instruments." This requires
us to record an additional liability for this feature if the value of the
interest Elan can obtain in the joint venture is more than the principal amount
of the note. This would be recorded as additional interest expense and could
fluctuate from period to period based on the overall value of DOV Bermuda. Since
we issued this note to Elan, this feature has not resulted in any interest
expense. However, to the extent DOV Bermuda's value increases in the future,
this could result in additional interest expense for us.
Elan has also agreed to lend us up to $7.0 million to fund our pro rata
share of research and development funding in DOV Bermuda. For this purpose, we
issued to Elan a convertible promissory note, which we refer to as the
convertible line of credit, that bears interest at 10% per annum compounded
semi-annually on the amount outstanding thereunder. This convertible line of
credit matures on January 20, 2005, at which time the principal amount and
accrued unpaid interest become due and payable. The convertible line of credit
may not be prepaid by us without Elan's prior written consent. At any time prior
to the date the convertible line of credit is repaid in full, Elan has the right
to convert the outstanding principal and accrued unpaid interest of the
convertible line of credit into shares of our common stock at $5.52 per share.
As of December 31, 2001 we have drawn down $2.4 million on the convertible line
of credit. Please refer to note 4 of our financial statements and the text of
subheading "Collaborations and Licensing Agreements--Elan Corporation, plc and
Elan International Service, Ltd." under the "Business" section of this
prospectus.
During 2001, 2000 and 1999, in connection with the grant of stock options to
employees, we recorded unearned compensation expense totaling $1.1 million,
$118,000 and $121,000, respectively. These amounts represent the difference
between the fair value of our common stock on the date the options were granted
and the applicable exercise prices for those options granted during the time
period, and are amortized using an accelerated vesting method over the vesting
period for the options. This method results in increased compensation expense in
earlier years than straight-line vesting. During 2001, 2000 and 1999, we
recorded amortization of unearned stock compensation expense of $332,000,
$148,000 and $108,000, respectively. At December 31, 2001, 2000 and 1999,
$808,000, $21,000 and $52,000 remained to be amortized over the vesting periods
of the stock options, of which $566,000 will be amortized in 2002 and the
remainder through 2005. Please refer to note 8 of our financial statements.
Additionally, during 2001, 2000 and 1999, we granted options and warrants to
outside consultants at fair value on the date of grant in exchange for future
services. These options and warrants are
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required to be accounted for in accordance with Statement of Financial
Accounting Standards, or SFAS 123 "Accounting for Stock Based Compensation" and
EITF 96-18 "Accounting for Equity Instruments that are Issued to other than
Employees for Acquiring, or in Conjunction with Selling Goods or Services" and
at the fair value of the consideration received, or the fair value of the equity
instrument issued, whichever may be more readily measured. As the performance of
services is completed, we revalue the options and warrants that have been earned
during the period. We valued these securities at the fair value using a
Black-Scholes methodology. During 2001, 2000 and 1999, in connection with the
grant of these stock options and warrants to outside consultants, we recorded
stock compensation expense totaling $293,000, $246,000 and $4,000, respectively.
We may be required to record additional expense on a quarterly basis based upon
increases in the fair value of our common stock. Please refer to note 8 of our
financial statements.
In May and June 2000, we sold series C preferred stock for net cash proceeds
of $6.4 million and in August and October of 2001, we sold series D preferred
stock for net cash proceeds of $9.0 million. After evaluating the fair value of
our common stock in contemplation of this offering, we determined that the
series C and series D preferred stock included a beneficial conversion feature
to be calculated in accordance with EITF 98-5 "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios" and EITF 00-27 "Application of Issue No. 98-5 to Certain
Convertible Instruments". This resulted in a deemed dividend of $49,000 in 2000
in connection with the issuance of our series C preferred stock and $97,000 in
2001 in connection with the issuance of our series D preferred stock. These
amounts increased the net loss attributable to common stockholders.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001 AND 2000
REVENUE. Our revenue was $5.7 million for 2001, as compared to no revenue
for 2000. In 2001, our revenue was comprised of $2.3 million in license fees
from Biovail, a $3.2 million milestone payment from Neurocrine, which included
$1.3 million in cash and warrants to purchase shares of Neurocrine's common
stock valued at $1.9 million, and $245,000 in revenue from contract research
services performed under our collaboration with Biovail.
ROYALTY EXPENSE. Royalty expense was $1.1 million for 2001, as compared to
no such expense in 2000. The expense in 2001 reflected Wyeth-Ayerst's share of
the milestone payment and warrants we received under our sublicense agreement
with Neurocrine.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased $2.9 million to $5.5 million in 2001 from $2.6 million in 2000. This
expense included $3.3 million in 2001 and $1.6 million in 2000 of research and
development expense related to DOV Bermuda. The increase in research and
development expense for DOV Bermuda of $1.7 million resulted primarily from
increased costs associated with the initiation of Phase II clinical trials for
ocinaplon and bicifadine in late 2000. The remaining increase of $1.2 million
resulted primarily from increased costs for our personnel dedicated to research
and development activities, clinical trials for DOV diltiazem and DOV 216,303
and preclinical studies for a number of product candidates. Research and
development expense included non-cash, stock-based compensation expense of
$288,000 in 2001 and $111,000 in 2000.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased $1.0 million to $2.3 million in 2001 from $1.3 million in 2000. The
increase was primarily attributable to increased costs for additional personnel
and increased professional fees as we expanded our operations. General and
administrative expense included non-cash, stock-based compensation expense of
$337,000 in 2001 and $283,000 in 2000.
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LOSS IN INVESTMENT IN DOV BERMUDA. Loss in investment in DOV Bermuda
increased $116,000 to $1.4 million in 2001 from $1.3 million in 2000. The
increase resulted primarily from increased costs associated with the formulation
development work for ocinaplon and bicifadine performed by Elan.
INTEREST INCOME. Interest income increased $143,000 to $366,000 in 2001
from $223,000 in 2000. The increase was due to higher balances of cash and cash
equivalents resulting from the $7.5 million license fee received from Biovail in
January 2001 and the $9.0 million in net cash proceeds received from our sale of
series D preferred stock in August and October 2001.
INTEREST EXPENSE. Interest expense increased $875,000 to $1.7 million in
2001 from $852,000 in 2000. We recorded interest expense of $930,000 on our
convertible exchangeable promissory note and convertible line of credit with
Elan in 2001, and $845,000 in 2000. This increase was due to higher outstanding
balances on the convertible exchangeable promissory note and the convertible
line of credit. Both the Elan convertible exchangeable promissory note and
convertible line of credit contain interest that will be paid either in cash or
common stock at Elan's option. In accordance with EITF 00-27, we evaluate this
conversion feature each time interest is accrued to the notes. During 2001, this
resulted in additional interest expense of $796,000. To the extent the value of
our common stock is at or above $6.44 per share with respect to the convertible
exchangeable promissory note or $5.52 per share with respect to the convertible
line of credit, we will continue to incur this additional interest expense each
time interest is accrued on the notes. The convertible exchangeable promissory
note and the convertible line of credit are described in further detail in
note 4 of our financial statements.
OTHER INCOME, NET. We had $423,000 of other income, net in 2001. We did not
record any other income, net in 2000. In 2001, other income, net consisted of a
$600,000 increase in value of the warrants issued by Neurocrine to us, which we
earned in 2001 upon the achievement of a certain milestone, offset by the
increase in our liability to Wyeth-Ayerst associated with the warrants.
YEARS ENDED DECEMBER 31, 2000 AND 1999
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased $917,000 to $2.6 million in 2000 from $1.7 million in 1999. This
expense included $1.6 million in 2000 and $1.1 million in 1999 of research and
development expense related to DOV Bermuda. The increase in research and
development expense at DOV Bermuda of $477,000 resulted primarily from increased
costs associated with the clinical trials for ocinaplon and bicifadine. The
remaining increase of $440,000 resulted primarily from increased costs for our
personnel dedicated to research and development activities, clinical trials of
DOV 216,303 and products in preclinical studies. Research and development
expense included non-cash, stock-based compensation of $111,000 in 2000 and
$85,000 in 1999.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased $329,000 to $1.3 million in 2000 from $1.0 million in 1999. The
increase was primarily attributable to increased costs for additional personnel.
General and administrative expense included non-cash, stock-based compensation
expense of $283,000 in 2000 and $27,000 in 1999.
LOSS IN INVESTMENT IN DOV BERMUDA. Loss in investment in DOV Bermuda
decreased $7.4 million to $1.3 million in 2000 from $8.7 million in 1999. In
1999, we wrote off the value of our initial contribution to DOV Bermuda of
$8.3 million and recorded our share of DOV Bermuda's remaining $541,000 loss. In
1999, DOV Bermuda paid Elan a technology license fee of $10.0 million. The value
of the technology obtained by DOV Bermuda from Elan and us was expensed by DOV
Bermuda upon contribution because the technological feasibility of using the
contributed technology as intended in conjunction with ocinaplon and bicifadine
had not been established. DOV Bermuda had no technology license fee expense in
2000. Excluding the $8.3 million we wrote off in 1999, the loss in investment in
DOV Bermuda increased from $434,000 to $1.3 million. The increase in expense in
2000 was due to
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increased costs for formulation development work for ocinaplon and bicifadine
being performed by Elan.
INTEREST INCOME. Interest income increased $173,000 to $223,000 in 2000
from $50,000 in 1999. The increase was attributable to higher balances of cash
and cash equivalents in 2000 resulting from the sale of series C preferred stock
in May and June 2000.
INTEREST EXPENSE. Interest expense increased $271,000 to $852,000 in 2000
from $581,000 in 1999. We recorded $845,000 in interest expense related to our
convertible exchangeable promissory note and convertible line of credit with
Elan in 2000 and $570,000 in 1999. The increase is primarily due to a higher
amount outstanding under the convertible line of credit.
PROVISION FOR INCOME TAXES
We incurred net operating losses for the years ended December 31, 1999, 2000
and 2001, and consequently did not pay federal, state or foreign income taxes.
As of December 31, 2001, we had federal and state net operating loss
carryforwards of approximately $10.0 million and $5.0 million, respectively. The
annual limitations may result in the expiration of net operating losses before
utilization. See note 6 of our financial statements. Pursuant to Section 382 of
the Internal Revenue Code of 1986, as amended, the annual utilization of a
company's net operating loss carryforwards may be limited if the company
experiences a change in ownership of more than 50 percentage points within a
three-year period. As a result of this offering, we may experience such an
ownership change. Accordingly, our net operating loss carryforwards available to
offset future federal taxable income arising before such ownership changes may
be limited. For financial reporting purposes, we have recorded a valuation
allowance to fully offset the deferred tax asset related to these carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
For the three years ended December 31, 1999, 2000 and 2001, we funded our
operations principally from sales of our equity securities and loans from our
collaborative partners, which provided cash in the aggregate amount of
approximately $28.9 million, and license and cash milestone revenues in the
aggregate amount of $8.8 million. Sales of our equity securities have resulted
in the receipt of net cash proceeds of $9.0 million from the sale of our
series D preferred stock in August and October 2001, $6.4 million from the sale
of our series C preferred stock in May and June 2000 and $2.9 million from the
sale of our series B preferred stock, common stock and warrants in
January 1999. Loans from our collaborative partners consisted of the
$8.0 million convertible exchangeable promissory note we issued to Elan in 1999
and the $7.0 million convertible line of credit we secured from Elan in 1999 to
fund our portion of the research and development costs associated with ocinaplon
and bicifadine, of which we borrowed $1.3 million in 1999, and $1.1 million in
2000. At December 31, 2001, the outstanding balance of the convertible
exchangeable promissory note including accrued interest was $9.8 million and the
outstanding balance of the convertible line of credit including accrued interest
was $3.0 million, with $4.6 million remaining available for borrowing. We also
earned a $1.3 million cash milestone payment from Neurocrine and received a
$7.5 million license fee from Biovail in 2001. At December 31, 2001, cash and
cash equivalents totaled $13.6 million, compared to $4.3 million at
December 31, 2000. At December 31, 2001, we had working capital of
$11.8 million.
We have agreed to fund our pro rata portion of DOV Bermuda's anticipated
expenses of at least $2.6 million in 2002. Under our license and development
agreement with Biovail, Biovail must pay the first $6.0 million of clinical
development costs for the initial co-developed product and 50% of such costs
thereafter. Under that agreement, Biovail is also required to enforce our DOV
diltiazem patent and the related intellectual property, including a requirement
to sue for infringement. We may be required to reimburse Biovail for up to
$1.5 million of legal fees and disbursements incurred in connection with such
enforcement. Please refer to note 12 of our financial statements.
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Cash provided by operations in 2001 amounted to $1.9 million, as compared
with cash used by operations of $3.1 million in 2000 and $2.1 million in 1999.
The receipt of the $7.5 million license fee from Biovail, net of amortization,
was the main reason for the increase in cash provided by operations. Non-cash
expense related to stock-based compensation, interest expense and depreciation
and amortization expenses were $2.5 million in 2001, $1.4 million in 2000 and
$761,000 in 1999.
Our investing activities in 2001 used cash of $1.6 million, as compared to
$1.2 million in 2000 and $8.8 million in 1999, which reflect our initial cash
investment in DOV Bermuda, capital purchases, leasehold improvements and
investments in certificates of deposit.
We believe that our existing cash and cash equivalents, and the net proceeds
of this offering, will be sufficient to fund our anticipated operating expenses,
debt obligations and capital requirements for the foreseeable future. Our future
capital uses and requirements depend on numerous factors, including:
- our progress with research and development;
- our ability to establish and the scope of any new collaborations;
- the progress and success of clinical trials and preclinical studies of our
product candidates;
- the costs and timing of obtaining, enforcing and defending our patent and
intellectual rights;
- the costs and timing of regulatory approvals; and
- expenses associated with potential litigation.
Our capital requirements may increase. As a result, we may require
additional funds and may attempt to raise additional funds through equity or
debt financings, collaborative agreements with corporate partners or from other
sources. In addition, future milestone payments under some of our collaborative
or license agreements are contingent upon our meeting particular research or
development goals. The amount and timing of future milestone payments are
contingent upon the terms of each collaborative or license agreement. Milestone
performance criteria are specific to each agreement and based upon future
performance. Therefore, we are subject to significant variation in the timing
and amount of our revenues and results of operations from period to period.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which supersedes SFAS No. 121. SFAS No. 144
further refines the requirements of SFAS No. 121 that requires companies to
recognize an impairment loss if the carrying amount of a long-lived asset is not
recoverable based on its undiscounted future cash flows and measure an
impairment loss as the difference between the carrying amount and fair value of
the asset. In addition, SFAS No. 144 provides guidance on accounting and
disclosure issues surrounding long-lived assets to be disposed of by sale. The
provisions of SFAS No. 144 are required to be adopted starting with fiscal years
beginning after December 15, 2001. We do not expect adoption of these provisions
to have a material impact on our financial position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
To date, we have invested our cash balances with significant financial
institutions. In the future, the primary objective of our investment activities
is to maximize the income we receive from our investments consistent with
preservation of principal and minimum risk. Some of the securities that we
invest in may have market risk. This means that a change in prevailing interest
rates may cause the principal amount of the investment to fluctuate. To minimize
this risk in the future, we intend to maintain our portfolio of cash equivalents
and investments in a variety of securities, including
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commercial paper, money market funds, government and non-government debt
securities and corporate obligations. Our revenues are denominated in U.S.
dollars, therefore, we have not been exposed to foreign currency translation
risks and have not engaged in any hedging instruments.
The investment balance of $2.4 million at December 31, 2001 represents the
warrants we received from Neurocrine under our sublicense agreement. We have a
corresponding accrued royalty expense of $833,000 included in accrued expenses
related to the portion of the Neurocrine warrants we must remit to Wyeth-Ayerst
under our license agreement. As the warrants represent a derivative financial
instrument under SFAS 133 "Accounting for Derivative Instruments and Hedging
Activities," both the asset and the liability to Wyeth-Ayerst are reflected in
our financial statements at fair value and we record an adjustment to those fair
values at the end of each reporting period with the corresponding gain or loss
reflected in other income or other expense. Included in other income for 2001,
was $423,000 for the net result of the increase in the value of the warrants
offset by the increase in the liability, which represent the increase in the
value of the warrants from our receipt of them on November 15, 2001 through the
end of the year. We calculated these values using a Black-Scholes methodology.
The significant assumptions include the volatility, term and risk-free rate used
in those calculations. The fair value of the warrants will fluctuate based on
many factors including but not limited to overall stock market conditions, the
fair value of Neurocrine's common stock, the volatility in Neurocrine's common
stock and length of time left on our warrants, currently five years. The
majority of the value in the asset at December 31, 2001, relates to the length
of our warrants and the fact that Neurocrine's common stock is volatile. We
expect these factors and the corresponding value of the asset and liability to
continue to fluctuate perhaps significantly from quarter-to-quarter and from
year-to-year. We are currently evaluating different means of disposing of these
warrants as it is not our policy to hold such high-risk investments. Until such
time as we can find an acceptable means to dispose of these warrants we will be
subject to further risk of changes in value.
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BUSINESS
OVERVIEW
We are a biopharmaceutical company focused on the discovery, in-licensing,
development and commercialization of novel drug candidates for central nervous
system, cardiovascular and urological disorders. We have five product candidates
in clinical trials addressing therapeutic indications with significant unmet
needs. Our product candidate for insomnia is currently in Phase III clinical
trials and our product candidates for the treatment of anxiety disorders and
pain are in Phase II clinical trials. Our product candidates for the treatment
of insomnia, anxiety and pain have demonstrated efficacy in Phase II clinical
trials. Our product candidate for the treatment of angina and hypertension is
currently in Phase I clinical trials and we intend to initiate Phase III
clinical trials by the end of 2002. Our product candidate for the treatment of
depression is currently in Phase I clinical trials. We also have four compounds
in preclinical development for the potential treatment of depression, panic
disorders, Parkinson's disease, attention deficit disorder and stress
incontinence.
Our core scientific expertise is in neurotransmitter receptors, ion channels
and transport proteins. These are subcellular structures that play fundamental
roles in many physiological processes. Our senior management team has
substantial experience in drug discovery and development. During their careers,
they have participated in the discovery and development of ten new drugs that
have been successfully brought to market. To enhance our drug development and
commercialization efforts, we have established collaborative agreements with
Elan and Biovail, and have sublicensed our product candidate for the treatment
of insomnia to Neurocrine.
OUR BUSINESS STRATEGY
Our goal is to become a leading biopharmaceutical company focused on the
treatment of central nervous system, cardiovascular and urological disorders.
The key elements of our strategy are to:
AGGRESSIVELY PURSUE DEVELOPMENT AND COMMERCIALIZATION OF OUR LEAD PRODUCT
CANDIDATES. We have five product candidates in clinical trials, each of which
addresses a separate and substantial pharmaceutical market. These markets
include insomnia, anxiety, pain, depression, angina and hypertension. We have
designed the clinical programs for the product candidates we are developing to
provide clear and defined paths to attain regulatory approval. We intend to
focus substantial resources on completing clinical testing and commercializing
these product candidates as quickly as possible.
EXPAND OUR PRODUCT PORTFOLIO WITH NOVEL DRUG CANDIDATES THAT ADDRESS UNMET
NEEDS IN LARGE, ESTABLISHED MARKETS. We seek to identify and develop, either
internally or through collaborative agreements, novel drug candidates that
address unmet needs in large, established markets. Our product candidates for
the treatment of insomnia and anxiety, NBI-34060 and ocinaplon, have
demonstrated efficacy equivalent to or better than currently marketed products
without their significant side effects. We intend to continue expanding our
existing product portfolio by discovering and developing novel drug compounds
both internally and through focused outsourced research and development. We also
intend to expand our portfolio by identifying, in-licensing and developing
additional compounds that are potentially superior to currently marketed
products and by developing additional applications and formulations for our
existing licensed compounds.
REDUCE CLINICAL DEVELOPMENT AND COMMERCIALIZATION RISK BY BUILDING A
DIVERSIFIED PRODUCT PORTFOLIO. We have built and intend to continue to build a
portfolio of diverse product candidates to reduce the risks associated with the
clinical development of drugs. We have focused our in-licensing and development
resources on compounds in the later stages of clinical development for which
there exists a significant amount of positive clinical data. We believe this
reduces the risk that these compounds will have safety concerns and enhances our
chances of demonstrating efficacy in clinical trials. We focus on developing
multiple compounds with diverse mechanisms of action to limit our risk of
difficulties
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associated with a particular mechanism of action. Finally, a single mechanism of
action may have multiple therapeutic uses. We intend to investigate the efficacy
of our compounds for these diverse uses in order to enhance the commercial
potential of our product candidates. We believe that our portfolio approach
reduces our dependence on any single compound to achieve commercial success and
creates multiple potential sources of revenue.
ESTABLISH ALLIANCES WITH INDUSTRY LEADERS TO ACCESS THEIR UNIQUE
TECHNOLOGIES AND CAPABILITIES. To date, we have entered into collaborative
agreements with Elan and Biovail. We formed a joint venture with Elan to develop
controlled release formulations of bicifadine and ocinaplon. Elan contributed
rights to its controlled release technologies and we jointly manage clinical and
product development. The joint venture retains all commercialization and
marketing rights for the product candidates. We have also entered into an
agreement with Biovail to develop our proprietary formulation of diltiazem,
under which Biovail will market the product and we manage clinical and product
development. We retain a co-promotion right. In the future, we will seek to
establish alliances that will enhance our product development and
commercialization efforts, including alliances that allow us to retain
significant development or commercialization rights for our product candidates.
OUR PRODUCT PIPELINE
The following table summarizes our product candidates currently in clinical
trials and preclinical development:
<Table>
<Caption>
PRODUCT INDICATION(S) STATUS MARKETING RIGHTS
- --------------------- --------------------------------- ----------------- -------------------------
NBI-34060 Insomnia Phase III Neurocrine
Ocinaplon Generalized Anxiety Disorder Phase II DOV Bermuda
Bicifadine Pain Phase II DOV Bermuda
DOV 216,303 Depression Phase I DOV
DOV Diltiazem Angina and Hypertension Phase I, DOV/Biovail
Phase III
planned
DOV 21,947 Depression Preclinical DOV
DOV 22,047 Panic Disorder Preclinical DOV
DOV 102,677 Attention Deficit Disorder and Preclinical DOV
Parkinson's Disease
DOV 102,177 Stress Incontinence Preclinical DOV
</Table>
For an explanation of the terms Preclinical, Phase I, Phase II and Phase III,
please refer to the text in subheading "Government Regulation" in this
"Business" section.
OUR PRODUCTS UNDER DEVELOPMENT
We have core scientific expertise in neurotransmitter receptors, ion
channels and transport proteins, which are subcellular structures that play a
fundamental role in many physiological processes and, as a result, are targets
for drugs. Our expertise has allowed us to develop product candidates for the
treatment of central nervous system, cardiovascular and urological disorders. We
have five product candidates in clinical development and four compounds in
preclinical development to treat disorders in one or more of these therapeutic
areas.
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CENTRAL NERVOUS SYSTEM DISORDERS
INSOMNIA AND ANXIETY
Most drugs currently marketed to treat insomnia and anxiety target the
neurotransmitter gamma-aminobutryic acid, or GABA. Neurotransmitters are
chemicals in the central nervous system that either excite or inhibit neuronal
function. GABA is one of the principal neurotransmitters in the central nervous
system. As a result, drugs acting on GABA receptors can produce a range of
pharmacological actions.
Benzodiazepines, or BDZs, such as Valium, Librium and Xanax, target a subset
of GABA receptors commonly referred to as GABA(A) receptors. BDZs have enjoyed
widespread commercial success for over 40 years for the treatment of anxiety,
insomnia and epilepsy. In addition to their desired therapeutic effects,
however, BDZs are known to produce a variety of undesired side effects. For
example, when used to treat anxiety, these side effects can include sedation,
muscular incoordination, memory impairment and potentially lethal effects when
used with alcohol. BDZs also produce tolerance, physical dependence and can
potentially be abused.
For many years, our senior management team has conducted research on GABA(A)
receptors. Their pioneering work classified GABA(A) receptors into
biochemically, pharmacologically and functionally distinct receptor subtypes.
They demonstrated that one subset of these subtypes influences anxiety and
epilepsy, another sedation, coordination and muscle relaxation and a third
amnesia and the deleterious effects of alcohol. Furthermore, through their
research delineating the actions of BDZs on GABA(A) receptors, they were the
first to discover non-BDZ compounds that act on specific subtypes of GABA(A)
receptors.
BDZs are believed to produce their undesired side effects at therapeutic
doses because they affect all GABA(A) receptor subtypes. We believe that
compounds that act on specific GABA(A) receptor subtypes will produce the
desired therapeutic effects while eliminating or reducing the undesired side
effects associated with BDZs. For example, compounds acting at one GABA(A)
receptor subtype may reduce anxiety, while compounds acting at another GABA(A)
receptor subtype may produce sedation, in each case without the effects
associated with acting at other subtypes.
NBI-34060. NBI-34060 is our product candidate for the treatment of
insomnia. In 1998, we licensed NBI-34060 from Wyeth-Ayerst and subsequently
sublicensed it to Neurocrine, which is currently conducting a Phase III clinical
trial on this product candidate. Insomnia is defined as a persistent complaint
of difficulty in initiating or maintaining sleep, or of not feeling rested after
an otherwise adequate amount of sleep. According to the National Sleep
Foundation, approximately one-half of the U.S. population reported trouble
sleeping a few nights per week or more, with approximately 29% of the U.S.
population reporting that they experience insomnia every night or almost every
night. IMS reported total U.S. sales of prescription drugs for the treatment of
insomnia exceeded $900 million in 2000.
In the 1980's, BDZs such as Dalmane and Halcion were extensively used to
treat insomnia. Sedation, an undesirable side effect of BDZs when used to treat
anxiety, became an intended primary therapeutic effect of BDZs to treat
insomnia. BDZs demonstrated substantial sedative effectiveness with a greater
margin of safety than previous treatments such as barbiturates. Despite the
efficacy of BDZs to treat insomnia, they produce significant undesirable side
effects, including:
- impaired motor coordination;
- confusion and memory impairment;
- rebound insomnia and anxiety after discontinuation;
- next day residual sedation;
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- development of tolerance with repeated use; and
- potentially lethal effect when combined with alcohol.
Impaired motor coordination, confusion and memory impairment are especially
problematic in older patients. We believe that many of these side effects are
due to the non-selective action of BDZs on all GABA(A) receptor subtypes, as
well as their delayed onset and extended duration of action.
A small number of non-BDZs have been introduced for the treatment of
insomnia. In March 1993, Ambien, the first and largest selling non-BDZ, was
introduced in the United States. It has shown a reduced side effect profile and
a shorter duration of action as compared to BDZs. Ambien, however, also has
undesirable side effects, including amnesia and next day residual sedation.
Despite these undesirable side effects, according to IMS figures, U.S. sales of
Ambien were approximately $712 million in 2000.
Our insomnia product candidate, NBI-34060, is a non-BDZ that is reported to
be more potent than currently marketed non-BDZs, including Ambien, and more
selectively targets the specific GABA(A) receptor subtype believed to be
responsible for promoting sleep. Furthermore, Neurocrine has noted that, in
their Phase II clinical studies, NBI-34060 was devoid of next day residual
sedation, and they expect it to have a considerably reduced amnestic potential.
We believe that NBI-34060's greater selectivity and improved pharmacokinetic
profile are responsible for its reduced side effects when compared to currently
marketed products.
Neurocrine is currently developing both an immediate release formulation and
a modified release formulation of NBI-34060 to address the different needs of
the insomnia patient population. Neurocrine's clinical studies have shown that
patient blood levels of NBI-34060 reach their highest point approximately 30
minutes after ingestion followed by rapid removal from the blood stream to the
point that it cannot be detected four hours later. This results in rapid sleep
onset followed by rapid removal of the drug from the body, reducing the risk of
next day residual sedation. Neurocrine believes that this short duration of
action will permit bedtime dosing for people who have trouble falling asleep,
and dosing in the middle of the night for people who have trouble staying
asleep, without causing the side effects and next day residual sedation that
occur with longer-acting drugs like Ambien. Neurocrine has formulated the drug
in a modified release form that will effectively provide within one tablet two
doses of the drug, one dose released immediately for sleep induction and one
dose released later for sleep maintenance.
Neurocrine has completed 19 Phase I and Phase II clinical trials of
NBI-34060 for efficacy and safety involving more than 1,100 subjects. Its
current Phase III program is reported to involve approximately 2,200 additional
subjects in seven large clinical trials. The first Phase III clinical trial,
which commenced in November 2001, involves approximately 500 patients to
evaluate an immediate release formulation of NBI-34060 for the long-term
treatment of chronic insomnia.
In reported Phase II clinical studies, NBI-34060 was shown to be safe and
effective in helping patients with both chronic insomnia and transient insomnia
fall asleep rapidly without adverse side effects. Neurocrine's reported results
demonstrated that its immediate release formulation of NBI-34060 does not lead
to next day residual sedation, while both Ambien and zopiclone exhibited
statistically significant measures of next day residual sedation. In
Neurocrine's Phase II clinical trials in elderly patients, NBI-34060 was found
to be well tolerated and without next day residual sedation. Neurocrine has also
reported that its modified release formulation of NBI-34060 demonstrated
efficacy in a number of sleep measures with no next day residual sedation at
doses likely to be used clinically.
The preceding description of Neurocrine's clinical development of NBI-34060
is based on their public disclosures.
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OCINAPLON. Ocinaplon is our product candidate for the treatment of anxiety
disorders, including generalized anxiety disorder, or GAD, the first indication
for which we intend to seek FDA approval. Anxiety can be defined in broad terms
as a state of unwarranted or inappropriate worry and is made up of various
disorders, including GAD, panic disorder and phobias. IMS reported that in 2000,
over $1.4 billion was spent in the United States on anti-anxiety drugs,
exclusive of antidepressants. In addition, IMS reported that BuSpar, a non-BDZ,
accounted for 50% of total U.S. sales for anti-anxiety drugs in 2000.
BDZs such as Xanax, Librium and Valium, the non-BDZ BuSpar and
antidepressants such as Zoloft and Paxil are currently used to treat GAD and
other anxiety disorders. Each of these therapeutics, however, has problems
associated with its use. As noted above, BDZs produce significant side effects
such as impaired motor coordination, next day residual sedation, physical
dependence and potential lethal effect when mixed with alcohol. These side
effects make them less desirable treatments for anxiety, particularly for the
treatment of GAD, when long-term usage is needed. While BuSpar is non-sedating
and displays no withdrawal effects or abuse potential, its efficacy has been
reported to be relatively low, particularly in patients who have previously used
BDZs. Additionally, BuSpar takes three to six weeks of drug administration to
achieve any clinically significant reduction in anxiety, requires termination of
BDZ therapy 30 days before initiating treatment and has its own side effects
such as dizziness and nausea. Because of these issues, physicians continue to
prescribe BDZs for the treatment of anxiety. Like BuSpar, the efficacy of
antidepressants in relieving anxiety is relatively low, and several weeks of
treatment are required to achieve clinically meaningful relief. In addition,
antidepressants display their own side effects, including nervousness,
agitation, insomnia and sexual dysfunction.
We believe ocinaplon, a non-BDZ, addresses significant unmet needs for the
treatment of anxiety disorders. Ocinaplon appears to selectively modulate a
specific subset of GABA(A) receptors that we believe are involved in the
mediation of anxiety. Preclinical studies have demonstrated that ocinaplon
produces an anti-anxiety effect at doses 20 to 40 times lower than doses that
produce sedation and muscle relaxation, and 10 times lower than doses that
produce amnesia. In preclinical studies, ocinaplon was also shown to be 15 times
less likely than Valium to increase the effects of alcohol. By contrast, BDZs
often produce these side effects at doses approximating those that produce an
anti-anxiety effect.
To date, through our joint venture with Elan, we have completed eight
clinical trials on ocinaplon, including seven double-blind, placebo-controlled
Phase I trials in which over 140 healthy volunteers have participated. In these
clinical trials, ocinaplon was shown to be safe and well tolerated at the
maximum doses used, with no evidence of sedation or any other side effects
typically associated with BDZs.
In our Phase II double-blind, placebo-controlled clinical trial, ocinaplon
exhibited the following characteristics:
- efficacy at least comparable to what has been reported for BDZs;
- rapid onset of action;
- a favorable side effect profile not significantly different from placebo;
and
- no "rebound" anxiety following treatment cessation.
This Phase II clinical trial investigated the effects of an immediate
release formulation of ocinaplon on 60 GAD patients. In this clinical trial,
ocinaplon demonstrated a highly statistically significant reduction of anxiety
during the four-week study period using a number of anxiety measurements,
including the Hamilton Anxiety Scale. In addition, statistically significant
effects were measured as early as one week after treatment, a much shorter
period than reported results for current treatments. The incidence of side
effects did not differ significantly from placebo.
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In December 2001, we initiated a second Phase II clinical trial. This
multicenter trial will involve 200 patients and is a 14-day double-blind,
placebo-controlled clinical trial designed to demonstrate the efficacy of
ocinaplon in patients with GAD. In this clinical trial, we are evaluating a
controlled release formulation of ocinaplon utilizing Elan's proprietary
technology.
PAIN
BICIFADINE. Bicifadine is our product candidate for the treatment of pain.
Drugs for the treatment of pain, or analgesics, have historically been placed
into one of three general categories:
- narcotics like morphine, codeine, Demerol, and Percodan;
- non-narcotic prostaglandin inhibitors like aspirin, acetaminophen,
ibuprofen and COX-2 inhibitors; and
- other analgesics such as Ultram.
While drugs in all three of these categories are regularly used in the
treatment of pain, their use has been limited because of various side effect
profiles. In addition, administering these drugs for extended durations has been
problematic. Although prostaglandin inhibitors have been used for the treatment
of pain, particularly pain associated with inflammation, their efficacy is
limited to milder types of pain and they often display undesirable side effects
relating to the gastrointestinal tract and the liver. Narcotics are also used to
treat pain, but tolerance develops rapidly and higher doses eventually lead to
physical dependence and additional side effects, including respiratory
depression. Ultram, originally thought to be a non-narcotic, has been reported
to act at certain opiate receptors and has the potential to cause morphine-like
psychic and physical dependence. Despite these drawbacks, according to IMS, U.S.
sales in 2000 of narcotic and non-narcotic analgesics, including Ultram,
exceeded $4.6 billion.
Alternative strategies for identifying potentially novel analgesics include
altering certain neurotransmitter systems involved in mediating the sensation of
pain. Preclinical studies have implicated the neurotransmitters glutamate,
norepinephrine and serotonin in pain reduction. Treatments that interfere with
certain glutamate receptors or that increase the actions of norepinephrine and
serotonin have been reported to produce analgesic effects in animals.
Bicifadine is a chemically distinct molecule with a unique profile of
pharmacological activity. It has two primary biochemical actions. It interferes
with the ability of glutamate to stimulate calcium entry into neurons by binding
to one of its receptors on the neuron's surface. In addition, it enhances and
prolongs the actions of norepinephrine and serotonin by inhibiting the transport
proteins that terminate their physiological actions. Preclinical studies and
clinical trials indicate that any of these individual actions or a combination
of these actions may account for the analgesic properties of bicifadine.
Bicifadine is not a narcotic and in preclinical studies it has been shown
not to act at any opiate receptor. In animal models, bicifadine did not
demonstrate abuse, addiction or dependence potential. There have been four Phase
I clinical trials and 14 Phase II clinical trials involving over 1,000 patients
conducted by Wyeth-Ayerst or us with an immediate release formulation of
bicifadine. In five double-blind, placebo-controlled Phase II clinical trials,
bicifadine demonstrated a statistically significant reduction in pain, in some
cases comparable to or better than positive controls such as codeine.
Recently, we began a Phase II clinical trial in the United States studying
our new controlled release formulation of bicifadine. This 750-patient
double-blind, placebo-controlled study will compare bicifadine and codeine to
placebo in a severe dental pain model. Enrollment for this study began in
December 2001. Depending upon the results of this trial, we intend to initiate a
Phase III clinical trial program by the end of 2002. If ultimately approved,
bicifadine would not be limited to use in the pain models studied, but according
to FDA guidelines could, be used to treat pain generally.
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DEPRESSION
DOV 216,303. DOV 216,303, our lead product candidate for the treatment of
depression, is a triple uptake inhibitor affecting the neurotransmitters
norepinephrine, serotonin and dopamine. These neurotransmitters regulate
numerous functions in the central nervous system, and imbalances in them have
been linked to a number of psychiatric disorders, including depression. The
actions of these neurotransmitters are terminated by specific transport proteins
that remove them from synapses in the brain. Antidepressants are thought to
produce their therapeutic effects by inhibiting the uptake activity of one or
more of these transport proteins, effectively increasing the concentration of
these neurotransmitters at their receptors.
The emergence of selective serotonin reuptake inhibitors, or SSRIs, starting
with Prozac in January 1988, followed by Zoloft in February 1992 and Paxil in
January 1993, has had a dramatic impact on the antidepressant market. According
to IMS figures, sales of antidepressants in the United States increased from
approximately $424 million in 1987, the year prior to the introduction of
Prozac, to approximately $9.6 billion in 2000. Despite this widespread
commercial success, SSRIs suffer from the following limitations:
- 30% - 40% of patients do not experience an adequate therapeutic response;
- three or more weeks of therapy are often required before a meaningful
improvement is observed; and
- side effects such as nervousness, agitation, insomnia and sexual
dysfunction have been documented.
Dual uptake inhibitors, like Effexor, block the uptake of serotonin and
norepinephrine. While more effective than SSRIs, dual uptake inhibitors have
their own unique set of side effects, including nausea, headache, sleepiness,
dry mouth and dizziness.
No currently marketed antidepressants inhibit the uptake of all three
neurotransmitters linked to depression. Both preclinical studies and clinical
trials indicate that a drug inhibiting uptake of serotonin, norepinephrine and
dopamine would be expected to produce a faster onset of action and greater
efficacy than traditional antidepressants. We believe that such a "broad
spectrum" antidepressant would represent a breakthrough in the treatment of
depression.
In preclinical studies, DOV 216,303 was shown to potently inhibit the uptake
of all three neurotransmitters, serotonin, norepinephrine and dopamine. In
animal models highly predictive of antidepressant action, DOV 216,303 was more
potent than both Tofranil, a dual uptake inhibitor, and Prozac. In one of these
models designed to test the onset of activity, DOV 216,303 produced an
antidepressant-like action after one week of treatment, compared to four weeks
for Tofranil. Because of its ability to inhibit the uptake of all three
neurotransmitters implicated in depression, we believe DOV 261,303 may be more
effective and have a more rapid onset than other antidepressants.
We recently completed a dose-escalating, placebo-controlled, double-blind
Phase I clinical trial in France that evaluated the pharmacokinetic properties
and safety profile of single doses of DOV 216,303. DOV 216,303 was rapidly
absorbed following oral administration, with blood levels proportional to the
administered dose. No adverse effects were observed after doses five to ten
times higher than the projected therapeutic doses. We intend to commence a Phase
Ib multiple dose-ranging clinical trial of DOV 216,303 by the end of 2002.
PRECLINICAL DEVELOPMENT
We have three compounds currently in preclinical development for the
treatment of central nervous system disorders. The first, DOV 22,047, is
believed to act at a specific GABA(A) receptor subtype and is under development
for the treatment of panic disorder. The second compound, DOV
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21,947, is structurally related to DOV 216,303 and is a triple uptake inhibitor
under development to treat depression. The third compound, DOV 102,677, is a
selective dopamine uptake inhibitor that may be used in the treatment of
attention deficit disorder and Parkinson's disease.
CARDIOVASCULAR DISORDERS
DOV DILTIAZEM. DOV diltiazem, our proprietary formulation of diltiazem, is
our product candidate for the treatment of angina and hypertension. Diltiazem
belongs to a well-known class of drugs called calcium channel blockers. DOV
diltiazem combines an immediate release component with an extended release
component in order to provide improved blood levels throughout the day compared
to currently marketed diltiazem products.
Chronic stable angina, or angina pectoris, refers to recurring severe
constricting pain in the chest due to inadequate blood supply to the heart
caused by heart disease. Angina attacks are more likely to occur during the
morning and afternoon hours. Likewise, hypertension is greater in the morning
hours. According to 1999 practice guidelines published by the American College
of Cardiology/American Heart Association/American College of Physicians-American
Society of Internal Medicine, chronic stable angina was estimated to have
affected over 16.5 million people in the United States. According to Decision
Resources, high blood pressure or hypertension was estimated to affect over
50 million people in the United States in 1999.
Calcium channel blockers remain the standard-of-care for treatment of
chronic stable angina and hypertension and continue to be highly endorsed by the
medical community. Although comparative studies have demonstrated equivalent
anti-angina effects for many marketed calcium channel blockers, a lower
incidence of side effects with diltiazem was often reported in these studies.
According to IMS figures for 2000, total sales of diltiazem in the United States
were $981 million.
In an effort to provide both therapeutic blood levels of diltiazem for
longer periods of time and improved patient compliance, several slow or extended
release preparations of diltiazem have been developed for the treatment of
hypertension and chronic stable angina. However, these commercially available,
once-daily, extended release formulations produce only a partial reduction of
chronic stable angina. According to published studies, currently marketed
diltiazem products such as Tiazac, Cardizem CD and Dilacor XR only reduce the
number of angina attacks by approximately 50% - 60% when given at FDA-approved
therapeutic doses. We believe incomplete reduction in angina demonstrated by
current treatments may be the result of inadequate blood levels of the drug in
the morning hours, when approximately half of angina attacks occur. Experts in
chronic stable angina have confirmed their dissatisfaction with the ability of
current extended release products to adequately treat many of their patients on
a once-a-day basis.
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We believe that DOV diltiazem will reduce morning angina attacks to a
significantly greater extent than commercially available products because of its
combination of immediate and extended release components. Data from three Phase
I trials indicate that our formulation produced clinically relevant blood levels
within 30 minutes of administration and resulted in higher blood levels in the
morning than Tiazac. We plan to begin a Phase III clinical trial by the end of
2002 comparing our formulation to placebo and a currently marketed diltiazem
formulation.
UROLOGICAL DISORDERS
We are evaluating bicifadine and DOV 102,177, a structurally related
molecule, in preclinical studies for stress incontinence. Urine leakage that
occurs during exercise, coughing, laughing or lifting is referred to as stress
incontinence. This condition results from a weakness or anatomical defect in the
lower urinary tract, often as a result of childbirth, weight gain or surgery.
The American Urological Association reports that approximately 40 million women
have symptoms consistent with some form of urinary incontinence, with about half
suffering from stress incontinence. While not life threatening, stress
incontinence has a significant impact on quality of life, particularly in the
aging female population. At present, there are no approved drug therapies
specifically for stress incontinence.
The function of the lower urinary tract is controlled by muscles that are,
in turn, controlled by nerves throughout the body. Several neurotransmitters,
including serotonin, norepinephrine and glutamate, are thought to play key roles
in regulating the storage and release of urine via their actions on the brain.
We believe the neurochemical profile of bicifadine, with its unique ability to
increase synaptic levels of norepinephrine and serotonin, as well as to block
glutamate transmission through a specific subtype of glutamate receptor, makes
it a potential candidate for use in the treatment of stress incontinence.
Bicifadine is active in a preclinical model used to assess the potential
effectiveness of drugs for the treatment of stress incontinence.
COLLABORATIONS AND LICENSING AGREEMENTS
One of our business strategies is to establish alliances with industry
leaders to access their unique technologies and capabilities. To date, we have
established the following collaborations and licensing agreements:
ELAN CORPORATION, PLC AND ELAN INTERNATIONAL SERVICES, LTD.
In January 1999, we created a joint venture with Elan to develop controlled
release formulations of bicifadine for the treatment of pain and ocinaplon for
the treatment of anxiety disorders and epilepsy. We granted a license and
sublicense to use the oral formulations of these two product candidates and Elan
granted a license to use its proprietary controlled release technologies. After
payments to our licensor, Wyeth-Ayerst, we are entitled to receive net royalties
on net sales, if any, of 8.35% for bicifadine and 4.64% for ocinaplon, and Elan
is entitled to receive royalties at the same rate. Elan and we jointly conduct
the research and development work, and the joint venture retains the
commercialization rights with respect to these two product candidates. Unless
Elan elects to exchange its convertible exchangeable promissory note, discussed
in the next paragraph, we have an 80.1% interest, and Elan has a 19.9% interest,
in the joint venture's net profits or net losses.
To form the joint venture, we initially invested cash of $8.0 million for
our 80.1% interest. Elan invested $2.0 million for its 19.9% interest. Elan
provided us with both debt and equity financing to fund our investment in the
joint venture and our share of the operations of the joint venture. We issued
Elan a convertible exchangeable promissory note for $8.01 million. Elan has the
right to convert this note at any time, together with accrued unpaid interest,
into shares of our common stock at $6.44 per share. Alternatively, Elan can
exchange the principal amount of this note for additional participation in the
joint venture, to make our equity interests equal. If Elan chooses this option,
it
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maintains its right to convert any accrued unpaid interest of this note into
shares of our common stock at $6.44 per share and it must reimburse us for a
portion of our development expenses so that our overall development payments are
equal. Elan's choice to convert or exchange the note expires in January 2005.
Elan also purchased, for an aggregate of $3.0 million, 324,090 shares of our
common stock, 354,643 shares of series B preferred stock and warrants to
purchase 75,000 shares of our common stock at an exercise price of $5.52 per
share.
Elan and we fund the joint venture in proportion to our equity ownership.
For this purpose, we may draw down on a $7.0 million convertible line of credit
provided to us by Elan. We have drawn down on the convertible line of credit in
the past and, at December 31, 2001, $3.0 million of principal and accrued
interest was outstanding and $4.6 million remained available for borrowing. This
convertible line of credit may not be prepaid without Elan's consent. Elan also
has the right to convert the amount outstanding under the convertible line of
credit at any time, together with any accrued unpaid interest, into shares of
our common stock at $5.52 per share.
Elan and we both licensed intellectual property to the joint venture. Those
licensing agreements terminate on a product-by-product basis and
country-by-country basis 15 years from the first product sale date in the
applicable country, or the last to expire of the patents covering the product,
whichever is later. Elan may terminate its license agreement if a named
technological competitor of Elan:
- directly or indirectly acquires ten percent or more of our or the joint
venture's voting stock, or otherwise controls or influences our or the
joint venture's management or business; or
- enters into any joint venture, collaborative, license or other agreement
with us or the joint venture to the extent that the competitor is
materially engaged in our or the joint venture's business or development.
Upon termination of the licenses granted to the joint venture or if the
joint venture winds-up or becomes insolvent, then, subject to the rights of
permitted third-party sublicensees, all intellectual property rights Elan and we
have licensed to the joint venture terminate. Further, the intellectual property
developed by the joint venture will be transferred to Elan and us jointly, and
we each will have the right to exploit and commercialize the intellectual
property developed by the joint venture that relates to our own intellectual
property.
BIOVAIL LABORATORIES INCORPORATED AND BIOVAIL CORPORATION
In January 2001, we entered into a license, research and development
agreement with Biovail to develop, manufacture and market DOV diltiazem. Biovail
has an exclusive, worldwide license to use DOV diltiazem. We received an upfront
license fee of $7.5 million, plus we are entitled to receive royalties on net
sales of co-developed products sold by Biovail or its sublicensees, if any.
Biovail must pay the first $6.0 million of clinical trial costs for the initial
co-developed product and 50% of the costs thereafter and 10% of all non-clinical
development costs. We are also entitled to receive up to $10.0 million in
milestone payments. Further, we retain the right to co-promote any co-developed
products, subject to a separate co-promotion agreement to be negotiated with
Biovail, utilizing our own resources or through a third party.
Biovail and we have formed a joint oversight committee to manage our
collaborative efforts under this agreement. Biovail will, at its expense,
perform all formulation and research work, obtain marketing authorization and
manufacture and market any co-developed products. We will be responsible for
carrying out all clinical development work and, as noted above, Biovail is
primarily responsible for funding that work. Biovail is required to enforce our
DOV diltiazem patent and the related intellectual property, including a
requirement to sue for infringement. We may be required to reimburse Biovail for
up to $1.5 million of legal fees and disbursements incurred in connection with
such enforcement.
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We can terminate our agreement with Biovail if Biovail fails to meet its
marketing or regulatory obligations, or if opposition by Biovail's joint
committee members causes clinical trials to be delayed beyond January 2003, or
causes clinical trials to be suspended for more than six months. We can also
terminate our agreement if Biovail does not perform any of its other significant
obligations, including payment of clinical development costs, milestones and
royalty payments. If we terminate our agreement under these circumstances, the
license will revert to us and Biovail must assign to us any marketing
authorizations for any co-developed products and name us as the applicant for
all drug applications. If we terminate our agreement due to Biovail's failure to
meet their marketing or regulatory obligations, we must pay Biovail royalties on
net sales by or through us of a co-developed product until Biovail has been
reimbursed for its clinical development costs.
NEUROCRINE BIOSCIENCES, INC.
In June 1998, we sublicensed NBI-34060 to Neurocrine on an exclusive,
worldwide basis for 10 years or, if later, the expiration of the patent covering
either the compound or the marketed product. After payments to our licensor,
Wyeth-Ayerst, we are entitled to receive a royalty equal to 3.5% of net sales,
if any, and milestone payments of up to approximately $4.7 million. We have
received milestone payments consisting of $1.3 million in cash, of which we have
retained $845,000 following required payments to Wyeth-Ayerst, and warrants to
purchase 75,000 shares of Neurocrine's common stock, of which we will retain
warrants to purchase approximately 50,000 shares, after payments to Wyeth-Ayerst
and transaction-related expenses. We achieved the milestone in November 2001.
Neurocrine also purchased shares of our series A preferred stock at an aggregate
purchase price of $440,000.
Neurocrine is responsible for the research, development and
commercialization of NBI-34060. We have the right to terminate the agreement,
with regard to the entire territory, if Neurocrine terminates the research and
development program or halts the research and development program for six months
or longer within the United States, other than for reasons relating to
regulatory constraints. Likewise, if Neurocrine halts, for six months or longer,
or terminates the research and development program in any other country, we have
the right to terminate the agreement with respect to that country. If we
terminate the agreement due to an uncured breach by Neurocrine, they must
transfer to us all information and know-how related to NBI-34060 or the marketed
product, and all governmental filings and approvals.
MARKET EXCLUSIVITY, PATENT PROTECTION AND INTELLECTUAL PROPERTY
We believe that establishing and maintaining market exclusivity for our
product candidates is critical to our long-term success. We utilize a number of
methods to establish and maintain market exclusivity, including taking advantage
of statutory market exclusivity provisions, seeking patent protection for our
product candidates and otherwise protecting our intellectual property.
THE HATCH-WAXMAN ACT
Under the United States Drug Price Competition and Patent Term Restoration
Act of 1984, or the Hatch-Waxman Act, newly approved drugs and indications
benefit from a statutory period of marketing exclusivity. Under the Hatch-Waxman
Act, the FDA provides marketing exclusivity to the first applicant to gain
approval for a particular drug by prohibiting the filing of an abbreviated NDA,
or ANDA, by a generic competitor for up to five years after the drug is first
approved. The Hatch-Waxman Act also provides three years of marketing
exclusivity for a new indication for an existing drug. This market exclusivity
is provided even in the absence of patent protection for the approved drug. If
the drug is also claimed in a patent, a third party may file an ANDA four years
after the drug is first approved, provided that the third party certifies that
the applicable patent is invalid or not infringed.
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Because they appear to be compounds with new active ingredients, we believe
ocinaplon, bicifadine and DOV 216,303 would each be eligible for the five year
exclusivity provisions of the Hatch-Waxman Act if they are the first approved
drugs containing their active compounds. Because the patent that provides
protection for the use of bicifadine for pain and the use of DOV 216,303 for the
treatment of depression has expired, these market exclusivity provisions will be
of particular importance to the success of these compounds in the event they are
approved by the FDA.
The Hatch-Waxman Act also permits an extension of up to five years of the
term of a patent for new products to compensate for patent term lost during the
FDA regulatory review process if applied for before patent expiration. Only one
patent applicable to any approved drug is eligible for extension under these
provisions. In addition, this extension must be applied for prior to expiration
of the applicable patent. We are considering applying for patent term extensions
for some of our current patents under the Hatch-Waxman Act to add patent life
beyond the expiration date, depending on the expected length of clinical trials
and other factors involved in the filing of a new drug application.
PATENTS AND INTELLECTUAL PROPERTY PROTECTION
We seek to protect our rights in the compounds, formulations, processes,
technologies and other valuable intellectual property invented, developed,
licensed, or used by us through a number of methods, including the use of
patents, patent extensions and license agreements. We have or have licensed from
others seven issued U.S. patents, three of which have expired, including the
patent for the use of bicifadine for pain and the use of DOV 216,303 for the
treatment of depression, three pending U.S. patent applications and two pending
foreign patent applications.
The patent that currently provides protection for the use of bicifadine and
DOV 216,303 for alcohol, cocaine addiction and addictive disorders is due to
expire in December 2011. We intend to file a provisional patent application
making additional claims with respect to bicifadine and DOV 216,303.
The patents covering ocinaplon and NBI-34060 are currently due to expire in
June 2003. Intermediates useful for manufacturing ocinaplon are currently
protected by a patent that is due to expire in February 2007. We expect shortly
to file a provisional patent application to cover a tablet composition for
ocinaplon. Additionally, Neurocrine has stated that it has filed nine U.S. and
foreign patent applications on NBI-34060, its synthesis and formulations, which
Neurocrine asserts if approved could extend patent protection to the year 2020.
In December 2000, a patent issued covering the compound formulation of DOV
diltiazem. This patent is due to expire in April 2018. We licensed this compound
to Biovail in January 2001. Additionally, in May 2001, we filed a patent
application covering an additional release characteristic of DOV diltiazem.
Further to the existing patents listed above, we have filed patent
applications to protect other compounds in our pipeline. In January 2001, we
filed a patent application covering composition of matter, use, method of
treatment and method of manufacture for DOV 21,947. In September 2001, we
received from the USPTO a Non-Final Office Action in which the USPTO questioned
the patent application for DOV 21,947 based on obviousness. In October 2001, we
filed our response to the USPTO's concern, demonstrating why we believe the
claims under the patent are not obvious. We are awaiting the USPTO's evaluation
of our response.
Another compound for which we have filed a patent application is DOV
102,677. In this application, we seek patent protection for composition of
matter, use, method of treatment and method of manufacture for DOV 102,677. This
application was filed with the USPTO in August 2001 and we have not yet received
any feedback from the USPTO on this application.
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Regarding DOV 22,047, we intend to file a patent application covering
composition of matter and methods of manufacture.
In addition to protecting our compounds described above, we intend to
supplement current patents with additional patent applications covering new
compositions of matter, uses, methods of manufacture and formulations, as
appropriate. Once a product patent expires, we may be able to derive commercial
benefits, including from:
- later-granted patents on processes or intermediates related to the most
economical method of manufacture of the active ingredient of the product;
- patents relating to the use of the product; and
- patents relating to special compositions and formulations of the product.
IN-LICENSES
In May 1998, we licensed from Wyeth-Ayerst, on an exclusive, worldwide
basis, NBI-34060, bicifadine, ocinaplon and DOV 216,303 for any indication,
including insomnia, pain, anxiety and depression. We have the right to develop
and commercialize these compounds, including the right to grant sublicenses to
third parties, subject to Wyeth-Ayerst's right of first refusal.
If we sublicense a compound to a third party, we are obligated to pay
Wyeth-Ayerst 35% of all payments we receive based upon that compound. This
payment drops to 25% if a new drug application has been filed by us before the
sublicense grant. These payment obligations are subject to minimum royalties of
2.5% of net sales for NBI-34060, ocinaplon and DOV 216,303 and 4.5% of net sales
for bicifadine, and minimum milestones of $2.5 million for NBI-34060, ocinaplon
and DOV 216,303 and $5.0 million for bicifadine. Our sublicense agreement with
Neurocrine and our joint venture with Elan are structured so that we can satisfy
these minimum milestone obligations. To the extent DOV Bermuda has not entered
into arrangements with third parties, however, any amounts owed to us from our
joint venture with Elan will be effectively funded by us to the extent of our
interest in DOV Bermuda. If Wyeth-Ayerst terminates the license upon an uncured
breach by us, we must transfer all information, data and know-how relating to
the products and any government authorizations, in addition to our rights
derived from our sublicensees with regard to the products. The agreement expires
as to each compound ten years following the launch of each compound in each
country. Upon such expiration, with respect to each country we will have a fully
paid, royalty-free license with the right to make, use or sell the compounds
without any further monetary obligation to Wyeth-Ayerst.
MANUFACTURING
We have and will continue to rely on third-party contract manufacturers to
produce sufficient quantities of our product candidates for use in our
preclinical studies and clinical trials. We also intend to rely on third-party
contract manufacturers to produce sufficient quantities for large scale
commercialization. In this regard, we have and will continue to engage those
contract manufacturers who have the capability to manufacture drug products in
bulk quantities for commercialization.
MARKETING AND SALES
We have no sales, marketing or distribution capabilities. In order to
commercialize any of our product candidates, we must either acquire or
internally develop sales, marketing and distribution capabilities, or make
arrangements with third parties to perform these services for us. Under our
license, research and development agreement with Biovail, we have retained the
right to co-promote products, subject to a separate co-promotion agreement to be
negotiated with Biovail, using our own resources or those of a third-party sales
force. For these products and other future products, we intend to rely on third
parties to perform sales, marketing and distribution services.
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GOVERNMENT REGULATION
Regulation by government authorities in the United States and foreign
countries is a significant factor in the development, manufacture and marketing
of our proposed products and in our ongoing research and product development
activities. All of our products will require regulatory approval by government
agencies prior to commercialization. In particular, human therapeutic products
are subject to rigorous preclinical studies and clinical trials and other
approval procedures of the FDA and similar regulatory authorities in foreign
countries. Various federal and state statutes and regulations also govern or
influence testing, manufacturing, safety, labeling, storage and record-keeping
related to such products and their marketing. The process of obtaining these
approvals and the subsequent substantial compliance with appropriate federal and
state statutes and regulations require the expenditure of substantial time and
financial resources.
Preclinical studies generally are conducted in laboratory animals to
evaluate the potential safety and the efficacy of a product. In the United
States, drug developers submit the results of preclinical studies to the FDA as
a part of an investigational new drug application, or IND, which must become
effective before we can begin clinical trials in the United States. An IND
becomes effective 30 days after receipt by the FDA unless the FDA objects to it.
Typically, clinical evaluation involves a time-consuming and costly three-phase
process.
<Table>
Phase I Refers typically to closely monitored clinical trials and
includes the initial introduction of an investigational new
drug into human patients or normal volunteer subjects. Phase
I clinical trials are designed to determine the metabolism
and pharmacologic actions of a drug in humans, the side
effects associated with increasing drug doses and, if
possible, to gain early evidence on effectiveness. Phase I
trials also include the study of structure-activity
relationships and mechanism of action in humans, as well as
studies in which investigational drugs are used as research
tools to explore biological phenomena or disease processes.
During Phase I clinical trials, sufficient information about
a drug's pharmacokinetics and pharmacological effects should
be obtained to permit the design of well-controlled,
scientifically valid, Phase II studies. The total number of
subjects and patients included in Phase I clinical trials
varies, but is generally in the range of 20 to 80 people.
Phase II Refers to controlled clinical trials conducted to evaluate
the effectiveness of a drug for a particular indication or
indications in patients with a disease or condition under
study and to determine the common short-term side effects
and risks associated with the drug. These clinical trials
are typically well controlled, closely monitored and
conducted in a relatively small number of patients, usually
involving no more than several hundred subjects.
Phase III Refers to expanded controlled and uncontrolled clinical
trials. These clinical trials are performed after
preliminary evidence suggesting effectiveness of a drug has
been obtained. They are intended to gather additional
information about the effectiveness and safety that is
needed to evaluate the overall benefit-risk relationship of
the drug and to provide an adequate basis for physician
labeling. Phase III trials usually include from several
hundred to several thousand subjects.
</Table>
The FDA closely monitors the progress of each of the three phases of
clinical trials that are conducted in the United States and may, at its
discretion, reevaluate, alter, suspend or terminate the testing based upon the
data accumulated to that point and the FDA's assessment of the risk/benefit
ratio to the patient. To date we have conducted many of our clinical trials in
Europe.
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Once Phase III trials are completed, drug developers submit the results of
preclinical studies and clinical trials to the FDA, in the form of a new drug
application, for approval to commence commercial sales. In response, the FDA may
grant marketing approval, request additional information or deny the application
if the FDA determines that the application does not meet regulatory approval
criteria. FDA approval may not be granted on a timely basis, or at all.
Furthermore, the FDA may prevent a drug developer from marketing a product under
a label for its desired indications, which may impair commercialization of the
product. Similar regulatory procedures must also be complied with in countries
outside the United States.
If the FDA approves the new drug application, the drug becomes available for
physicians to prescribe in the United States. After approval, the drug developer
must submit periodic reports to the FDA, including descriptions of any adverse
reactions reported. The FDA may request additional studies, known as Phase IV
trials, to evaluate long-term effects.
In addition to studies requested by the FDA after approval, a drug developer
may conduct other trials and studies to explore use of the approved compound for
treatment of new indications. The purpose of these trials and studies and
related publications is to broaden the application and use of the drug and its
acceptance in the medical community.
We will have to complete an approval process, similar to the U.S. approval
process, in virtually every foreign target market for our products in order to
commercialize our product candidates in those countries. The approval procedure
and the time required for approval vary from country to country and may involve
additional testing. Foreign approvals may not be granted on a timely basis, or
at all. In addition, regulatory approval of prices is required in most countries
other than the United States. We face the risk that the resulting prices would
be insufficient to generate an acceptable return to us or our collaborators.
COMPETITION
The pharmaceutical industry is highly competitive and marked by a number of
established, large pharmaceutical companies, as well as smaller emerging
companies, whose activities are directly focused on our target markets and areas
of expertise. Many of our competitors possess greater financial, managerial and
technical resources and have established reputations for successfully developing
and marketing drugs, all of which put us at a competitive disadvantage. We face
and will continue to face competition in the discovery, in-licensing,
development and commercialization of our product candidates, which could
severely impact our ability to generate revenue or achieve significant market
acceptance of our drug candidates. Furthermore, new developments, including the
development of other drug technologies and methods of preventing the incidence
of disease such as vaccines, occur in the pharmaceutical industry at a rapid
pace. These developments may render our product candidates or technologies
obsolete or noncompetitive.
We have five product candidates in clinical development, each of which
addresses a different and substantial pharmaceutical market. These markets are
insomnia, anxiety, pain, depression and angina and hypertension. Competition in
these markets includes the following drugs and pharmaceutical companies:
INSOMNIA MARKET
NBI-34060, our sleep promoting compound sublicensed to Neurocrine, will
compete in the sedative market. This market is dominated by Ambien, marketed by
Sanofi-Synthelabo, and Sonata, marketed by Elan. Significant market positions
are also held by Restoril, now marketed by Mallinckrodt Inc., and Halcion,
marketed by Pharmacia Corporation.
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ANXIETY MARKET
Ocinaplon, our compound for the treatment of anxiety sublicensed to the
joint venture with Elan, will compete in the anxiolytic market, which includes
the BDZs Valium, Xanax, lorazepam and chlordiazepoxide. These drugs, together
with BuSpar, marketed by Bristol-Myers Squibb Company, make up the majority of
drugs used to treat anxiety.
PAIN MARKET
Bicifadine, our compound for the treatment of pain sublicensed to the joint
venture with Elan, targets the analgesic market. The largest selling
non-narcotic prescription analgesic is Ultram, marketed by Ortho-McNeil
Pharmaceutical. A number of pharmaceutical companies sell generic and branded
narcotic and non-narcotic prescription analgesics, including AstraZeneca LP,
Bristol-Myers Squibb, Janssen Pharmaceutica Inc., Abbott Laboratories, Inc., Eli
Lilly and Company, Merck & Co., Inc., Hoffman-LaRoche Inc., Novartis
Pharmaceuticals Corporation, GlaxoSmithKline, Pharmacia, Pfizer Inc. and
Wyeth-Ayerst.
DEPRESSION MARKET
DOV 216,303, currently under development in-house, will target the
antidepressant market, which is dominated by SSRIs, including Prozac, marketed
by Eli Lilly and other companies in generic form, as well as Paxil, marketed by
GlaxoSmithKline, Zoloft, marketed by Pfizer, and Celexa, marketed by Forest
Laboratories. SSRIs comprise nearly 75% of the antidepressant market. Other
drugs in this market include Effexor, marketed by Wyeth-Ayerst, Wellbutrin,
marketed by GlaxoSmithKline, Serzone, marketed by Bristol-Myers Squibb,
tricyclics and tetracyclics. Pharmaceutical companies selling branded and
generic tricyclic antidepressants include Novartis and Hoffman La-Roche.
Non-tricyclic antidepressants include Desyrel, as well as generic trazodone,
which are sold by numerous companies.
ANGINA AND HYPERTENSION MARKETS
DOV diltiazem will compete in the chronic stable angina and hypertension
markets. Calcium channel blockers are used in the treatment of both these
conditions. The diltiazem class of calcium channel blockers has been utilized
extensively in the treatment of chronic stable angina, which is the most
prevalent type of angina. Leading branded diltiazem products include Cardizem
CD, marketed by Biovail, Tiazac, marketed by Forest in the United States and
Biovail elsewhere in the world, and Cartia XT, a branded generic drug, marketed
by Andrx.
LEGAL PROCEEDINGS
Following our license of the DOV diltiazem patent to Biovail, Biovail listed
it with the FDA and the FDA thereafter published it in the APPROVED DRUG
PRODUCTS WITH THERAPEUTIC EQUIVALENCE EVALUATION book, commonly known as the
"Orange Book." This filing had the effect of temporarily preventing Andrx
Pharmaceuticals, Inc. from obtaining FDA approval of its abbreviated new drug
application for a generic version of Tiazac and marketing that generic drug.
Litigation in Florida federal court between Andrx and Biovail ensued. We are not
a party to the litigation.
While the court dismissed many of Andrx's claims, some survived, including:
- various conspiracy and monopolization claims under the Sherman Antitrust
Act;
- a request for a declaration that Andrx's generic drug does not infringe
the DOV diltiazem patent; and
- a request for a declaration that the DOV diltiazem patent is invalid.
Related to the Andrx/Biovail litigation, the Federal Trade Commission, or
FTC, commenced an investigation to determine whether Biovail Corporation or any
other person is engaging in unfair
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methods of competition. The FTC purported to focus primarily on the legality of
Biovail's recent listing of the DOV diltiazem patent with the FDA. In connection
with this investigation, the FTC has requested that we provide information
regarding our license agreement with Biovail. In December 2001, the FTC staff
advised us informally that it intended to seek a formal complaint against
Biovail. We were advised we would also be a named defendant, not for alleged
wrongdoing, but for remedy purposes.
We have met with the FTC staff and agreed informally not to object to a
court order, if the FTC achieves one, that changes Biovail's license to use our
patent from exclusive to non-exclusive insofar as it is used to manufacture and
market a drug that is approved for sale pursuant to Biovail's NDA 24-401 and any
amendments to that application relating to Tiazac. In return, the FTC would not
name us as a party defendant in the case against Biovail.
At this time we are unable to determine the effect the Andrx/Biovail legal
proceedings and the FTC investigation of Biovail may have on our business. For a
complete description of these proceedings and the risks they present, please
refer to the "Risk Factors" section under the subheading "Risks Related to our
Business--Current federal litigation involving our out-licensed DOV diltiazem
patent, among other things, calls the efficacy of our patent into question and
has given rise to a formal investigation by the FTC."
We are not a party to any other material legal proceedings.
EMPLOYEES
As of December 31, 2001, we had 25 employees, consisting of 24 full-time
employees and one part-time employee. Of the full-time employees, eight hold
Ph.D., M.D. or equivalent degrees. None of our employees are represented by a
collective bargaining arrangement, and we believe our relationship with our
employees is good.
FACILITIES
We currently occupy approximately 7,200 square feet in our principal
executive offices located in Hackensack, New Jersey. Our lease will expire if
not renewed in June 2004.
OUR SCIENTIFIC ADVISORY BOARD
Our scientific advisory board advises us with respect to our product
development strategy as well as the scientific and business merits of licensing
opportunities or acquisition of compounds. The board consists of a group of
highly regarded and experienced scientists and clinicians chosen for their
particular expertise to advise us on scientific matters affecting the research
and development of our drug compounds and the availability of opportunities for
collaborations with other pharmaceutical companies. We intend to compensate
scientific advisory board members with stock options pursuant to our 2000 stock
option plan, and a fee for attendance at meetings. We intend to add additional
members to the scientific advisory board. The current scientific advisory board
members are:
ROBERT CANCRO, M.D. is the chairman of our scientific advisory board and one
of our co-founders. Since 1976, Dr. Cancro has been professor and chairman of
the Department of Psychiatry at New York University School of Medicine, Director
of Psychiatry at New York University Hospital and director of the Nathan S.
Kline Institute for Psychiatric Research. Prior to 1976, Dr. Cancro was a
professor in the Department of Psychiatry at the University of Connecticut
Health Center. Dr. Cancro is a widely published, internationally recognized
psychiatrist and educator, having received numerous honors and awards. He is on
the editorial board of several scientific journals and is an examiner for the
American Board of Psychiatry and Neurology Inc. Dr. Cancro is a Fellow of the
American Psychiatric Association, the American College of Psychiatrists and the
American College of Physicians. He is also a member of the Expert Advisory Panel
on Mental Health for the World Health Organization and the
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Research Advisory Committee of the United States Secret Service. Dr. Cancro is
president and a director of the International Committee Against Mental Illness
and Chairman of the Section on Psychiatric Rehabilitation of the World
Psychiatric Association.
MORTON E. GOLDBERG, D.SC. is a director of several biopharmaceutical
companies, including Exocell, Inc., North Star Pharmaceuticals, Inc., Procyon
Pharmaceuticals, Inc. and Theragem, Inc. He is also a member of the scientific
advisory boards of Adolor Corporation., Arena Pharmaceuticals, Inc., InKine
Pharmaceutical Company, Inc. and North Star Pharmaceuticals, Inc. From 1991 to
1996, Dr. Goldberg was Clinical Professor of Pharmacology and Experimental
Therapeutics in the Department of Pharmacology at the University of Pennsylvania
School of Medicine where he served as a liaison in development of collaborative
research programs between faculty and the pharmaceutical and biotechnology
industry. From 1984 to 1991, Dr. Goldberg served as Senior Vice President of
Research, Development and Regulatory Affairs at ICI Pharmaceuticals Group and
corporate vice president at ICI Americas, now AstraZeneca PLC. From 1977 to
1984, he was Vice President of Biomedical Research at ICI Pharmaceuticals Group.
Previously, he was Director of Pharmacology at the Squibb Institute for Medical
Research and prior thereto, Director of Pharmacodynamics at the Warner Lambert
Research Institute.
LARRY STEIN, PH.D. is professor and chairman of the Department of
Pharmacology and professor in the Department of Psychiatry and Human Behavior at
the University of California, Irvine. From 1969 to 1979, Dr. Stein served as the
head of the Psychopharmacology Department at Wyeth Laboratories and adjunct
professor in the Psychology Department at Bryn Mawr College and in the
Departments of Psychology and Psychiatry at the University of Pennsylvania.
Dr. Stein is a world renowned neuropsychopharmacologist and has served as a
consultant for several pharmaceutical companies, including the Schering-Plough
Corporation, American Cyanamid, Syntex Laboratories, Inc. and CoCensys, Inc.
DAVID H. FARB, PH.D. is a molecular pharmacologist and neuroscientist and
serves as professor and chairman of the Department of Pharmacology and
Experimental Therapeutics at Boston University School of Medicine. He served
previously as Professor of Anatomy and Cell Biology and head of the Molecular
Pharmacology Research Program at SUNY Downstate Medical Center. Dr. Farb's
accomplishments include selection as the Fogarty Senior International Fellow at
the Molecular Genetics Unit of the Medical Research Council (Cambridge, UK),
membership in the Harvey Society, participation in the panel of Independent
Assessors of the National Health and Medical Research Council of the
Commonwealth of Australia and service on the Executive Committee at Boston
University Medical School. Dr. Farb was elected chair of the Section of
Biological Sciences and founded the Section of Neuroscience at the New York
Academy of Sciences.
ARVID CARLSSON, M.D., PH.D. is a world renowned neuropharmacologist and the
recipient of numerous prizes and awards, including the Nobel Prize and the
Legion of Honour. Dr. Carlsson has been Professor Emeritus at the University of
Gothenburg, Sweden since 1989. Prior to that, he had been Professor,
Pharmacology Department, University of Gothenburg since 1959 and served as
chairman from 1959 to 1976. He has conducted groundbreaking research in the
areas of depression, schizophrenia and Parkinson's disease.
ROGER GUILLEMIN, M.D., PH.D. is a Nobel laureate and distinguished professor
at The Salk Institute. Dr. Guillemin received the Nobel prize for his work on
brain hormones, which brought to light an entirely new class of hormones
important in regulating growth, development, reproduction and stress response.
Drugs based upon these molecules are used for the management or treatment of
infertility, precocious puberty, dwarfism, diabetes and prostate cancer. He has
served on several committees of the National Institutes of Health, as President
of the Endocrine Society and is a member of the National Academy of Sciences,
and of several other foreign academies.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table provides information about our directors, executive
officers and key employees.
<Table>
<Caption>
NAME AGE POSITION
- ---- -------- --------
Arnold S. Lippa, Ph.D..................... 55 Co-Chairman of the Board, Chief Executive Officer,
Secretary and Director
Bernard Beer, Ph.D........................ 69 Co-Chairman of the Board, President and Director
Phil Skolnick, Ph.D., D.Sc. (hon)......... 54 Vice President, Research and Chief Scientific
Officer
Stephen J. Petti.......................... 55 Vice President, Drug Development
Barbara G. Duncan......................... 37 Vice President, Finance, Chief Financial Officer
and Treasurer
Paul Schiffrin............................ 52 Vice President, Corporate Services
Zola Horovitz, Ph.D....................... 67 Director
Patrick Ashe.............................. 39 Director*
Mark N. Lampert........................... 41 Director
</Table>
- ------------------------
* Mr. Ashe was elected by the majority of the holders of our series B preferred
stock.
ARNOLD S. LIPPA, PH.D. is a co-founder and has served as our Chief Executive
Officer since our inception in April 1995. Dr. Lippa also serves as our
Secretary and is a director and co-chairman of our board of directors.
Dr. Lippa also serves as director and chairman of Nascime Limited, a company
formed in connection with the Elan joint venture. Prior to founding DOV in 1995,
Dr. Lippa founded Fusion Associates, Ltd., an investment and management company
specializing in the creation and management of biomedical companies. Dr. Lippa
served as Fusion's managing director from 1991 to 1995. From 1989 through 1990,
Dr. Lippa served as Vega Biotechnologies, Inc.'s chairman and chief executive
officer. In 1984, Dr. Lippa co-founded Praxis Pharmaceuticals, Inc. and served
as president and chief operating officer until 1988. In addition, Dr. Lippa has
consulted for various pharmaceutical and biotechnology companies and has been a
graduate faculty professor at the New York University School of Medicine and the
City University of New York. He received his B.A. from Rutgers University in
1969 and his Ph.D. in psychobiology from the University of Pittsburgh in 1973.
BERNARD BEER, PH.D. is a co-founder and has served as our President,
director and co-chairman of our board of directors since our inception in April
1995. From 1977 to 1995, Dr. Beer was employed by American Cyanamid, now
Wyeth-Ayerst, and served as its Global Director of Central Nervous System
Biological and Clinical Research. Dr. Beer has extensive experience in
pharmaceutical research starting at Squibb Corporation from 1966 to 1976 where
he was section head, Neuropsychopharmacology. He is currently an Adjunct
Professor of Psychiatry at the New York University School of Medicine and a
Special Professor in Pharmacology at Boston University Medical School. Dr. Beer
received his B.A. from Brooklyn College in 1956 and his M.S. and Ph.D. from The
George Washington University in 1961 and 1966, respectively.
PHIL SKOLNICK, PH.D., D.SC. (HON) joined us in January 2001 and serves as
our Vice President, Research and Chief Scientific Officer. Prior to joining us,
Dr. Skolnick served as a Lilly Research Fellow (Neuroscience) at Eli Lilly &
Company from January 1997 to January 2001 where he spearheaded several
innovative programs in drug discovery. From 1986 to August 1997, he served as
Senior Investigator and Chief, Laboratory of Neuroscience, at the National
Institutes of Health.
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Dr. Skolnick served as a Research Professor of Psychiatry at the Uniformed
Services University of the Health Sciences from 1989 to 1998. He is currently an
Adjunct Professor of Anesthesiology at The Johns Hopkins University, an Adjunct
Professor of Pharmacology and Toxicology at Indiana University School of
Medicine and Research Professor of Psychiatry at New York University School of
Medicine. Dr. Skolnick is an editor of Current Protocols in Neuroscience and
also serves on the editorial advisory boards of the European Journal of
Pharmacology, the Journal of Molecular Neuroscience and Pharmacology,
Biochemistry & Behavior. He received a B.S. (summa cum laude) from Long Island
University in 1968 and his Ph.D. from The George Washington University in 1972.
Dr. Skolnick was awarded the D.Sc. HONORIS CAUSA from Long Island University in
1993 and the University of Wisconsin-Milwaukee in 1995.
STEPHEN J. PETTI, R.N., B.S.N., B.B.A. joined us in February 1998 and serves
as our Vice President, Drug Development. Mr. Petti also serves as President of
Nascime. From October 1995 to December 1997, he was Vice President of Global
Consulting Operations at Barnett International/PAREXEL, a contract research
organization in the pharmaceutical industry. He established a European presence
for Barnett International/PAREXEL by starting its first overseas office in
Paris. From July 1980 to August 1995, Mr. Petti held a variety of clinical
research management positions with American Cyanamid, now Wyeth-Ayerst,
including the position of Director of Global Clinical Research Training and
Process Development. He is a member of the Drug Information Association and the
Society of Research Administrators. Mr. Petti received his B.B.A. from St.
John's University in 1968 and a B.S.N (Nursing) in 1973 from Dominican College.
BARBARA G. DUNCAN joined us in August 2001 and serves as our Vice President,
Finance and Chief Financial Officer and Treasurer. Prior to joining us,
Ms. Duncan served as a vice president of Lehman Brothers Inc. in its corporate
finance division from August 1998 to August 2001, where she provided financial
advisory services primarily to companies in the life sciences and general
industrial industries. From September 1994 to August 1998, Ms. Duncan was an
associate and director at SBC Warburg Dillon Read, Inc. in its corporate finance
group, where she focused primarily on structuring mergers, divestitures and
financings for companies in the life sciences and general industrial industries.
She also worked for PepsiCo, Inc. from 1989 to 1992 in its international audit
division, and was a certified public accountant in the audit division of
Deloitte & Touche from 1986 to 1989. Ms. Duncan received her B.S. from Louisiana
State University in 1985 and her M.B.A. from the Wharton School, University of
Pennsylvania, in 1994.
PAUL M. SCHIFFRIN, B.SC. joined us in February 1999 and serves as our Vice
President, Corporate Services. Prior to joining us, Mr. Schiffrin was president
of Pharmadev Inc., a site management company serving a number of major
pharmaceutical companies from January 1997 to January 1999. From 1982 through
1995, Mr. Schiffrin held several management positions with American Cyanamid,
now Wyeth-Ayerst, including Manager of Clinical Systems Development/Forms
Design, and Manager of Office Automation in Support of Clinical Drug
Development. Mr. Schiffrin received his B.Sc. from City University of New York,
Hunter College Institute of Health Sciences in 1973.
ZOLA HOROVITZ, PH.D. has been a member of our board of directors since our
inception in April 1995. Dr. Horovitz currently is a consultant to the
pharmaceutical and biotechnology industries and serves as a director of
Diacrin, Inc., Biocryst Pharmaceuticals, Inc., Synaptic Pharmaceutical
Corporation, Three Dimensional Pharmaceuticals Inc., Avigen, Inc., Geneva
Pharmaceuticals, Inc. and Paligent, Inc. Before joining us, Dr. Horovitz served
35 years in various managerial and research positions at Bristol-Myers Squibb
and its affiliates. At Bristol-Myers Squibb, Dr. Horovitz served as Vice
President, Business Development and Planning from 1991-1994, Vice President,
Licensing in 1990, and Vice President, Research, Planning and Scientific Liaison
from 1985-1989. Dr. Horovitz received a B.S. in Pharmacy and his M.S. and Ph.D.
in Pharmacology from the University of Pittsburgh in 1955, 1958 and 1960
respectively.
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PATRICK ASHE has been a member of our board of directors since January 1999.
He currently serves as Senior Vice President, Business Development at
Athpharma, Ltd. From May 1994 to November 2001, Mr. Ashe served as Vice
President, Commercial Development at Elan Pharmaceutical Technologies, a
division of Elan Corporation, plc. Additionally, from January 1999 to
November 2001, Mr. Ashe served as co-manager of Nascime Limited, a company
formed in connection with our joint venture with Elan. Mr. Ashe graduated from
University College Dublin with a B.Sc. in pharmacology in 1985 and completed his
M.B.A. at Dublin City University's Business School in 1994. Mr. Ashe was
nominated and elected by our series B preferred stockholders.
MARK N. LAMPERT has been a member of our board of directors since
June 2000. He is also a director of Mendel Biotechnology and Athersys, Inc.
Mr. Lampert, is the founder and general partner of the Biotechnology Value Fund,
L.P., a San Francisco-based, private investment partnership. Prior to forming
the fund in 1993, Mr. Lampert was a vice president at the investment banking
firm Oppenheimer & Co., Inc. and worked for Cambridge NeuroScience and G.D.
Searle & Co. Mr. Lampert earned his A.B. in chemistry from Harvard College in
1982 and an M.B.A. from Harvard Business School in 1988.
BOARD COMPOSITION
Following the closing of this offering, except for the director elected by
the holders of our series B preferred stock, our board of directors will be
divided into three classes, each of whose members will serve for a staggered
three-year term. Our board of directors will consist of as Class I
directors, whose term of office will continue until the 2003 annual meeting of
stockholders, as Class II directors, whose term of office will continue
until the 2004 annual meeting of stockholders, and as Class III directors,
whose term of office will continue until the 2005 annual meeting of
stockholders. At each annual meeting of stockholders, a class of directors will
be elected for a three-year term to succeed the directors of the same class
whose terms are then expiring. We currently intend to elect one additional
independent director within 90 days following completion of this offering. We
expect that this director will serve on our audit committee and our compensation
committee.
The holders of our series B preferred stock have the right, for as long as
they own in the aggregate at least 10% of our outstanding capital stock, to
nominate and elect one director to our board of directors. Under the terms of
the series B preferred stock the director elected by the series B preferred
stockholders has a vote that is equal at all times to 9.9% of all votes that may
be cast by the board. Currently, Elan holds all of the outstanding series B
preferred stock.
BOARD COMMITTEES
AUDIT COMMITTEE
Upon completion of this offering, we will establish an audit committee that
will report to our board of directors with regard to the selection, compensation
and performance of our independent auditors and the scope of our annual audits.
The audit committee will also report to our board of directors with respect to
the adequacy of our internal accounting controls and compliance with our
accounting and financial policies. We expect that our audit committee will be
comprised of two independent directors and one non-employee director who, while
not independent under Nasdaq rules, our board of directors has determined may
serve on the audit committee in the best interests of our stockholders. We
expect that our audit committee members will be Mr. Horovitz, Mr. Ashe and our
additional independent director.
COMPENSATION COMMITTEE
The members of the compensation committee, a majority of whom are
independent directors, are responsible for approving or recommending to the
board of directors the amount and type of
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consideration to be paid to our executive officers, administering our stock
option plans and establishing and reviewing general policies relating to
compensation and benefits of all employees. Upon completion of this offering,
Mr. Horovitz and our additional independent director will serve on our
compensation committee.
DIRECTOR COMPENSATION
Non-employee directors are paid $4,000 for each board meeting they attend
and are eligible to participate in our 2000 Stock Option and Grant Plan. During
the last fiscal year each of our non-employee directors was granted options to
purchase 15,000 shares of our common stock. These options have an exercise price
equal to the fair market value of our common stock on the grant date and vest
25% on the one year anniversary of the grant date and the remainder ratably
thereafter over the next 36 months.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth information concerning
compensation for services rendered in all capacities during the fiscal year
ended December 31, 2001, awarded to, earned by or paid to the chief executive
officer and our four most highly compensated executive officers other than our
chief executive officer. We refer to these persons as the named executive
officers.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SHARES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)(1)
- --------------------------- --------- -------- ------------ ------------------
Arnold S. Lippa, Ph.D. ......................... 260,577 150,000 -- 23,308
CHIEF EXECUTIVE OFFICER
Bernard Beer, Ph.D. ............................ 260,577 150,000 -- 30,423
PRESIDENT
Phil Skolnick, Ph.D., D.Sc. (hon). ............. 230,769 -- 250,000 9,847
CHIEF SCIENTIFIC OFFICER
Stephen Petti .................................. 221,154 16,250 95,000 4,500
VICE PRESIDENT, DRUG DEVELOPMENT
Paul Schiffrin ................................. 140,288 10,000 5,000 --
VICE PRESIDENT, CORPORATE SERVICES
</Table>
- ------------------------
(1) Includes an automobile allowance of $18,405 for Dr. Lippa, $16,518 for
Dr. Beer, $9,847 for Dr. Skolnick and $4,500 for Mr. Petti. Also includes
insurance premiums of $4,903 for Dr. Lippa and $13,905 for Dr. Beer.
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<Page>
OPTION GRANTS IN LAST FISCAL YEAR AND OPTION VALUES AT FISCAL YEAR END
The following table provides information regarding stock options granted to
the named executive officers during the fiscal year ended December 31, 2001. The
percentage of total options set forth below is based on options to purchase an
aggregate of 689,000 shares of common stock granted to employees in 2001.
Potential realizable values are based on our initial public offering price of
per share net of exercise price, but before taxes associated with
exercise. Amounts represent hypothetical gains that could be achieved for the
options if exercised at the end of the option term. The assumed 0%, 5% and 10%
rates of stock appreciation are provided in accordance with the rules of the
Securities and Exchange Commission and do not represent our estimate or
projection of the future common stock price. Actual gains, if any, on stock
option exercises will be dependent on the future performance of our common
stock.
<Table>
<Caption>
INDIVIDUAL GRANTS
-------------------------------------------------------------- POTENTIAL REALIZABLE
PERCENTAGE OF VALUE AT
TOTAL ASSUMED ANNUAL
NUMBER OF OPTIONS RATE OF STOCK PRICE
SECURITIES GRANTED TO EXERCISE MARKET APPRECIATION FOR
UNDERLYING EMPLOYEES IN PRICE PRICE ON OPTION TERM
OPTIONS FISCAL PER SHARE DATE OF EXPIRATION ------------------------------
NAME GRANTED(#) YEAR(%) ($/SH) GRANT($) DATE 0% 5% 10%
- ---- ---------- ------------- --------- -------- ---------- -------- -------- --------
Phil Skolnick, Ph.D., D.Sc.
(hon)........................ 250,000(1) 36.28 4.50 5.48 7/10/10
Stephen Petti.................. 95,000(2) 13.79 6.50 6.50 3/15/11
Paul Schiffrin................. 5,000(2) 0.73 6.50 6.50 3/15/11
</Table>
- ------------------------
(1) Options vest 50% on July 19, 2002, and ratably thereafter over the
subsequent six quarters.
(2) Options vest 25% on the one-year anniversary of the grant date and ratably
thereafter over the next 36 months.
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the number and value
of unexercised options to purchase common stock held as of December 31, 2001 by
the named executive officers. There was no public trading market for our common
stock as of December 31, 2001. Accordingly, the values of the unexercised
in-the-money options have been calculated on the basis of our assumed initial
public offering price of $ per share, less the applicable exercise price
multiplied by the number of shares which may be acquired on exercise. None of
the named executive officers exercised any stock options in fiscal 2001.
AGGREGATE OPTION AMOUNTS AND FISCAL YEAR-END OPTION VALUES
<Table>
<Caption>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END(#) AT FISCAL YEAR-END($)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
Arnold Lippa, Ph.D........................... 130,000 --
Bernard Beer, Ph.D........................... 130,000 --
Phil Skolnick Ph.D., D.Sc. (hon)............. -- 250,000
Paul Schiffrin............................... 60,000 10,000
Stephen Petti................................ 95,000 105,000
</Table>
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<Page>
BENEFIT PLANS
1998 STOCK OPTION PLAN
Our 1998 Stock Option Plan, adopted by our board of directors and approved
by our stockholders in September 1998, provided for the issuance of 1,250,000
shares of our common stock. As of December 31, 2001, options to purchase 698,000
shares of our common stock were outstanding under our 1998 Stock Option Plan.
Generally, options granted under our 1998 Stock Option Plan vest 50% six months
from the date of grant and 50% eighteen months from the date of grant. All
options generally terminate on the tenth anniversary of the date of grant. In
the event of a change in control, all options will become immediately
exercisable. We will not make any additional grants under our 1998 Stock Option
Plan.
STOCK OPTION GRANT TO PHIL SKOLNICK
In connection with the commencement of Dr. Skolnick's employment with us, we
granted him stock options to acquire 250,000 shares of our common stock at an
exercise price of $4.50 per share. Dr. Skolnick's options vest as follows: 50%
on July 19, 2002 and ratably thereafter over the next six quarters. Although
Dr. Skolnick's 250,000 options were not granted under our 1998 Stock Option Plan
or our 2000 Stock Option and Grant Plan, the options were charged against the
total number of options available for future grants under our 2000 Stock Option
and Grant Plan.
2000 STOCK OPTION AND GRANT PLAN
Our board of directors adopted, and our stockholders approved, our 2000
Stock Option and Grant Plan in November 2000. The 2000 Stock Option and Grant
Plan provides for the issuance of up to 1,040,000 shares of common stock plus
that number of shares of common stock underlying any terminated, canceled or
reacquired options granted under the 1998 Stock Option Plan. Additionally, if
any of the 250,000 options granted to Phil Skolnick are terminated, canceled or
otherwise reacquired by us, that number of reacquired shares will also become
available for issuance under the 2000 Stock Option and Grant Plan. As of
December 31, 2001, 490,500 shares of common stock were available for future
grants under the 2000 Stock Option and Grant Plan. Our compensation committee
will administer the 2000 Stock Option and Grant Plan.
Under the 2000 Stock Option and Grant Plan, our compensation committee may:
- grant incentive stock options;
- grant non-qualified stock options;
- grant stock appreciation rights;
- issue or sell common stock with or without vesting or other restrictions;
and
- grant common stock upon the attainment of specified performance goals.
These grants and issuances may be made to our officers, employees,
directors, consultants, advisors and other key persons.
Our compensation committee has the right, in its discretion, to select the
individuals eligible to receive awards, determine the terms and conditions of
the awards granted, accelerate the vesting schedule of any award and generally
administer and interpret the plan.
The exercise price of options granted under the 2000 Stock Option and Grant
Plan is determined by our compensation committee. Under present law, incentive
stock options and options intended to qualify as performance-based compensation
under Section 162(m) of the Internal Revenue Code of 1986 may not be granted at
an exercise price less than the fair market value of our common stock on
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<Page>
the date of grant, or less than 110% of the fair market value in the case of
incentive stock options granted to optionees holding more than 10% of our voting
power.
Non-qualified stock options may be granted at prices that are less than the
fair market value of the underlying shares on the date granted. Options are
typically subject to vesting schedules, terminate 10 years from the date of
grant and may be exercised for specified periods after the termination of the
optionee's employment or other service relationship with us. Upon the exercise
of options, the option exercise price must be paid in full either in cash or by
certified or bank check or other instrument acceptable to the committee or, in
the sole discretion of the committee, by delivery of shares of common stock that
have been owned by the optionee free of restrictions for at least six months.
Restricted stock awards may be granted to eligible service providers at the
compensation committee's discretion. The compensation committee determines the
terms of restricted stock awards and a restricted stock agreement may give us
the option, or impose an obligation, to repurchase some or all of the shares of
restricted stock held by a grantee upon the termination of the grantee's
employment or other service relationship with us. Restricted stock awards will
vest at a rate determined by the compensation committee and may be granted
without restrictions.
Stock appreciation rights may be granted to eligible service providers at
the compensation committee's discretion. Stock appreciation rights entitle the
optionee to elect to receive an amount of cash or shares of stock or a
combination thereof having a value equal to the excess of the value of the stock
on the date of exercise over the exercised price of the award. The terms of the
stock appreciation rights will be determined by the compensation committee.
Stock appreciation rights will generally terminate upon the termination of an
optionee's employment or other service relationship with us.
The 2000 Stock Option and Grant Plan and all awards granted under the plan
will terminate upon a merger, reorganization or consolidation, the sale of all
or substantially all of our assets or all of our outstanding capital stock or a
liquidation or other similar transaction, unless we and the other parties to
such transactions have agreed otherwise. All participants under the 2000 Stock
Option and Grant Plan will be permitted to exercise before any such termination
all awards held by them that are then exercisable or will become exercisable
upon the closing of the transaction.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with each of the following
employees on the following material terms:
ARNOLD S. LIPPA, PH.D. We have entered into an employment agreement with
Dr. Lippa, which provides for his employment as our Chief Executive Officer
until December 10, 2004. Dr. Lippa's base compensation will be at least $275,000
for 2002, and during each subsequent year his base compensation will increase by
at least 10% annually. The agreement provides for benefits, the reimbursement of
expenses and the payment of incentive compensation, which will be determined by
our board of directors in its sole discretion. Additionally, if we should merge
or consolidate with or into an unrelated entity, sell all or substantially all
of our assets, or enter into a transaction or series of transactions the result
of which 51% or more of our capital stock is transferred to one or more
unrelated third parties, Dr. Lippa is entitled to receive a bonus equal to 2% of
the gross proceeds of such sale (as defined in the agreement). We are obligated
to continue to pay Dr. Lippa his base and incentive compensation and to continue
his benefits for a period of nine months if he is terminated upon becoming
disabled or for a period of 90 days upon his death. If Dr. Lippa terminates his
employment with us for good reason, or within six months of a change of control,
or if we terminate Dr. Lippa without cause, he is entitled to receive his base
and incentive compensation and the continuation of all benefits for two years
from the date of termination, and all stock options granted to him shall
immediately vest. The agreement also requires Dr. Lippa to refrain from
competing with us
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<Page>
and from soliciting our clients and customers for the duration of his employment
and for a period following employment equal to the length of time we make
severance payments to him.
BERNARD BEER, PH.D. We have entered into an employment agreement with
Dr. Beer, which provides for his employment as our President until December 10,
2004. Dr. Beer's base compensation will be at least $275,000 for 2002, and
during each subsequent year his base compensation will increase by at least 10%
annually. The agreement provides for benefits, the reimbursement of expenses and
the payment of incentive compensation, which will be determined by our board of
directors in its sole discretion. Additionally, if we should merge or
consolidate with or into an unrelated entity, sell all or substantially all of
our assets, or enter into a transaction or series of transactions the result of
which 51% or more of our capital stock is transferred to one or more unrelated
third parties, Dr. Beer is entitled to receive a bonus equal to 2% of the gross
proceeds of such sale (as defined in the agreement). We are obligated to
continue to pay Dr. Beer his base and incentive compensation and to continue his
benefits for a period of nine months if he is terminated upon becoming disabled
or for a period of 90 days upon his death. If Dr. Beer terminates his employment
with us for good reason, or within six months of a change of control, or if we
terminate Dr. Beer without cause, he is entitled to receive his base and
incentive compensation and the continuation of all benefits for two years from
the date of termination, and all stock options granted to him shall immediately
vest. The agreement also requires Dr. Beer to refrain from competing with us and
from soliciting our clients and customers for the duration of his employment and
for a period following employment equal to the length of time we make severance
payments to him.
PHIL SKOLNICK, PH.D., D.SC.(HON) We have entered into an employment
agreement with Dr. Skolnick, which provides for his employment as
Vice-President, Research and Chief Scientific Officer until January 19, 2004.
Under the agreement, we will pay Dr. Skolnick base compensation of at least
$250,000 per year. The agreement provides for benefits, the reimbursement of
expenses and the payment of incentive compensation, which will be determined by
our board of directors in its sole discretion. Additionally, upon the
commencement of Dr. Skolnick's employment with us, we granted him options to
purchase 250,000 shares of our common stock at an exercise price of $4.50. The
options vest 50% on July 19, 2002 and ratably thereafter over the next six
quarters. We are obligated to continue to pay Dr. Skolnick his base and
incentive compensation and to continue his benefits for a period of nine months
if he is terminated upon becoming disabled or for a period of 90 days upon his
death. If Dr. Skolnick terminates his employment with us for good reason, or
within six months of a change of control, or if we terminate Dr. Skolnick
without cause, he is entitled to receive his base compensation for three years
from the date of termination and all stock options granted to him shall
immediately vest. The agreement also requires Dr. Skolnick to refrain from
competing with us and from soliciting our customers and clients for the duration
of his employment and for a period following employment equal to the length of
time we make severance payments to him.
STEPHEN PETTI. We have entered into an employment agreement with
Mr. Petti, which provides for his employment as Vice-President, Drug Development
until April 1, 2004. Mr. Petti's base compensation will be at least $237,500 for
2002, and during each subsequent year his base compensation will increase by at
least 5% annually. The agreement provides for benefits, the reimbursement of
expenses and the payment of incentive compensation, which will be determined by
our board of directors in its sole discretion. We are obligated to continue to
pay Mr. Petti his base and incentive compensation and to continue his benefits
for a period of six months if Mr. Petti is terminated upon becoming disabled or
for a period of 90 days upon his death. If Mr. Petti terminates his employment
with us for good reason, or within six months of a change of control, or if we
terminate Mr. Petti without cause, he is entitled to receive his base
compensation for one year from the date of termination and all stock options
granted to him shall immediately vest. The agreement also requires Mr. Petti to
refrain from competing with us and from soliciting our clients and customers for
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<Page>
the duration of his employment and for a period following employment equal to
the length of time we make severance payments to him.
PAUL SCHIFFRIN. We have entered into an employment agreement with
Mr. Schiffrin, which provides for his employment as Vice-President, Corporate
Services until July 12, 2002. Under the agreement, we will pay Mr. Schiffrin
base compensation of at least $145,000 per year. The agreement provides for
benefits, the reimbursement of expenses and the payment of incentive
compensation, which will be determined by our board of directors in its sole
discretion. We are obligated to continue to pay Mr. Schiffrin his base and
incentive compensation and to continue his benefits for a period of 90 days upon
the termination of his employment for any reason other than by us for cause or
Mr. Schiffrin's resignation without good reason. The agreement also requires
Mr. Schiffrin to refrain from competing with us and from soliciting our clients
and customers for the duration of his employment and for a period following
employment equal to the length of time we make severance payments to him.
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<Page>
CERTAIN TRANSACTIONS
In January 1999, we created DOV Bermuda, a joint venture with Elan, to
develop controlled release formulations of bicifadine for the treatment of pain
and ocinaplon for the treatment of anxiety disorders and epilepsy. We granted to
the joint venture a non-exclusive license and sublicense to use the oral
formulations of these two product candidates and Elan granted the joint venture
a non-exclusive license to use its proprietary controlled release formulations.
After payments to our licensor, Wyeth-Ayerst, we are entitled to receive
royalties on net sales, if any, at a rate of 8.35% for bicifadine and 4.64% for
ocinaplon, and Elan is entitled to receive royalties at the same rate. Elan also
purchased, for an aggregate of $3.0 million, 324,090 shares of our common stock,
354,643 shares of series B preferred stock, all of which will be outstanding,
and warrants to purchase 75,000 shares of our common stock at an exercise price
of $5.52 per share. In the ordinary course of its business, DOV Bermuda incurs
expenses for formulation development work provided by Elan. These expenses
amounted to approximately $509,000 in 1999, $1.6 million in 2000 and
$1.8 million in 2001. For a further discussion of our collaboration with Elan,
please refer to the text in subheading "Collaborations and Licensing
Agreements--Elan Corporation, plc and Elan International Services, Ltd." under
the "Business" section.
From 1999 through November of 2001, one of our directors, Patrick Ashe, was
employed by Elan Pharmaceutical Technologies USA, a division of Elan.
Additionally, Mr. Ashe served as co-manager of Nascime Limited, a wholly-owned
subsidiary of DOV Bermuda formed in connection with the Elan joint venture.
Mr. Ashe was nominated and elected to our board of directors by Elan, the holder
of all of our issued and outstanding shares of series B preferred stock.
In August of 2001, as part of our sale of an aggregate of 1,040,000 shares
of our series D preferred stock, we sold 25,000 shares for an aggregate purchase
price of $250,000 to Biotechnology Value Fund, L.P., Biotechnology Fund II,
L.P., Investment 10 LLC and BVF Investments LLC, each of whose general partner
or investment advisor is BVF Partners L.P. BVF Partners L.P.'s general partner
is BVF, Inc. Prior to this transaction, BVF, Inc. had the sole voting and
investment power over 1,240,000 shares of our series C preferred stock. These
entities acquired the series D preferred stock on the same terms as other
purchasers in the transaction. Mr. Lampert, one of our directors, is the
president of BVF, Inc.
Ms. Morgen Lippa, daughter of Arnold Lippa, is employed by us as comptroller
and a project manager. During 2001, she was paid $87,000 in salary and was
awarded options to purchase 5,000 shares of our common stock.
Mr. Gary Beer, son of Bernard Beer, is employed by us as Director of Data
Management. During 2001, he was paid $87,000 in salary and was awarded options
to purchase 5,000 shares of our common stock.
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<Page>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of December 31, 2001 and on an as adjusted
basis to reflect the sale of the common stock offered in this offering by:
- all persons known by us to own beneficially 5% or more of the common
stock;
- each of our directors;
- the named executive officers; and
- all of our directors and executive officers as a group.
The number of shares beneficially owned by each stockholder is determined
under rules issued by the Securities and Exchange Commission and includes voting
or investment power with respect to securities. Under these rules, beneficial
ownership includes any shares as to which the individual or entity has sole or
shared voting power or investment power and includes any shares that an
individual or entity has the right to acquire beneficial ownership of within
60 days of December 31, 2001 through the exercise of any warrant, stock option
or other right. The inclusion in this prospectus of such shares, however, does
not constitute an admission that the named stockholder is a direct or indirect
beneficial owner of such shares. Unless otherwise indicated, the address of all
listed stockholders is c/o DOV Pharmaceutical, Inc., 433 Hackensack Avenue,
Hackensack, NJ 07601. Each of the stockholders listed has sole voting and
investment power with respect to the shares beneficially owned by the
stockholder unless noted otherwise, subject to community property laws where
applicable.
<Table>
<Caption>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)
---------------------
NUMBER OF SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
- ------------------------ ------------------ --------- ---------
Elan International Services, Ltd.(2)
Flatts, Smiths Parish
Bermuda, FL04.......................................... 2,817,967 33.93%
BVF Inc.(3)
1 Sansone Street
39th Floor
San Francisco, CA 94104................................ 1,265,000 21.77
Merlin BioMed Private Equity Fund, L.P.(4)
230 Park Ave, Suite 928
New York, NY 10169..................................... 500,000 8.60
Reservoir Capital Group, L.L.C.(5)
650 Madison Ave.
New York, NY 10022..................................... 500,000 8.60
Oppenheimer Discovery Fund(6)
6803 South Tuscan Way
Englewood, CO 80112.................................... 300,000 5.16
Arnold Lippa(7).......................................... 1,050,000 17.67
Bernard Beer(7).......................................... 1,050,000 17.67
Phil Skolnick............................................ -- --
Stephen Petti(8)......................................... 105,000 1.77
Paul Schiffrin(9)........................................ 65,000 1.11
Zola Horowitz(10)........................................ 155,000 2.62
Patrick Ashe(11)......................................... 45,000 *
Mark N. Lampert(12)...................................... 1,275,000 21.90
All directors and executive officers as a group (9
persons)(13)........................................... 3,745,000 58.60
</Table>
- ------------------------
* Less than one percent.
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(1) The number of outstanding shares of our common stock is based on the number
of shares of our common stock and common stock equivalents outstanding as
of December 31, 2001. Our calculation includes 3,021,137 shares of common
stock, 2,790,000 shares of common stock issuable upon the conversion of
1,750,000 shares of our series C preferred stock and 1,040,000 shares of
our series D preferred stock. For purposes of calculating the percentage of
shares beneficially owned after this offering, the number of shares of
common stock deemed outstanding after this offering assumes the issuance of
shares of common stock in this offering.
(2) Includes 324,090 shares of common stock, warrants to purchase 75,000 shares
of common stock that are currently exercisable, 354,643 shares of common
stock issuable upon the conversion of our series B preferred stock,
approximately 1,522,935 shares of common stock issuable upon the conversion
of the Elan exchangeable convertible promissory note and approximately
541,299 shares of common stock issuable upon the conversion of the Elan
convertible line of credit.
(3) BVF Inc. is the general partner of BVF Partners L.P., which is either the
general partner of or the investment advisor of Biotechnology Value Fund,
L.P., Biotechnology Fund II, L.P., Investment 10 LLC and BVF Investments
LLC, and exercises sole voting and investment power held of record by
Biotechnology Value Fund, L.P., Biotechnology Fund II, L.P., Investment 10
LLC and BVF Investments LLC. Mr. Lampert, a member of our board of
directors, is the president of BVF Inc. Mr. Lampert disclaims any
beneficial ownership of the shares held by Biotechnology Value Fund, L.P.,
Biotechnology Fund II, L.P., Investment 10 LLC and BVF Investments LLC,
except to the extent of his pecuniary interest therein. Includes 1,240,000
shares of common stock issuable upon the conversion of our series C
preferred stock and 25,000 shares of common stock issuable upon the
conversion of our series D preferred stock. Our series C and series D
preferred stocks automatically convert into shares of common stock upon the
closing of this offering.
(4) Includes 500,000 shares of common stock issuable upon the conversion of our
series D preferred stock.
(5) Reservoir Capital Group, L.L.C. is the general partner of Reservoir Capital
Partners, L.P., Reservoir Capital Master Fund, L.P. and Reservoir Capital
Associates, L.P., and exercises sole voting and investment power held of
record by Reservoir Capital Partners, L.P., Reservoir Capital Master Fund,
L.P. and Reservoir Capital Associates, L.P. Includes 500,000 shares of
common stock issuable upon the conversion of our series C preferred stock.
(6) Includes 300,000 shares of our common stock issuable upon the conversion of
our series D preferred stock.
(7) Includes 975,000 shares of common stock and options to purchase 130,000
shares of common stock that are currently exercisable.
(8) Includes options to purchase 105,000 shares of common stock that are
currently exercisable. Excludes options to purchase 95,000 shares of common
stock that are not exercisable within 60 days of December 31, 2001.
(9) Includes options to purchase 65,000 shares of common stock that are
currently exercisable. Excludes options to purchase 5,000 shares of common
stock that are not exercisable within 60 days of December 31, 2001.
(10) Includes 60,000 shares of common stock and options to purchase 95,000
shares of common stock that are currently exercisable. Excludes options to
purchase 15,000 shares of common stock that are not exercisable within
60 days of December 31, 2001.
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(11) Includes options to purchase 45,000 shares of common stock that are
currently exercisable. Excludes options to purchase 15,000 shares of
common stock that are not exercisable within 60 days of December 31, 2001.
(12) Includes the shares described in footnote (3), of which Mr. Lampert may be
considered the beneficial owner. Mr. Lampert disclaims beneficial
ownership of such shares, except to the extent of his pecuniary interest
therein. Also includes options to purchase 10,000 shares of our common
stock which are currently exercisable. Excludes options to purchase 15,000
shares of our common stock which are not exercisable with 60 days of
December 31, 2001.
(13) Includes options to purchase 450,000 shares of common stock that are
currently exercisable.
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DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, our authorized capital stock will consist
of shares of common stock, of which shares will be
outstanding, 354,643 shares of series B preferred stock and 6,495,357 shares of
undesignated preferred stock, issuable in one or more series designated by our
board of directors, none of which will be outstanding. All of our outstanding
series B preferred stock is owned by Elan. Prior to this offering, our common
stock was held by 40 stockholders of record. The following information relates
only to our certificate of incorporation and by-laws, as they will exist after
this offering.
COMMON STOCK
VOTING RIGHTS. The holders of our common stock have one vote per share.
Holders of our common stock are not entitled to vote cumulatively for the
election of directors. Generally, all matters to be voted on by stockholders
must be approved by a majority, or, in the case of election of directors, by a
plurality, of the votes cast at a meeting at which a quorum is present and
voting together as a single class, subject to any voting rights granted to
holders of any then outstanding preferred stock.
DIVIDENDS. Holders of common stock will share ratably together with holders
of series B preferred stock in any dividends declared by our board of directors,
subject to the preferential rights of any preferred stock then outstanding.
Dividends consisting of shares of common stock may be paid to holders of shares
of common stock.
OTHER RIGHTS. Upon our liquidation, dissolution or winding up, the holders
of common stock are entitled to share ratably in any assets available for
distribution to holders of shares of common stock. No shares of common stock are
subject to redemption or have preemptive rights to purchase additional shares of
common stock.
SERIES B NONVOTING CONVERTIBLE PREFERRED STOCK
VOTING RIGHTS. Except as provided by applicable law, the series B preferred
stockholders have neither voting power, nor the right to receive notice of any
meetings of our stockholders. Except as required by law, the consent of the
series B preferred stockholders is not required to authorize or take any
corporate action.
DIVIDENDS. Our series B preferred stock is not entitled to any preferential
dividends and will participate in dividends pro rata with the holders of common
stock on an as-converted basis.
CONVERSION. At any time upon the affirmative vote of 75% of the holders of
series B preferred stock, each share of series B preferred stock will convert
into one share of our common stock.
BOARD OF DIRECTORS. For as long as the series B preferred stockholders own
at least 10% of our outstanding capital stock, they will be entitled, as a
class, to nominate and elect one director to our board of directors who has a
vote that is equal at all times to 9.9% of all votes that may be cast by the
board.
OTHER RIGHTS. Upon our liquidation, dissolution or winding up, the
series B preferred stockholders are not entitled to any preferential
distributions and will share with the holders of common stock on an as-converted
basis. No shares of series B preferred stock are subject to redemption or have
preemptive rights to purchase additional shares of series B preferred stock or
our common stock.
PREFERRED STOCK
Our certificate of incorporation provides that 6,495,357 shares of preferred
stock may be issued from time to time in one or more series. Our board of
directors is authorized to fix the voting rights, if
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any, designations, powers, preferences, qualifications, limitations and
restrictions, applicable to the shares of each series. Our board of directors
may, without stockholder approval, issue preferred stock with voting and other
rights that could adversely affect the voting power and other rights of the
holders of the common stock and could have anti-takeover effects, including
preferred stock or rights to acquire preferred stock in connection with
implementing a stockholder rights plan. We have no present plans to issue any
shares of preferred stock. The ability of our board of directors to issue
preferred stock without stockholder approval could have the effect of delaying,
deferring or preventing a change of control with respect to our company or the
removal of existing management.
ELAN CONVERTIBLE EXCHANGEABLE PROMISSORY NOTE
In connection with our entering into the joint venture with Elan on
January 21, 1999, we issued to Elan a convertible exchangeable promissory note
in the original principal amount of $8.0 million. The note accrues interest at
the rate of 7% per annum compounded semi-annually and matures on January 21,
2005. The note and all accrued unpaid interest is convertible at anytime prior
to its maturity into that number of shares of our common stock that is equal to
the total amount of outstanding principal and accrued unpaid interest on the
date of conversion divided by $6.44. We may not prepay the note without Elan's
consent. Alternatively, Elan may elect to exchange the total amount of
outstanding principal balance for that number of shares of the joint venture to
make our equity interests equal. If Elan chooses this option, it maintains its
right to convert any accrued unpaid interest of this note into shares of our
common stock at $6.44 per share.
ELAN CONVERTIBLE PROMISSORY NOTE
In connection with our entering into the joint venture with Elan, Elan
provided us with a $7.0 million convertible line of credit. We have drawn down
on the convertible line of credit in the past and, at December 31, 2001,
$3.0 million was outstanding and $4.6 million remained available for borrowing.
Amounts outstanding under the convertible line of credit accrue interest at the
rate of 10% per annum compounded semi-annually. This convertible line of credit
matures on January 21, 2005, and may not be prepaid without Elan's consent. The
note and all accrued unpaid interest thereon is convertible at anytime prior to
its maturity into that number of shares of common stock that is equal to the
total amount of outstanding principal and accrued unpaid interest on the date of
conversion divided by $5.52.
WARRANTS
As of December 31, 2001, we had outstanding warrants to purchase 340,323
shares of our common stock at a weighted average exercise price of $5.16.
OPTIONS
As of December 31, 2001, we had outstanding options to purchase 1,502,000
shares of our common stock at a weighted average purchase price of $5.15 and
options convertible into 490,500 shares of common stock are available for future
grants under our 2000 Stock Option and Grant Plan. Options to purchase an
aggregate of 7,500 shares of common stock have been exercised under our stock
option plans as of December 31, 2001.
REGISTRATION RIGHTS
At anytime after the 12-month anniversary of this offering, Neurocrine
Biosciences, Inc. and its transferees have the right to demand that we file one
registration statement to register all or part of their shares of common stock.
Additionally, if we register any shares of our common stock, either for our own
account or for the account of other stockholders, Neurocrine or its transferees
are entitled to
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notice of the registration and to include some of their shares of common stock
in the registration. All of these registration rights are subject to further
conditions and limitations, among them the right of the underwriters of an
offering to limit the number of shares included in a registration under some
circumstances. We will pay all expenses in connection with any registration,
other than underwriting discounts and commissions. As of December 31, 2001,
99,547 shares of common stock are entitled to these registration rights.
Elan and its affiliates have the right at any time from and after the
six-month anniversary of this offering to demand that we file one registration
statement to register all or part of their shares of common stock, including any
shares of common stock received upon the conversion of series B preferred stock,
the convertible exchangeable promissory note, the convertible line of credit and
exercise of their warrants. Additionally, if we register any of our common
stock, either for our own account or for the account of other stockholders, Elan
is entitled to notice of the registration and to request that we include its
shares of common stock in the registration. All of these registration rights are
subject to further conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares included in a
registration. We will pay all expenses in connection with any registration,
other than underwriting discounts and commissions. As of December 31, 2001, an
aggregate of 2,817,967 shares of common stock (on an as-converted basis) are
entitled to these registration rights.
At anytime from and after the six-month anniversary of this offering the
holders of the 1,750,000 shares of our common stock received upon the conversion
of our series C preferred stock have the right to demand that we file one
registration statement to register all or part of their shares of common stock.
These stockholders are entitled to demand one additional registration if we are
unable to register all of their shares requested to be registered in their
initial demand. Additionally, if we register any of our common stock, either for
our own account or for the account of other stockholders, the holders of these
shares are entitled to notice of the registration and to request that we include
their shares of common stock in the registration. All of these registration
rights are subject to further conditions and limitations, among them the right
of the underwriters of an offering to limit the number of shares included in a
registration. We will pay all expenses in connection with any registration,
other than underwriting discounts and commissions.
At anytime from and after the 12-month anniversary of this offering the
holders of the 1,040,000 shares of our common stock received upon the conversion
of our series D preferred stock have the right to demand that we file one
registration statement to register all or part of their shares of common stock.
These stockholders are entitled to demand one additional registration if we are
unable to register all of their shares requested to be registered in their
initial demand. These stockholders are also entitled to demand once annually
that we register their shares of common stock on either Form S-2 or S-3 if the
anticipated offering price of the shares of common stock expected to be
registered exceeds $5,000,000. Additionally, if we register any of our common
stock, either for our own account or for the account of other stockholders, the
holders of these shares are entitled to notice of the registration and to
request that we include their shares of common stock in the registration. All of
these registration rights are subject to further conditions and limitations,
among them the right of the underwriters of an offering to limit the number of
shares included in a registration. We will pay all expenses in connection with
any registration, other than underwriting discounts and commissions.
If we register any of our common stock, either for our own account or for
the account of other stockholders, the holders of warrants to purchase 255,323
shares of our common stock are entitled to notice of the registration and to
request that we include, upon exercise of their warrants, their shares of common
stock in the registration. These registration rights are subject to further
conditions and limitations, among them the right of the underwriters of an
offering to limit the number of shares included in a registration.
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INDEMNIFICATION MATTERS
Prior to this offering, we will have entered into indemnification agreements
with each of our directors. The form of indemnification agreement provides that
we will indemnify our directors for expenses incurred because of their status as
a director to the fullest extent permitted by Delaware law, our certificate of
incorporation and our by-laws.
Our certificate of incorporation contains a provision permitted by Delaware
law that generally eliminates the personal liability of directors for monetary
damages for breach of their fiduciary duty, including breaches involving
negligence or gross negligence in business combinations, unless the director has
breached his or her duty of loyalty to us, failed to act in good faith, engaged
in intentional misconduct or a knowing violation of law, paid a dividend or
approved a stock repurchase in violation of the Delaware General Corporation Law
or obtained an improper personal benefit. This provision does not alter a
director's liability under the federal securities laws and does not affect the
availability of equitable remedies, such as an injunction or rescission, for
breach of fiduciary duty. Our by-laws provide that directors and officers shall
be, and in the discretion of our board of directors, non-officer employees may
be, indemnified by us to the fullest extent authorized by Delaware law, as it
now exists or may in the future be amended, against all expenses and liabilities
reasonably incurred in connection with service for or on behalf of us. Our
by-laws also provide for the advancement of expenses to directors and, in the
discretion of our board of directors, to officers and non-officer employees. In
addition, our by-laws provide that the right of directors and officers to
indemnification shall be a contract right and shall not be exclusive of any
other right now possessed or hereafter acquired under any by-law, agreement,
vote of stockholders or otherwise. We also have directors' and officers'
insurance against certain liabilities. We believe that the indemnification
agreements, together with the limitation of liability and indemnification
provisions of our certificate of incorporation and by-laws and directors' and
officers' insurance will assist us in attracting and retaining qualified
individuals to serve as our directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be provided to directors, officers or persons controlling us as
described above, we have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable. At present, there is no
pending material litigation or proceeding involving any of our directors,
officers, employees or agents in which indemnification will be required or
permitted.
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS THAT MAY HAVE
ANTI-TAKEOVER EFFECTS
Following this offering, the provisions of our certificate of incorporation
and by-laws described below, as well as the ability of our board of directors to
issue shares of preferred stock and to set the voting rights, preferences and
other terms thereof, may be deemed to have an anti-takeover effect and may
discourage takeover attempts not first approved by our board of directors,
including takeovers which particular stockholders may deem to be in their best
interests. These provisions also could have the effect of discouraging open
market purchases of our common stock because they may be considered
disadvantageous by a stockholder who desires subsequent to such purchase to
participate in a business combination transaction with us or to elect a new
director to our board.
CLASSIFIED BOARD OF DIRECTORS. Our board of directors is divided into three
classes serving staggered three-year terms, with one-third of the board being
elected each year. Our classified board, together with certain other provisions
of our certificate of incorporation authorizing the board to fill vacant
directorships or increase the size of the board, may prevent a stockholder from
removing, or delaying the removal of, incumbent directors, and simultaneously
gaining control of the board by filling vacancies created by such removal with
its own nominees.
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DIRECTOR VACANCIES AND REMOVAL. Our certificate of incorporation and
by-laws provide that vacancies in our board of directors may be filled only by
the affirmative vote of a majority of the remaining directors. Our certificate
of incorporation provides that directors may be removed from office only with
cause and only by the affirmative vote of holders of at least two-thirds of the
shares then entitled to vote in an election of directors.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT. Our certificate of incorporation
provides that any action required or permitted to be taken by our stockholders
at an annual or special meeting of stockholders must be effected at a duly
called meeting and may not be taken or effected by a written consent of
stockholders.
SPECIAL MEETINGS OF STOCKHOLDERS. Our certificate of incorporation and
by-laws provide that a special meeting of stockholders may be called only by our
board of directors. Our by-laws provide that only those matters included in the
notice of the special meeting may be considered or acted upon at that special
meeting unless otherwise provided by law.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND STOCKHOLDER PROPOSALS. Our
by-laws include advance notice and informational requirements and time
limitations on any director nomination or any new proposal which a stockholder
wishes to make at an annual meeting of stockholders. For the first annual
meeting following the completion of this offering, a stockholder's notice of a
director nomination or proposal will be timely if delivered to our secretary at
our principal executive offices not later than the close of business on the
later of the 75th day prior to the scheduled date of such annual meeting or the
10th day following the day on which we make public announcement of the date of
such annual meeting.
AMENDMENT OF THE CERTIFICATE OF INCORPORATION. As required by Delaware law,
any amendment to our certificate of incorporation must first be approved by a
majority of our board of directors and, if required by law, thereafter approved
by a majority of the outstanding shares entitled to vote with respect to such
amendment, except that any amendment to the provisions relating to stockholder
action by written consent, directors, limitation of liability and the amendment
of our certificate of incorporation must be approved by at least 75% of the
outstanding shares entitled to vote with respect to such amendment.
AMENDMENT OF BY-LAWS. Our certificate of incorporation and by-laws provide
that our by-laws may be amended or repealed by our board of directors or by the
stockholders. Such action by the board of directors requires the affirmative
vote of a majority of the directors then in office. Such action by the
stockholders requires the affirmative vote of at least two-thirds of the shares
present in person or represented by proxy at an annual meeting of stockholders
or a special meeting called for such purpose unless our board of directors
recommends that the stockholders approve such amendment or repeal at such
meeting, in which case such amendment or repeal only requires the affirmative
vote of a majority of the shares present in person or represented by proxy at
the meeting.
STATUTORY BUSINESS COMBINATION PROVISION
Following this offering, we will be subject to Section 203 of the Delaware
General Corporation Law, which prohibits a publicly-held Delaware corporation
from consummating a "business combination," except under certain circumstances,
with an "interested stockholder" for a period of three years after the date such
person became an "interested stockholder" unless:
- before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the
business combination;
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- upon the closing of the transaction that resulted in the interested
stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at
the time the transaction commenced, excluding shares held by directors who
are also officers of the corporation and shares held by employee stock
plans; or
- following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of stockholders
by the affirmative vote of the holders of two-thirds of the outstanding
voting stock of the corporation not owned by the interested stockholder.
The term "interested stockholder" generally is defined as a person who, together
with affiliates and associates, owns, or, within the prior three years, owned,
15% or more of a corporation's outstanding voting stock. The term "business
combination" includes mergers, consolidations, asset sales involving 10% or more
of a corporation's assets and other similar transactions resulting in a
financial benefit to an interested stockholder. Section 203 makes it more
difficult for an "interested stockholder" to effect various business
combinations with a corporation for a three-year period. A Delaware corporation
may "opt out" of Section 203 with an express provision in its original
certificate of incorporation or an express provision in its certificate of
incorporation or by-laws resulting from an amendment approved by holders of a
least a majority of the outstanding voting stock. Neither our certificate of
incorporation nor our by-laws contains any such exclusion.
TRADING ON THE NASDAQ NATIONAL MARKET SYSTEM
We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol "DOVP."
PREEMPTIVE RIGHTS
Until January 21, 2003, Elan and/or its affiliates have the right to
participate in any equity financing commenced by us in order to maintain its
then current pro rata ownership percentage of us. This right does not apply to
this offering, equity issued in connection with a merger, acquisition or
consolidation of us, or the issuance of common stock under our 2000 Stock Option
and Grant Plan.
Until the date that is 30 days after the closing of this offering, the
holders of 2,790,000 shares of our common stock received upon the conversion of
our series C and series D preferred stocks have the right to participate in
certain equity financings commenced by us in order to maintain their respective
pro rata ownership percentages of us. This right does not apply or has been
waived with respect to this offering, the issuance of common stock under our
2000 Stock Option and Grant Plan, the issuance of securities upon the conversion
of any securities held by Elan and the issuance of common stock upon the
exercise of any of our outstanding warrants.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock will be .
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SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering, we will have outstanding
shares of common stock or shares if the underwriters'
over-allotment option is exercised in full, in each case including the number of
shares of common stock issuable upon the conversion of our series B preferred
stock and the Elan convertible exchangeable promissory note and convertible line
of credit, but excluding shares underlying outstanding options. Of these shares,
all of the shares sold in this offering ( shares, or shares if
the underwriters' over-allotment option is exercised in full) will be freely
tradable without restriction or further registration under the Securities Act
except for any shares purchased by an "affiliate," which will be subject to the
limitations of Rule 144 of the Securities Act. As defined in Rule 144, an
"affiliate" of an issuer is a person that directly, or indirectly through one or
more intermediaries, controls, is controlled by or is under common control with
the issuer. The remaining outstanding shares of common stock will be "restricted
securities" as defined in Rule 144 and may not be resold in the absence of
registration under the Securities Act or pursuant to an exemption from such
registration, including exemptions provided by Rule 144.
In addition, our executive officers, directors and substantially all our
stockholders have agreed not to offer, sell, contract to sell or otherwise
dispose of any common stock or any securities convertible into or exchangeable
for common stock for a period of 180 days after the date of this prospectus
without the prior written consent of Lehman Brothers Inc. in prior consultation
with CIBC World Markets Corp. Immediately following this offering, the shares
subject to the lock-up agreements will represent approximately % of the then
outstanding shares of common stock ( % if the underwriters' over-allotment
option is exercised in full). While the underwriters have indicated no present
intention to waive these restrictions, were they to do so, approximately an
additional shares of our common stock could be available for sale during
the period following this offering, which could harm our stock price or make it
more difficult to sell our shares. Historically, factors that have led
underwriters to waive lock-up restrictions on a case by case basis include bona
fide gifts to charitable institutions and other small waivers which underwriters
reasonably believe will have minimal effect on the trading price of the common
stock of the applicable company.
RULE 144
Generally, under Rule 144, beginning 90 days after the date of this
prospectus, a person who has beneficially owned restricted shares for at least
one year, including persons who are affiliates, would be entitled to sell within
any three-month period a number of shares that does not exceed the greater of:
- 1% of the then outstanding shares of our common stock, approximately
shares immediately after this offering; or
- the reported average weekly trading volume of our common stock during the
four calendar weeks preceding a sale by such person.
Sales under Rule 144 are also subject to manner-of-sale provisions, notice
requirements and the availability of current public information.
RULE 144(K)
Under Rule 144(k), a person who has not been one of our affiliates during
the 90 days preceding a sale, and who has beneficially owned the shares proposed
to be sold for at least two years, is free to sell such shares without regard to
the volume, manner-of-sale or certain other limitations contained in Rule 144.
Upon completion of this offering, shares of our common stock will be
eligible for sale under Rule 144(k).
Prior to this offering, there has been no public market for our common stock
and we can make no predictions about the effect, if any, that market sales of
shares or the availability of shares for sale will
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have on the market price of our common stock prevailing from time to time.
Future sales of substantial amounts of our common stock in the public market, or
the perception that such sales may occur, may cause the market prices of our
common stock to decline.
REGISTRATION RIGHTS
After the 180-day period following the closing of this offering, the holders
of approximately 8,962,838 shares of our common stock (includes shares issuable
upon the exercise of warrants and the conversion of series B preferred stock,
the Elan convertible exchangeable promissory note and the convertible line of
credit) will have certain rights which may require us to register their shares
under the Securities Act. See "Description of Capital Stock--Registration
Rights."
OPTIONS
As of December 31, 2001, options to purchase 1,502,000 shares of our common
stock were outstanding. At some time following the effectiveness of this
offering the board of directors in its discretion, intends to file a
registration statement on Form S-8 under the Securities Act to register all of
the shares of our common stock reserved for issuance under our 2000 Stock Option
and Grant Plan, our 1998 Stock Option Plan and those options granted to Phil
Skolnick. The filing of this registration statement will allow these shares,
other than those held by members of management who are deemed to be affiliates,
to be eligible for resale without restriction, subject to the lock-up period
related to this offering. After the effective date of the registration statement
on Form S-8 and, if applicable, the expiration of the lock-up period related to
this offering, shares purchased upon exercise of options granted pursuant to
these plans, generally will be available for resale in the public market by
non-affiliates without restriction. Sales by our affiliates of shares registered
on the S-8 registration statement are subject to all of the Rule 144
restrictions except for the one-year minimum holding period requirement.
In addition to possibly being able to sell option shares without restriction
under a Form S-8 registration statement when effective, persons other than our
affiliates are allowed under Rule 701 of the Securities Act to sell shares of
our common stock issued upon exercise of stock options beginning 90 days after
the date of this prospectus, subject only to the manner of sale provisions of
Rule 144 and to the lock-up period related to this offering. Our affiliates may
also begin selling option shares beginning 90 days after the date of this
prospectus, but are subject to the 180-day lock-up period related to this
offering and all of the Rule 144 restrictions except for the one-year holding
period requirement.
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UNDERWRITING
Under the terms of an underwriting agreement, which is filed as an exhibit
to the registration statement relating to this prospectus, each of the
underwriters named below, for whom Lehman Brothers Inc., CIBC World Markets
Corp., Lazard Freres & Co. LLC and Fidelity Capital Markets, a division of
National Financial Services LLC, are acting as representatives, have severally
agreed to purchase from us the respective number of shares of common stock
opposite their names below:
<Table>
<Caption>
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
Lehman Brothers Inc.........................................
CIBC World Markets Corp.....................................
Lazard Freres & Co. LLC.....................................
Fidelity Capital Markets, a division of National Financial
Services LLC..............................................
---------
Total.....................................................
=========
</Table>
The underwriting agreement provides that the underwriters' obligations to
purchase our common stock depend on the satisfaction of the conditions contained
in the underwriting agreement, which include:
- if any shares of common stock are purchased by the underwriters, then all
of the shares of common stock the underwriters agreed to purchase must be
purchased;
- the representations and warranties made by us to the underwriters are
true;
- there is no material change in the financial markets; and
- we deliver customary closing documents to the underwriters.
We have granted the underwriters a 30-day option after the date of the
underwriting agreement to purchase, from time to time, in whole or in part, up
to shares at the public offering price less underwriting discounts and
commissions. The option may be exercised to cover over-allotments, if any, made
in connection with this offering. To the extent that this option is exercised,
each underwriter will be obligated, subject to certain conditions, to purchase
its pro rata portion of these additional shares based on the underwriter's
percentage underwriting commitment in the offering as indicated in the preceding
table.
The representatives of the underwriters have advised us that the
underwriters propose to offer shares of common stock directly to the public at
the public offering price on the cover of this prospectus and to selected
dealers, who may include the underwriters, at this public offering price less a
selling concession not in excess of $ per share. The underwriters may allow,
and the selected dealers may re-allow, a discount from the concession not in
excess of $ per share to other dealers. After the completion of this
offering, the representatives may change the public offering price and other
selling terms.
The following table summarizes the underwriting discounts and commissions we
will pay to the underwriters. These amounts are shown assuming both no exercise
and full exercise of the underwriters' over-allotment option to purchase
additional shares. The underwriting fee is the
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difference between the initial price to the public and the amount the
underwriters pay to us for the shares.
<Table>
<Caption>
PAID BY US
---------------------------------------------
NO EXERCISE OF FULL EXERCISE OF
OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
--------------------- ---------------------
Per Share.............................. $ $
Total.................................. $ $
</Table>
We estimate that the total expense of this offering, excluding the
underwriting discounts and commissions, will be approximately $ .
We have applied to have our common stock listed on the Nasdaq National
Market under the symbol "DOVP."
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act and liabilities incurred in
connection with the directed share program referred to below, and to contribute
to payments that the underwriters may be required to make for these liabilities.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between the underwriters and us. The factors that the representatives will
consider in determining the public offering price will include:
- the history and prospects for the industry in which we compete;
- the ability of our management and our business potential and earning
prospects;
- the prevailing securities markets at the time of this offering; and
- the recent market prices of, and the demand for, publicly traded shares of
generally comparable companies.
The representatives may engage in over-allotment, stabilizing transaction,
syndicate covering transactions, and penalty bids or purchasers for the purpose
of pegging, fixing or maintaining the price of the common stock, in accordance
with Regulation M under the Securities Exchange Act of 1934:
- Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short portion or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the
over-allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may close out any short position by either
exercising their over-allotment option and/or purchasing shares in the
open market.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of shares to
close out the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. If the underwriters sell more shares than could be
covered by the over-allotment option, a naked short position, the position
can only be closed out by buying shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned
that there could be downward pressure on
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the price of the shares in the open market after pricing that could
adversely affect investors who purchase in this offering.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may have the effect of raising or maintaining the market price of our
common stock or preventing or retarding a decline in the market price of the
common stock. As a result, the price of the common stock may be higher than the
price that might otherwise exist in the open market. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
Neither we nor any of the underwriters make any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common stock. In addition, neither we nor any
of the underwriters make representation that the representatives will engage in
these stabilizing transactions or that any transaction, once commenced, will not
be discontinued without notice.
The underwriters have informed us that they do not intend to confirm sales
to discretionary accounts that exceed 5% of the total number of shares offered
by them.
We have agreed that, without the prior written consent of Lehman
Brothers Inc., in prior consultation with CIBC World Markets Corp., we will not,
directly or indirectly, offer, sell or otherwise dispose of any shares of
capital stock or any securities that may be converted into or exchanged for any
shares of capital stock for a period of 180 days from the date of this
prospectus. All of our executive officers, directors and substantially all of
our stockholders have agreed that, without the prior written consent of Lehman
Brothers Inc. in prior consultation with CIBC World Markets Corp., they will
not, directly or indirectly, offer, sell or otherwise dispose of any shares of
capital stock or any securities that may be converted into or exchanged for any
shares of capital stock for a period of 180 days from the date of this
prospectus. See "Shares Eligible for Future Sale."
At our request, the underwriters have reserved up to shares, or %
of our common stock offered by this prospectus, for sale under a directed share
program to specified business associates. All of the persons purchasing the
reserved shares must commit to purchase no later than the close of business on
the day following the date of this prospectus. The number of shares available
for sale to the general public will be reduced to the extent these persons
purchase the reserved shares. Shares committed to be purchased by directed share
participants which are not so purchased will be reallocated for sale to the
general public in the offering. All sales of shares pursuant to the directed
share program will be made at the initial public offering price set forth on the
cover page of this prospectus.
A prospectus in electronic format may be made available on the Internet
sites or through other online services maintained by one or more of the
underwriters and/or selling group members participating in this offering, or by
their affiliates. In those cases, prospective investors may view offering terms
online and, depending on the particular underwriter or selling group member,
prospective investors may be allowed to place orders online. The underwriters
may agree with us to allocate a specific number of shares for sale to online
brokerage account holders. Any such allocation for online distributions will be
made by the representatives on the same basis as other allocations.
Other than the prospectus in electronic format, the information on any
underwriter's or selling group member's web site and any information contained
in any other web site maintained by an underwriter or selling group member is
not part of the prospectus or the registration statement of which this
prospectus forms a part, has not been approved and/or endorsed by us or any
underwriter or
76
<Page>
selling group member in its capacity as underwriter or selling group member and
should not be relied upon by investors.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the county of purchase, in addition to the offering price listed on the cover of
this prospectus.
This prospectus is not, and under no circumstances is to be construed as, an
advertisement or a public offering of shares in Canada or any province or
territory thereof. Any offer or sale of shares in Canada will be made only under
an exemption from the requirements to file a prospectus supplement or prospectus
and an exemption from the dealer registration requirement in the relevant
province or territory of Canada in which such offer or sale is made.
LEGAL MATTERS
The validity of the shares of common stock in this offering will be passed
upon for us by Goodwin Procter LLP, New York, NY. Wilson Sonsini Goodrich &
Rosati, Professional Corporation, New York, NY, is acting as counsel for the
underwriters.
As of the date of this prospectus, certain members of Goodwin Procter LLP
own or beneficially own an aggregate of 75,000 shares of our common stock and
hold options to purchase an additional 50,000 shares of our common stock all of
which are exercisable.
EXPERTS
The financial statements of DOV Pharmaceutical, Inc. as of December 31, 2000
and 2001 and for each of the three years in the period ended December 31, 2001
included in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of DOV (Bermuda), Ltd. as of December 31, 2000 and
2001 and for the period from inception (January 21, 1999) through December 31,
1999 and the years ended December 31, 2000 and 2001 and for the period from
inception (January 21, 1999) through December 31, 2001 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, or SEC, a
registration statement on Form S-1 (including the exhibits and schedules
thereto) under the Securities Act of 1933 and the rules and regulations
promulgated thereunder, for the registration of the common stock offered hereby.
This prospectus is part of the registration statement. This prospectus does not
contain all the information included in the registration statement because we
have omitted certain parts of the registration statement as permitted by the SEC
rules and regulations. For further information about us and our common stock,
you should refer to the registration statement. Statements contained in this
prospectus as to any contract, agreement or other document referred to are not
necessarily complete. Where the contract or other document is an exhibit to the
registration statement, each statement is qualified by the provisions of that
exhibit.
You can inspect and copy the registration statement and the exhibits and
schedules thereto at the public reference facility maintained by the SEC at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's
regional offices at 233 Broadway, New York, New York 10279, and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. You may call the SEC at
1-800-732-0330 for further information about the operation of the public
reference rooms. Copies of all
77
<Page>
or any portion of the registration statement can be obtained from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, the registration statement is publicly available
through the SEC's site on the Internet's World Wide Web, located at
http://www.sec.gov.
We will also file annual, quarterly and current reports, proxy statements
and other information with the SEC. You can also request copies of these
documents, for a copying fee, by writing to the SEC. Our SEC filings are also
available to the public from the SEC's website at http://www.sec.gov. We intend
to furnish to our stockholders annual reports containing audited financial
statements for each fiscal year.
78
<Page>
INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
--------
DOV PHARMACEUTICAL, INC.
Report of Independent Accountants........................... F-2
Balance Sheets as of December 31, 2000 and 2001............. F-3
Statements of Operations for the Years Ended December 31,
1999, 2000 and 2001....................................... F-4
Statements of Stockholders' Deficit for the Years Ended
December 31, 1999, 2000 and 2001.......................... F-5
Statements of Cash Flows for the Years Ended December 31,
1999, 2000 and 2001....................................... F-6
Notes to Financial Statements............................... F-7
DOV (BERMUDA), LTD. (A DEVELOPMENT STAGE COMPANY)
Report of Independent Accountants........................... F-25
Consolidated Balance Sheets as of December 31, 2000 and
2001...................................................... F-26
Consolidated Statements of Operations for the Period from
Inception (January 21, 1999) through December 31, 1999 and
the Years Ended December 31, 2000 and 2001, and from
Inception (January 21, 1999) through December 31, 2001.... F-27
Consolidated Statements of Changes in Stockholders' Deficit
for the Periods from Inception (January 21, 1999) through
December 31, 2001......................................... F-28
Consolidated Statements of Cash Flows for the Period from
Inception (January 21, 1999) through December 31, 1999 and
the Years Ended December 31, 2000, 2001, and the Period
from Inception (January 21, 1999) through December 31,
2001...................................................... F-29
Notes to Consolidated Financial Statements.................. F-30
</Table>
F-1
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
DOV Pharmaceutical, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, stockholders' deficit and cash flows present fairly, in all material
respects, the financial position of DOV Pharmaceutical, Inc. at December 31,
2000 and 2001, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. 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 of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
January 23, 2002
Florham Park, NJ
F-2
<Page>
DOV PHARMACEUTICAL, INC.
BALANCE SHEETS
<Table>
<Caption>
(UNAUDITED)
PRO FORMA
STOCKHOLDER'S
DEFICIT AS OF
AS OF DECEMBER 31, DECEMBER 31,
------------------------- 2001
2000 2001 (NOTE 2)
----------- ----------- -------------
ASSETS
Current assets:
Cash and cash equivalents............................... $ 4,262,926 $13,573,707
Certificate of deposit--restricted collateral........... 74,831 78,627
Accounts receivable..................................... -- 156,000
Investments............................................. -- 2,380,583
Receivable from DOV Bermuda............................. 554,674 1,330,821
Prepaid expenses and other current assets............... 28,323 85,029
----------- -----------
Total current assets.................................. 4,920,754 17,604,767
Property and equipment, net............................... 256,937 242,377
Deferred charges, net..................................... 372,402 232,885
----------- -----------
Total assets.......................................... $ 5,550,093 $18,080,029
=========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable........................................ $ 236,856 $ 359,754
Accrued expenses........................................ 641,709 1,410,223
Notes payable........................................... 2,386 1,141
Deferred revenue--current............................... -- 2,500,000
Accumulated loss in excess of investment in DOV
Bermuda............................................... 803,054 1,502,903
----------- -----------
Total current liabilities............................. 1,684,005 5,774,021
----------- -----------
Deferred revenue--noncurrent.............................. -- 2,708,333
Convertible exchangeable promissory note.................. 9,157,598 9,807,704
Convertible promissory note............................... 2,708,642 2,987,971
Commitments and contingencies
Redeemable preferred stock--series C, $1.00 par value,
1,750,000 shares authorized, 1,750,000 issued and
outstanding at December 31, 2000 and 2001--none
authorized, issued or outstanding on a pro forma basis;
liquidation preference $7,070,000 at December 31, 2000
and 2001................................................ 6,021,570 6,021,570 $ --
Redeemable preferred stock--series D, $1.00 par value,
1,400,000 shares authorized, 1,040,000 issued and
outstanding at December 31, 2001--none authorized,
issued or outstanding on a pro forma basis; liquidation
preference $10,400,000 at December 31, 2001............. -- 8,816,589 --
Stockholders' deficit:
Preferred stock--series B, $1.00 par value, 354,643
shares authorized, 354,643 shares issued and
outstanding at December 31, 2000 and 2001 and on a pro
forma basis........................................... 354,643 354,643 354,643
Common stock, $.0001 par value, 30,000,000 shares
authorized, 3,013,637 issued and outstanding at
December 31, 2000; 3,021,137 issued and outstanding at
December 31, 2001; 5,811,137 issued and outstanding on
a pro forma basis..................................... 301 302 581
Additional paid-in capital.............................. 4,346,568 6,759,163 21,597,043
Accumulated deficit..................................... (18,701,913) (24,342,368) (24,342,368)
Unearned compensation................................... (21,321) (807,899) (807,899)
----------- ----------- -----------
Total stockholders' deficit........................... (14,021,722) (18,036,159) $(3,198,000)
----------- ----------- ===========
Total liabilities, redeemable preferred stock and
stockholders' deficit............................. $ 5,550,093 $18,080,029
=========== ===========
</Table>
The accompanying notes are an integral part of these financial statements.
F-3
<Page>
DOV PHARMACEUTICAL, INC.
STATEMENTS OF OPERATIONS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
----------------------------------------
1999 2000 2001
------------ ----------- -----------
Revenue............................................... $ -- $ -- $ 5,711,466
Operating expenses:
Royalty expense..................................... -- -- 1,111,122
General and administrative expense.................. 1,018,661 1,347,839 2,343,105
Research and development expense.................... 1,722,850 2,639,639 5,524,837
------------ ----------- -----------
Loss from operations.............................. (2,741,511) (3,987,478) (3,267,598)
Loss in investment in DOV Bermuda..................... (8,705,078) (1,318,340) (1,433,902)
Interest income....................................... 50,347 223,413 366,061
Interest expense...................................... (581,507) (852,004) (1,727,615)
Other income, net..................................... -- -- 422,599
------------ ----------- -----------
Net loss.......................................... (11,977,749) (5,934,409) (5,640,455)
Deemed dividend on conversion of series A preferred... (11,957) -- --
Deemed dividend on issuance of series C preferred..... -- (49,000) --
Deemed dividend on issuance of series D preferred..... -- -- (97,400)
------------ ----------- -----------
Net loss attributable to common stockholders...... $(11,989,706) $(5,983,409) $(5,737,855)
============ =========== ===========
Basic and diluted net loss per share.................. $ (4.02) $ (1.99) $ (1.90)
============ =========== ===========
Weighted average shares used in computing basic and
diluted net loss per share.......................... 2,979,346 3,010,801 3,021,075
Pro forma basic and diluted net loss per share
(unaudited)......................................... $ (1.11)
===========
Weighted average shares used in computing pro forma
basic and diluted net loss per share (unaudited).... 5,098,198
</Table>
The accompanying notes are an integral part of these financial statements.
F-4
<Page>
DOV PHARMACEUTICAL, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<Table>
<Caption>
PREFERRED STOCK
SERIES B COMMON STOCK ADDITIONAL TOTAL
------------------- -------------------- PAID-IN ACCUMULATED UNEARNED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION DEFICIT
-------- -------- --------- -------- ---------- ------------ ------------ -------------
Balance, January 1,
1999.................... -- $ -- 2,580,000 $258 $ 153,658 $ (789,755) $ (37,994) $ (673,833)
Conversion of preferred
stock, series A to
common stock............ -- -- 99,547 10 439,990 -- -- 440,000
Beneficial conversion
feature on conversion of
series A preferred...... -- -- -- -- 11,957 -- -- 11,957
Deemed dividend on
conversion of series A
preferred............... -- -- -- -- (11,957) -- -- (11,957)
Issuance of series B
preferred............... 354,643 354,643 -- -- 1,255,436 -- -- 1,610,079
Issuance of common
stock................... -- -- 324,090 32 1,471,336 -- -- 1,471,368
Costs related to issuance
of common and series B
preferred stock......... -- -- -- -- (229,255) -- -- (229,255)
Issuance of warrants...... -- -- -- -- 180,000 -- -- 180,000
Issuance of warrants for
offering costs.......... -- -- -- -- 173,755 -- -- 173,755
Issuance of common stock
for services............ -- -- 1,000 -- 4,000 -- -- 4,000
Issuance of options to
employees............... -- -- -- -- 121,250 -- (121,250) --
Amortization of unearned
compensation............ -- -- -- -- -- -- 107,673 107,673
Net loss, year ended
December 31, 1999....... -- -- -- -- -- (11,977,749) -- (11,977,749)
------- -------- --------- ---- ---------- ------------ ---------- ------------
Balance, December 31,
1999.................... 354,643 354,643 3,004,637 300 3,570,170 (12,767,504) (51,571) (8,893,962)
Warrants issued for
offering costs for
issuance series C....... -- -- -- -- 412,125 -- -- 412,125
Beneficial conversion
feature on issuance of
series C................ -- -- -- -- 49,000 -- -- 49,000
Deemed dividend on
issuance of series C.... -- -- -- -- (49,000) -- -- (49,000)
Issuance of common stock
for services............ -- -- 9,000 1 37,739 -- -- 37,740
Issuance of options to
employees............... -- -- -- -- 117,800 -- (117,800) --
Amortization of unearned
compensation............ -- -- -- -- -- -- 148,050 148,050
Issuance of warrants and
options for services.... -- -- -- -- 208,734 -- -- 208,734
Net loss, year ended
December 31, 2000....... -- -- -- -- -- (5,934,409) -- (5,934,409)
------- -------- --------- ---- ---------- ------------ ---------- ------------
Balance, December 31,
2000.................... 354,643 354,643 3,013,637 301 4,346,568 (18,701,913) (21,321) (14,021,722)
Warrants issued for
offering costs for
issuance of series D.... -- -- -- -- 173,784 -- -- 173,784
Beneficial conversion
feature on issuance of
series D................ -- -- -- -- 97,400 -- -- 97,400
Deemed dividend on
issuance of series D.... -- -- -- -- (97,400) -- -- (97,400)
Options exercised......... -- -- 7,500 1 31,249 -- -- 31,250
Issuance of options to
employees............... -- -- -- -- 1,118,705 -- (1,118,705) --
Amortization of unearned
compensation............ -- -- -- -- -- -- 332,127 332,127
Issuance of options for
services................ -- -- -- -- 293,099 -- -- 293,099
Interest payable in
convertible
securities.............. -- -- -- -- 795,758 -- -- 795,758
Net loss, year ended
December 31, 2001....... -- -- -- -- -- (5,640,455) -- (5,640,455)
------- -------- --------- ---- ---------- ------------ ---------- ------------
Balance, December 31,
2001.................... 354,643 $354,643 3,021,137 $302 $6,759,163 $(24,342,368) $ (807,899) $(18,036,159)
======= ======== ========= ==== ========== ============ ========== ============
</Table>
The accompanying notes are an integral part of these financial statements.
F-5
<Page>
DOV PHARMACEUTICAL, INC.
STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
----------------------------------------
1999 2000 2001
------------ ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................ $(11,977,749) $(5,934,409) $(5,640,455)
Adjustments to reconcile net loss to net cash used
in operating activities:
Loss in investment in DOV Bermuda................. 8,705,078 1,318,340 1,433,902
Noncash revenue................................... -- -- (1,874,633)
Noncash royalty and other expense................. -- -- 749,853
Net appreciation in warrants...................... -- -- (422,599)
Accrued interest on Elan notes.................... 570,139 844,501 1,725,193
Depreciation...................................... 53,368 96,594 96,634
Amortization of deferred charges.................. 25,436 27,750 30,429
Noncash compensation charges...................... 107,673 148,050 332,127
Warrants, options and common stock issued for
services........................................ 4,000 246,474 293,099
Changes in operating assets and liabilities
Accounts receivable............................. -- -- (156,000)
Prepaid expenses and other current assets....... (3,273) (23,173) (56,706)
Accounts payable................................ 271,313 (290,364) 269,979
Accrued expenses................................ 115,464 419,284 (107,787)
Deferred revenue................................ -- -- 5,208,333
------------ ----------- -----------
Net cash (used in) provided by operating
activities...................................... (2,128,551) (3,146,953) 1,881,369
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment................. (273,369) (125,604) (82,074)
Purchases of certificates of deposit................ (171,212) (5,156) (3,796)
Proceeds from maturity of certificates of deposit... -- 101,536 --
Investments in DOV Bermuda, net of cash received.... (8,385,235) (1,133,401) (1,505,096)
------------ ----------- -----------
Net cash used in investing activities............. (8,829,816) (1,162,625) (1,590,966)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deferred charges paid............................... (63,796) -- --
Proceeds from notes payable......................... 44,510 -- --
Repayment of notes payable.......................... (46,010) (80,830) (1,245)
Proceeds from convertible exchangeable promissory
note.............................................. 8,010,000 -- --
Proceeds from convertible promissory note........... 1,281,600 1,160,000 --
Repayment of promissory note........................ (250,000) -- --
Proceeds from issuance of stock, net of cash
costs............................................. 2,944,500 6,433,695 8,990,373
Proceeds from options exercised..................... -- -- 31,250
------------ ----------- -----------
Net cash provided by financing activities......... 11,920,804 7,512,865 9,020,378
------------ ----------- -----------
Net increase in cash and cash equivalents....... 962,437 3,203,287 9,310,781
Cash and cash equivalents, beginning of year.......... 97,202 1,059,639 4,262,926
------------ ----------- -----------
Cash and cash equivalents, end of year................ $ 1,059,639 $ 4,262,926 $13,573,707
============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid....................................... $ 11,367 $ 7,536 $ 2,421
============ =========== ===========
</Table>
The accompanying notes are an integral part of these financial statements.
F-6
<Page>
DOV PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY
ORGANIZATION
DOV Pharmaceutical, Inc. (the "Company") was incorporated in May 1995 under
the laws of the State of New Jersey. In November 2000, the Company reorganized
as a Delaware corporation.
The Company is a biopharmaceutical company focused on the discovery,
in-licensing, development and commercialization of novel drug candidates for
central nervous system, cardiovascular and urological disorders. The Company has
five product candidates in clinical trials targeting insomnia, anxiety
disorders, pain, depression and angina and hypertension. The Company has
established strategic alliances with select partners to access their unique
technologies and their commercialization capabilities. The Company operates
principally in the United States. Prior to 2001, the Company was considered a
development stage company under Statement of Financial Accounting Standards
No. 7 "Accounting and Reporting by Development Stage Enterprises."
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements are presented on the basis of accounting principles
that are generally accepted in the United States.
The Company and Elan Corporation, plc ("Elan") entered into a transaction to
form DOV (Bermuda), Ltd. f/k/a DOV Newco, Ltd. a Bermuda exempted limited
company ("DOV Bermuda") as described in Note 4. While the Company owns 80.1% of
the outstanding capital stock of DOV Bermuda and Elan owns 19.9%, Elan has
retained significant minority rights that are considered "participating rights"
as defined in the Emerging Issues Task Force Consensus No. 96-16 "Investor's
Accounting for an Investee When the Investor Has a Majority of the Voting
Interest but the Minority Shareholder or Shareholders Have Certain Approval or
Veto Rights." Accordingly, the Company does not consolidate the financial
statements of DOV Bermuda, but instead accounts for its investment in DOV
Bermuda under the equity method of accounting.
The Company records its 80.1% interest in the loss in DOV Bermuda as
research and development expense for the portion of the research and development
expense incurred by the Company on behalf of DOV Bermuda and as Loss in
Investment in DOV Bermuda for the Company's 80.1% interest in the remaining loss
of DOV Bermuda.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported assets, liabilities, earnings, financial
position and various disclosures. Actual results could differ from those
estimates.
SEGMENT AND GEOGRAPHIC INFORMATION
The Company has determined it has one reportable operating segment as
defined by Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information."
F-7
<Page>
DOV PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
90 days or less when purchased to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided on
furniture and fixtures and machinery and equipment over their estimated useful
lives ranging from 3 to 7 years, using principally the straight-line method.
Leasehold improvements are amortized over the lesser of the term of the
respective lease or the useful lives of the related assets. Expenditures for
maintenance and repairs are expensed to operations as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121"), the Company reviews the
recorded values for long-lived assets, including property and equipment, for
impairment whenever events or changes in business circumstances indicate that
the carrying amount of the assets may not be fully recoverable. Under SFAS 121,
an impairment loss would be recognized when estimated undiscounted future cash
flows expected to result from the use of the asset and its eventual disposition
is less than its carrying amount. Impairment, if any, is assessed using
discounted cash flows. Through December 31, 2001, there have been no such
losses.
DEFERRED CHARGES
Deferred charges are issuance costs for the convertible exchangeable
promissory note and the convertible promissory note and are being amortized over
the six-year term of the instruments. Costs of $259,000 in connection with the
offering of series D redeemable convertible preferred stock were deferred at
December 31, 2000. These costs were offset against the proceeds upon the
successful completion of the issuance. Costs of $150,000 in connection with the
Company's planned initial public offering are deferred at December 31, 2001.
These costs will be charged to additional paid-in capital upon the successful
completion of the offering or expensed if the offering is unsuccessful.
REVENUE RECOGNITION
Revenue is recognized under collaboration or research and development
agreements when services are performed or when contractual obligations and/or
milestones are met and amounts are considered collectible. The Company has
adopted the milestone payment method to account for milestone payments received
pursuant to development agreements. Revenues from milestone payments that
represent the culmination of a separate earnings process are recorded when the
milestone is achieved. Cash received in advance of revenue recognition for
license fees is recorded as deferred revenue and recognized when earned over the
research and development period.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred. Certain research
and development expenses incurred on behalf of DOV Bermuda are billed to DOV
Bermuda under a joint development
F-8
<Page>
DOV PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and operating agreement. Payments received from DOV Bermuda that reflect Elan's
19.9% interest in the work performed by the Company for DOV Bermuda are recorded
as a reduction in research and development expense. Research and development
expenses include $1,092,065, $1,568,652 and $3,303,617 for the years ended
December 31, 1999, 2000 and 2001 related to work performed for DOV Bermuda.
Payments made under license agreements where the product has not yet reached
technological feasibility and has no alternative use are expensed when incurred.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end, based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
UNAUDITED PRO FORMA STOCKHOLDERS' DEFICIT
Upon the closing of the Company's initial public offering, the series C and
series D redeemable convertible preferred stock outstanding will automatically
be converted into common stock on a one-to-one basis. The unaudited pro forma
stockholders' deficit presented on the balance sheet reflects the effect of such
conversion.
NET LOSS PER SHARE AND UNAUDITED PRO FORMA NET LOSS PER SHARE
Basic and diluted net loss per share has been computed using the
weighted-average number of shares of common stock outstanding during the period.
The Company has excluded the shares issuable on conversion of the convertible
exchangeable promissory note, the convertible promissory note, convertible
preferred stock, outstanding options and warrants to purchase common stock from
the calculation of diluted net loss per share, as such securities are
antidilutive for all periods presented. Basic and diluted pro forma net loss per
share, as presented in the statements of operations, has been computed as
described above but also gives effect to the conversion of the convertible
preferred stock (using the if-converted method) from the original date of
issuance for the series D redeemable convertible preferred and the beginning of
the year for the series C redeemable convertible preferred.
F-9
<Page>
DOV PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table presents the calculation of basic and diluted and pro
forma basic and diluted net loss per share (unaudited):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
----------------------------------------
1999 2000 2001
------------ ----------- -----------
Net loss attributable to common stockholders.......... $(11,989,706) $(5,983,409) $(5,737,855)
============ =========== ===========
Basic and diluted:
Weighted-average shares used in computing basic and
diluted net loss per share........................ $ 2,979,346 $ 3,010,801 $ 3,021,075
============ =========== ===========
Basic and diluted net loss per share.................. $ (4.02) $ (1.99) $ (1.90)
============ =========== ===========
Pro forma (unaudited):
Net loss attributable to common stockholders as
above............................................. $(5,737,855)
Pro forma adjustment for deemed dividend............ 97,400
-----------
Pro forma net loss attributable to common
stockholders.................................... $(5,640,455)
===========
Shares used above..................................... 3,021,075
Pro forma adjustment to reflect weighted-average
effect of assumed conversion of convertible
preferred stock..................................... 2,077,123
-----------
Weighted-average shares used in computing pro forma
basic and diluted net loss per common share....... 5,098,198
===========
Pro forma basic and diluted net loss per common
share............................................... $ (1.11)
===========
Antidilutive securities not included in basic and
diluted net loss per share calculation:
Convertible preferred stock......................... 354,643 2,104,643 3,144,643
Convertible exchangeable promissory note............ 1,327,195 1,421,987 1,522,935
Convertible promissory note......................... 238,153 490,696 541,299
Options............................................. 385,000 978,000 1,502,000
Warrants............................................ 142,873 299,123 340,323
------------ ----------- -----------
2,447,864 5,294,449 7,051,200
============ =========== ===========
</Table>
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation expense for options
granted to employees using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
has adopted the disclosure only alternative of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The
expense for options granted to nonemployees has been determined in accordance
with FAS 123 and EITF 96-18, "Accounting for Equity Instruments That Are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." Unearned compensation expense is being amortized in accordance with
Financial Accounting Standards Board Interpretation No. 28 on an accelerated
basis over the vesting period.
F-10
<Page>
DOV PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RISKS AND UNCERTAINTIES
The Company is subject to risks common to companies in the biopharmaceutical
industry, including, but not limited to, successful commercialization of product
candidates, protection of proprietary technology and compliance with FDA
regulations.
CONCENTRATION OF CREDIT RISK
Cash and cash equivalents are invested in deposits with significant
financial institutions. The Company has not experienced any losses on its
deposits of cash and cash equivalents. Management believes that the financial
institutions are financially sound and, accordingly, minimal credit risk exists.
Approximately $13,500,000 of the Company's cash balance was uncollateralized at
December 31, 2001.
DERIVATIVES
The Company adopted Statement of Financial Accounting Standards No. 133, as
amended, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133") on January 1, 2001. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The adoption of SFAS No. 133 did not
have any impact on the Company's financial position or results of operations.
INVESTMENTS
Investments as of December 31, 2001, represent the warrants to purchase
shares of common stock received from Neurocrine (see Note 10). The warrants are
derivative financial instruments under SFAS No. 133 and thus are carried at fair
value. Changes in fair value are recorded as other income or other expense.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which supersedes SFAS No. 121. SFAS No. 144
further refines the requirements of SFAS No. 121 that requires companies to
recognize an impairment loss if the carrying amount of a long-lived asset is not
recoverable based on its undiscounted future cash flows and measure an
impairment loss as the difference between the carrying amount and fair value of
the asset. In addition, SFAS No. 144 provides guidance on accounting and
disclosure issues surrounding long-lived assets to be disposed of by sale. The
provisions of SFAS No. 144 are required to be adopted starting with fiscal years
beginning after December 15, 2001. The Company does not expect the adoption of
this statement to have a material impact on its financial position or results of
operations.
F-11
<Page>
DOV PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
<Table>
<Caption>
DECEMBER 31,
-------------------
YEARS 2000 2001
-------- -------- --------
Furniture and fixtures.................................... 7 $140,482 $155,994
Machinery and equipment................................... 3-5 198,513 265,075
Leasehold improvements.................................... 5 80,539 80,539
-------- --------
Less accumulated depreciation............................. 162,597 259,231
-------- --------
Property and equipment, net............................. $256,937 $242,377
======== ========
</Table>
4. TRANSACTION WITH ELAN
In January 1999, the Company and Elan International Services, Ltd. ("EIS"),
a wholly-owned subsidiary of Elan, formed DOV Bermuda, which owns 100% of the
issued and outstanding share capital of Nascime Limited, an Irish private
limited company ("Nascime"). DOV Bermuda was formed for the special and limited
purpose of holding all the issued and outstanding shares of Nascime. The
principal business of Nascime is to carry on the business of development,
testing, exploitation, registration, manufacture, commercial realization and
licensing of two of the Company's compounds, ocinaplon and bicifadine, utilizing
certain Elan technology.
In addition, in connection with the transaction, EIS purchased from the
Company, for an aggregate purchase price of $3,000,000, 324,090 shares of common
stock, 354,643 shares of series B preferred stock, and a warrant to purchase
75,000 shares of the Company's common stock at an exercise price of $5.52 a
share. The funding for the Company's contribution to DOV Bermuda was obtained by
issuing a convertible exchangeable promissory note to EIS in the amount of
$8,010,000.
For financial reporting purposes, the Company's investment in DOV Bermuda
was determined to be equal to the fair value of the common stock, series B
preferred stock, convertible exchangeable promissory note and warrants issued
less $3,000,000 cash retained by the Company, which was $8,271,448. The Company
recorded this transaction at fair value as the cash proceeds received both by
the Company and by DOV Bermuda were ultimately remitted to Elan in the form of a
$10,000,000 license fee. The technology obtained from Elan and the Company,
valued at their carry-over basis, was expensed at inception by DOV Bermuda
because the feasibility of using the contributed technology in conjunction with
the compounds had not been established and DOV Bermuda had no alternative future
use for the contributed technology. The Company immediately expensed as "Loss in
Investment in DOV Bermuda" its initial investment in DOV Bermuda of $8,271,448.
DOV Bermuda is owned 80.1% by the Company and 19.9% by EIS. At EIS's
election through exchanging the principal portion of the convertible
exchangeable promissory note, its ownership interest in DOV Bermuda can become
equal to the Company, and both the Company and EIS have certain preemptive
rights in financing DOV Bermuda, and both are subject to dilution. Although the
Company is the majority shareholder, the joint development agreement gives
management participation to both the Company and EIS. Therefore, because the
minority shareholder, EIS, has substantive participating rights, the Company
accounts for its investment in the joint venture using the equity method of
accounting, in accordance with EITF 96-16.
F-12
<Page>
DOV PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. TRANSACTION WITH ELAN (CONTINUED)
The Company sublicensed and licensed rights to two compounds, ocinaplon and
bicifadine, to Nascime for a $5,000 license fee. Elan licensed its controlled
release formulation technologies to Nascime for $10,000,000. The Company may
earn milestone payments of up to $7,500,000 and royalties on net sales from
Nascime and remains responsible for payments under its agreement with American
Cyanamid, now Wyeth-Ayerst (See Note 10). Under the license agreement with Elan,
Nascime will pay Elan a royalty on net sales. Both licenses expire on a product
by product and country by country basis on the later of 15 years from the launch
of the product or the last patent expiration. Elan may terminate its license
agreement if a named technological competitor of Elan acquires a ten percent
interest in the Company or DOV Bermuda, or becomes materially engaged in the
business or development of the Company or DOV Bermuda.
The Company and EIS fund DOV Bermuda on a pro-rata basis based on their
respective ownership interests. The Company has the ability to borrow upon a
convertible promissory note with EIS to fund a maximum of $7,008,750 to meet its
obligations under this agreement. At December 31, 2001, the Company has borrowed
$2,441,600 under the convertible promissory note. As of December 31, 2001, the
Company has committed to fund approximately $2,600,000 in additional investments
to DOV Bermuda. The accumulated loss in excess of investment in DOV Bermuda of
$1,502,903 reflects the Company's commitment to fund the losses in DOV Bermuda
incurred as of December 31, 2001.
From the inception of DOV Bermuda through December 31, 2001 the Company's
loss in investment in DOV Bermuda was $11,457,320, including the $8,271,448
immediate write-off of the investment in DOV Bermuda. DOV Bermuda is a
development stage company with no revenue. For the period from inception through
December 31, 2001, excluding the write-off of the contributed technology by Elan
and the Company, DOV Bermuda had operating expenses of $11,431,787, which
included $7,446,109 for research and development expenses invoiced to DOV
Bermuda by the Company. Separate financial statements for DOV Bermuda are
included elsewhere in this prospectus.
ELAN NOTES
In January 1999, the Company issued a convertible exchangeable promissory
note in the amount of $8,010,000 and a convertible promissory note in the
maximum initial principal amount of $7,008,750 to EIS. At December 31, 2001, the
Company had available $4,567,150 for borrowing under the convertible promissory
note. The proceeds of these notes are to be used solely in accordance with the
provisions of a joint development and operating agreement between the Company,
Elan, EIS, DOV Bermuda and Nascime.
A. CONVERTIBLE EXCHANGEABLE PROMISSORY NOTE
The convertible exchangeable promissory note provides for interest to accrue
at the rate of 7% per annum compounded on a semi-annual basis. The note requires
no payments until maturity on January 20, 2005, at which time the principal
amount and unpaid accrued interest become due and payable. The note may not be
prepaid by the Company without the prior written consent of EIS.
At anytime prior to the date the note is paid in full, EIS has the right to
convert the outstanding principal and unpaid accrued interest amount of the note
into shares of common stock of the Company at $6.44 per share. If no portion of
the original principal has been converted and DOV and EIS
F-13
<Page>
DOV PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. TRANSACTION WITH ELAN (CONTINUED)
maintain their current respective ownership, the principal amount of the note is
exchangeable at any time during the term of the note for a number of additional
Class B common stock of DOV Bermuda such that EIS' interest in DOV Bermuda is
equal to that of the Company.
The Company is accounting for the exchange feature of the note in accordance
with EITF 86-28 "Accounting Implications of Indexed Debt Instruments." As such,
the Company will record an adjustment to the carrying value of the note if the
fair value of the additional interest in the joint venture exceeds the face
value of the note. As of December 31, 2001 there has been no incremental
interest expense recorded related to this feature. If EIS chooses to exchange
the note for an additional interest in the joint venture, the accrued interest
will remain convertible into common stock of the Company at $6.44 per share. If
EIS chooses to exchange the note they are required to reimburse the Company for
a portion of the research expense incurred by DOV Bermuda since inception, such
that the Company and EIS have funded the research and development expense
equally.
During 2001, the interest feature in the convertible exchangeable promissory
note was determined to include a beneficial conversion feature as the interest
is convertible into shares of the Company or payable in cash at the option of
EIS. The Company is accounting for this feature in accordance with EITF 98-5
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios" and EITF 00-27 "Application of Issue
98-5 to Certain Convertible Instruments." The Company recorded $497,919 of
additional interest expense associated with this beneficial conversion feature
in 2001, with a corresponding increase in additional paid-in capital.
For the years ended December 31, 1999, 2000 and 2001, the accrued interest
excluding the additional interest noted above on the note amounted to $537,133,
$610,465 and $650,106, respectively and has been recorded as interest expense
and added to the principal balance of the note.
B. CONVERTIBLE PROMISSORY NOTE
The convertible promissory note provides for interest to accrue at the rate
of 10% per annum compounded on a semi-annual basis. The note requires no
payments until maturity on January 20, 2005, at which time the principal and
unpaid accrued interest becomes due and payable. The note may not be prepaid by
the Company without the prior written consent of EIS.
EIS has the right to convert the outstanding principal and unpaid accrued
interest amount of the note into shares of common stock of the Company at $5.52
per share.
For the years ended December 31, 1999, 2000 and 2001, the Company has
borrowed $1,281,600, $1,160,000 and $0, respectively, under this note. For the
year ended December 31, 1999, 2000 and 2001 accrued interest on this note
amounted to $33,006, $234,036 and $279,329, respectively, which has been
recorded as interest expense and added to the principal balance of the note.
Also during 2001, the interest feature in the convertible promissory note
was determined to include a beneficial conversion feature as the interest is
convertible into shares of the Company or payable in cash at the option of EIS.
The Company is accounting for this feature in accordance with EITF 98-5 and EITF
00-27. The Company recorded $297,839 of additional interest expense associated
with this beneficial conversion feature in 2001, with a corresponding increase
to additional paid-in capital.
F-14
<Page>
DOV PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<Table>
<Caption>
2000 2001
-------- ----------
Accrued royalties........................................... $ -- $ 833,203
Accrued professional fees................................... 327,247 368,227
Accrued research expenses................................... 209,625 111,585
Accrued payroll, vacation and other......................... 104,837 97,208
-------- ----------
$641,709 $1,410,223
======== ==========
</Table>
6. INCOME TAXES
No U.S. Federal or state taxes are payable at December 31, 2000 and 2001. At
December 31, 2001, the Company had approximately $10,000,000 of Federal and
$5,000,000 of state net operating loss ("NOL") carryforwards available to offset
future taxable income. The federal and state NOL carryforwards will begin
expiring in 2010 and 2007, respectively, if not utilized.
Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended,
the annual utilization of a company's net operating loss carryforwards may be
limited if the Company experiences a change in ownership of more than
50 percentage points within a three-year period. As a result of a planned
initial public offering, the Company may experience such ownership changes.
Accordingly, the Company's net operating loss carryforwards available to offset
future federal taxable income arising before such ownership changes may be
limited.
For financial reporting purposes, a valuation allowance of $4,435,087 has
been recorded at December 31, 2001, to fully offset the deferred tax asset
related to these carryforwards. A valuation allowance is provided when it is
more likely than not that some portion of or all of the deferred tax assets will
not be realized. The principal components of the deferred tax asset at
December 31, 2000 and 2001, assuming a 34% federal tax rate, are as follows:
<Table>
<Caption>
2000 2001
----------- -----------
Deferred tax assets:
Fixed assets............................................. $ 12,955 $ 17,329
Accrued legal expenses................................... 94,829 67,178
Accrued other............................................ 165,799 436,879
Net operating loss carryforward.......................... 1,869,207 3,913,701
----------- -----------
Total gross deferred tax assets........................ 2,142,790 4,435,087
Valuation allowance...................................... (2,142,790) (4,435,087)
----------- -----------
Net deferred tax assets................................ $ -- $ --
=========== ===========
</Table>
The net change in valuation allowance for 2000 was an increase of
$2,292,297, primarily related to additional net operating losses incurred by the
Company. The difference between the federal statutory tax rate (34%) and the
effective tax rate (0%) is due to the increase in valuation allowance in all
periods presented.
F-15
<Page>
DOV PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SERIES C AND D REDEEMABLE CONVERTIBLE PREFERRED STOCK
In May and June 2000, the Company issued 1,750,000 shares of series C
redeemable convertible preferred stock for a total of $7,070,000 and incurred
offering costs of $1,048,430. The series C redeemable convertible preferred
stock was issued at $4.04 per share. The series C redeemable convertible
preferred has a 7% dividend payable at the discretion of the Company's board of
directors prior and in preference to the holders of common stock and of other
series of preferred stock, other than series D redeemable convertible preferred.
The series C redeemable convertible preferred stockholders also have liquidation
rights. The liquidation value is calculated at the issue price of $4.04 plus an
amount equal to all declared and unpaid dividends. There have been no declared
dividends on the series C redeemable convertible preferred stock since issuance.
The liquidation value of the outstanding series C redeemable convertible
preferred at December 31, 2001 is $7,070,000. The series C redeemable
convertible preferred is convertible on a one to one basis subject to adjustment
in certain instances into shares of common stock. Such conversion is automatic
with the closing of an initial public offering of at least $20,000,000.
The Company recorded a deemed dividend of $49,000 on issuance of the
series C redeemable convertible preferred related to costs paid on behalf of the
investors.
The series C redeemable convertible preferred also contains a contingent
beneficial conversion feature that would provide the series C redeemable
convertible preferred stock holders with a lower conversion price if the Company
were to issue equity securities below the $4.04 issue price. There has not been
an equity issuance below the $4.04 price since the issuance of the series C
redeemable convertible preferred.
In August and October 2001, the Company issued 1,040,000 shares of series D
redeemable convertible preferred stock to outside investors for a total of
$10,400,000 and incurred offering costs of $1,583,411. The series D redeemable
convertible preferred stock was issued at $10.00 per share. The series D
redeemable convertible preferred has a 7% dividend payable at the discretion of
the Company's board of directors prior and in preference to the holders of
common stock and to other series of preferred stock, other than series C
redeemable convertible preferred. The series D redeemable convertible preferred
stockholders also have liquidation rights. There have been no declared dividends
on the series D redeemable convertible preferred since issuance. The liquidation
value of the outstanding series D redeemable convertible preferred at
December 31, 2001 is $10,400,000. The series D redeemable convertible preferred
is convertible on a one to one basis subject to adjustment in certain instances
into shares of common stock. Such conversion is automatic on the closing of an
initial public offering of at least $20,000,000.
F-16
<Page>
DOV PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company recorded a deemed dividend of $97,400 on issuance of the
series D redeemable convertible preferred related to costs paid on behalf of the
investors.
The series D redeemable convertible preferred also contains a contingent
beneficial conversion feature that would provide the series D redeemable
convertible preferred stockholders with a lower conversion price if the Company
were to issue equity securities below the $10.00 issue price. There has not been
an equity issuance below the $10.00 since the issuance of the series D
redeemable convertible preferred stock.
Both the series C and series D redeemable convertible preferred stock are
redeemable in the event of a liquidation of the Company. As redemption is not
probable at either December 31, 2001 or 2000, the series C and series D
redeemable convertible preferred are carried at the fair value received, net of
offering costs.
Both the series C preferred and series D redeemable convertible preferred
have voting rights on an as-converted basis as described in the Second Amended
and Restated Certificate of Incorporation.
8. EQUITY TRANSACTIONS
In June 1998, the Company sold $440,000 of its $1.00 par value series A
redeemable convertible preferred stock for par value. The series A preferred
stock automatically converted into 99,547 shares of common stock at a conversion
price of $4.42 per share on January 21, 1999 upon the closing of the Elan
transaction. Upon conversion, the Company recorded a deemed dividend to the
series A stockholders of $11,957.
During 1999, in connection with the Elan transaction (see Note 4) the
Company issued to EIS 324,090 shares of common stock, 354,643 shares of
series B preferred stock, and warrants to purchase shares of the Company's
common stock at $5.52 a share. The series B preferred stock are non-voting
shares issued from available "blank check" preferred stock with no preference as
to liquidation or dividends. Each share of the preferred stock is convertible,
without additional consideration, into one share of the Company's common stock.
The warrants to purchase shares of common stock entitle EIS to purchase up to
75,000 shares of the Company's common stock at a price of $5.52 per share. The
term of the warrants expires January 15, 2005.
As of December 31, 2001, the Company has 6,495,357 shares of undesignated
preferred stock authorized with a par value of $1.00.
STOCK OPTION PLANS
1998 STOCK OPTION PLAN
The Company's 1998 Stock Option Plan (the "1998 Plan") was adopted by the
Company's board of directors on September 10, 1998. Under the 1998 Plan, the
Company has granted stock options to selected officers, employees, directors and
consultants of the Company. The Company's board of directors administers the
1998 Plan. The 1998 Plan provided for the issuance of 1,250,000 shares of common
stock. As of December 31, 2001, options to purchase 698,000 shares of common
stock were outstanding under the 1998 Plan. As of October 15, 2000 all new
option grants are issued under the 2000 stock option plan. The term of the
options granted under the 1998 Plan is ten years. Awards under the 1998 Plan
vest 50% on the six month anniversary and 50% on the eighteen month anniversary.
F-17
<Page>
DOV PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. EQUITY TRANSACTIONS (CONTINUED)
2000 STOCK OPTION AND GRANT PLAN
The Company's 2000 Stock Option and Grant Plan (the "2000 Plan") was adopted
by the Company's board of directors on November 18, 2000. The 2000 Plan provides
for the granting of stock, stock options, restricted stock and stock
appreciation rights. Under the 2000 Plan, the Company has granted options to
certain employees and non-employee advisors. The Company's Board of Directors
administers the 2000 Plan. Options granted under the 2000 Plan have a maximum
term of 10 years. Options issued generally vest 25% on the first anniversary of
grant and 1/36 ratably over the next 36 months. The Plan also provides the
Company's board of directors with the discretion to accelerate exercisability of
any award. The 2000 Plan allows for the issuance of up to 1,040,000 shares of
common stock plus that number of shares of common stock underlying any
terminated, canceled or reacquired options granted under the 1998 Plan.
Additionally, if any of the 250,000 options granted under the non-plan option
grant are terminated, canceled or otherwise reacquired by the Company, that
number of reacquired shares will also become available for issuance under the
2000 Plan. As of December 31, 2001 there were 490,500 options available for
awards.
NON-PLAN OPTION GRANT
In connection with the commencement of employment, the Company granted an
employee stock options to acquire 250,000 shares of common stock at an exercise
price of $4.50 per share. These options vest as follows: 50% on July 19, 2002
and the remaining 50% ratably thereafter over the next six quarters. Although
these 250,000 options were neither granted under the 1998 Plan nor the 2000
Plan, the options were charged against the total number of options available for
future grants under the 2000 Plan.
During 1999, 2000 and 2001, the Company granted stock options to employees
with an exercise price less than fair market value. These options gave rise to
unearned compensation in the amount $121,250, $117,800 and $1,118,705,
respectively, as of the date of the grant, which amount is being amortized to
operations over the vesting period.
If the Company had elected to recognize compensation expense based upon the
fair value at the date of grant for awards under these plans, consistent with
the methodology prescribed by SFAS 123, the effect on the Company's net loss
would be as follows:
<Table>
<Caption>
DECEMBER 31,
----------------------------------------
1999 2000 2001
------------ ----------- -----------
Net loss attributed to common stockholders
As reported......................................... $(11,989,706) $(5,983,409) $(5,737,855)
Pro forma........................................... (12,427,263) (6,482,523) (6,494,549)
------------ ----------- -----------
Basic and diluted net loss per share applicable to
common stockholders................................. $ (4.17) $ (2.15) $ (2.15)
============ =========== ===========
</Table>
The fair value of Company's common stock options granted to directors,
officers and employees for the years ended December 31, 1999, 2000 and 2001
approximated $327,750, $704,760 and $2,854,460, respectively, and was estimated
on the date of grant using the minimum value method with
F-18
<Page>
DOV PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. EQUITY TRANSACTIONS (CONTINUED)
the following assumptions (1) risk-free interest ranging from 4.43% to 6.97%,
(2) expected lives of ten years and (3) dividend yield 0%.
NON-EMPLOYEE OPTIONS AND WARRANTS
In January 13, 2000, the Company granted warrants to an outside advisor to
purchase 25,000 shares of its common stock at an exercise price of $4.00. The
warrant vested immediately and was granted for professional services provided to
the Company and resulted in a charge to operations of $71,240 in 2000.
In August 2001, the Company issued 10,000 warrants to a non-employee
consultant. 50% of the warrants vested immediately and the remaining 50% vest on
the earlier of the Company's sale, initial public offering or February 1, 2002.
The warrants resulted in a charge to operations of $77,522 in 2001.
The Company granted 50,000 and 40,000 options to non-employees for the years
ended December 31, 2000 and 2001 respectively. These options were valued at fair
value and resulted in a charge to operations of 137,494 and 215,577 in 2000 and
2001 respectively.
Option activity for the years ended December 31, 1999, 2000 and 2001 was as
follows:
<Table>
<Caption>
WEIGHTED
AVERAGE
OPTIONS
EXERCISE
OPTIONS PRICE
--------- --------
Balance at December 31, 1998................................ 260,000 $4.42
Granted..................................................... 125,000 3.68
Exercised................................................... -- --
Forfeited................................................... -- --
Balance at December 31, 1999................................ 385,000 4.18
Granted..................................................... 360,000 4.35
Exercised................................................... (7,500) 4.17
Forfeited................................................... (9,500) 10.03
Balance at December 31, 2000................................ 728,000 4.19
Granted..................................................... 774,000 6.06
Exercised................................................... -- --
Forfeited................................................... -- --
Balance at December 31, 2001................................ 1,502,000 $5.15
</Table>
The weighted average exercise price, by price range, for all outstanding
options as of December 31, 2001 is:
<Table>
<Caption>
WEIGHTED
AVERAGE
REMAINING
CONTRACTUAL OUTSTANDING OPTIONS
LIFE OPTIONS EXERCISABLE
----------- ----------- -----------
Price range $3.68-$5.99.................................... 8.04 years 978,000 652,750
Price range $6.00-$8.99.................................... 9.52 years 479,000 --
Price range $9.00-$11.99................................... 9.85 years 45,000 --
</Table>
F-19
<Page>
DOV PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
WARRANTS
At December 31, 2001, warrants to purchase 340,323 shares of the Company's
common stock were outstanding. All outstanding warrants are fully vested except
for warrants to purchase 5,000 shares of common stock, which will be fully
vested on the earlier of the Company's sale, initial public offering or
February 1, 2002. The details of the warrants for common stock outstanding at
December 31, 2001 were as follows:
<Table>
<Caption>
NUMBER OF SHARES EXERCISE PRICE EXPIRATION DATE
- ---------------- -------------- ---------------
67,873........ $ 4.42 January 2004
75,000........ $ 5.52 January 2005
25,000........ $ 4.00 January 2005
131,250....... $ 4.04 June 2005
37,600........ $10.00 August 2006
3,600......... $10.00 October 2006
</Table>
9. EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with both the Chief
Executive Officer and the President that expire on December 10, 2004. The
agreements provide for base compensation with annual increases, benefits, the
reimbursement of expenses and the payment of incentive compensation, which will
be determined by the Company's board of directors in its sole discretion.
Additionally, if the Company should merge or consolidate with or into an
unrelated entity, sell all or substantially all of its assets, or enter into a
transaction or series of transactions the result of which 51% or more of its
capital stock is transferred to one or more unrelated third parties, both the
Chief Executive Officer and the President are entitled to receive a bonus equal
to 2% of the gross proceeds of such sale (as defined in the agreement). The
agreements also provide for benefits upon termination, disability or death. In
addition, the agreements provide for severance and acceleration of vesting of
stock options in the event of a termination after a change in control. The
agreements also contain non-competition provisions that are in effect during the
severance period.
The Company has also entered into employment agreements with several other
key employees which range in term from one to three years. The agreements
provide for a base salary subject to annual increases and incentive compensation
if the Company achieves certain milestones as defined in the agreements plus a
performance bonus as determined by the Company's board of directors. Certain of
these agreements provide for compensation and incentive compensation if the
employee is terminated without cause or if the employee terminates because of
the Company's failure to pay amounts due, demotion of title or responsibilities,
or certain changes of control.
10. SIGNIFICANT AGREEMENTS
WYETH-AYERST AGREEMENT
In May 1997, the Company entered into an option agreement with American
Cyanamid, now Wyeth-Ayerst, to license four compounds from them and paid $10,000
as an option fee. In June 1998, the Company exercised its option and entered
into a license agreement with Wyeth-Ayerst pursuant to which the Company paid
$300,000 to Wyeth-Ayerst for certain rights to four compounds, NBI-34060,
ocinaplon, bicifadine and DOV 216,303. As each of the four compounds licensed in
from Wyeth-Ayerst require the approval of the FDA prior to their
commercialization, are prior to technological feasibility
F-20
<Page>
DOV PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SIGNIFICANT AGREEMENTS (CONTINUED)
and have no alternative future use, the Company wrote off the entire amount paid
to Wyeth-Ayerst as research and development expense. The Company must pay
Wyeth-Ayerst either 25% or 35% based on the stage of development of any
sub-license revenue received for the products as well as minimum royalties based
on sales. In addition, the Company is obligated to pay up to $12,500,000 in
additional fees to Wyeth-Ayerst as it or its sub-licensees achieves certain
milestones in connection with the development of these compounds. Royalty
expense for the year ended December 31, 2001, of $1,111,122 represents amounts
due under this agreement, which includes 35% of the cash and 35% of the fair
value of the warrants at the date received from Neurocrine. Included in accrued
expenses at December 31, 2001 is $833,203 related to the 35% of the amounts
payable to Wyeth-Ayerst. This liability is adjusted to fair value and resulted
in $177,083 of expense which has been netted against other income during 2001.
BIOVAIL AGREEMENT
In January 2001, the Company entered into a license and research and
development agreement regarding DOV diltiazem with Biovail Laboratories
Incorporated ("Biovail") under which Biovail obtained an exclusive, worldwide
license to certain DOV intellectual property. The parties agreed to work
together to formulate, research and clinically develop the product. Biovail has
the exclusive right to manufacture and market the product and Biovail is
responsible for marketing and commercialization decisions. The Company retains a
co-promotion right subject to a separate co-promotion agreement to be negotiated
with Biovail. Biovail is responsible for the first $6,000,000 of research and
development costs to develop the product. Costs above $6,000,000 are shared
equally by the parties. In connection with this agreement, the Company received
a $7,500,000 fee on signing and the Company is entitled to receive milestone
payments of up to $10,000,000 upon the occurrence of certain events and a
royalty of net sales, if any. The upfront payment has been deferred and is being
amortized to revenue when earned over the estimated research and development
period of three years. Biovail will also pay the Company to perform research and
development under this agreement. Revenue includes $245,000 for the year ended
December 31, 2001 for such services.
Under the Biovail license agreement, Biovail is required to enforce the DOV
diltiazem patent and the related intellectual property, including to sue for
infringement, and the Company may be required to reimburse Biovail for legal
fees and disbursements in connection with such enforcement up to $1,500,000.
(See Note 12.)
NEUROCRINE AGREEMENT
In June 1998, the Company entered into a sublicense and development
agreement for one of the Company's compounds (NBI-34060) with Neurocrine
Biosciences, Inc. ("Neurocrine"). The Company received a sublicensing fee of
$5,000. In addition, the Company is entitled to receive milestone payments on
certain development events and royalties on net sales, if any. In the fourth
quarter of 2001, Neurocrine commenced the first pivotal trial and made a
milestone payment to the Company of $1,300,000 in cash and warrants to purchase
75,000 shares of Neurocrine common stock. The $1,300,000 in cash and fair value
of the warrants of $1,874,633 were recorded as milestone revenue in the fourth
quarter of 2001. A portion of these warrants with a fair value of $93,732 were
used to pay transaction fees. The warrants qualify as a derivative under
SFAS No. 133 and are carried on the balance sheet at their fair market value.
Any change in fair market value will be recorded as other
F-21
<Page>
DOV PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SIGNIFICANT AGREEMENTS (CONTINUED)
income or expense. During the fourth quarter of 2001, the Company recorded
$599,682 in other income related to the appreciation in fair value of these
warrants. The warrants were valued using the Black-Scholes methodology.
Significant assumptions include volatility (55%--58%), the term (five years) and
the risk-free rate of 4.5%.
In connection with this agreement, the Chief Executive Officer and President
of the Company, respectively, entered into consulting agreements with Neurocrine
in which they agreed to provide certain consulting services for an annual
service fee of $50,000 each. Subsequently, these original consulting agreements
were terminated and new consulting agreements with entities in which the Chief
Executive Officer and President retain beneficial ownership were implemented. To
date, services under these agreements have not been requested. This portion of
the Neurocrine agreement is not reflected in the financial statements of the
Company.
OPERATING LEASES
The Company leases office space under a long-term operating lease expiring
in the year 2004. The Company also leases various office and transportation
equipment under operating leases with terms ranging from one to three years.
As of December 31, 2001, the total non-cancelable future minimum rental
payments under the above-mentioned leases are as follows:
<Table>
Year ending December 31,
2002...................................................... $270,000
2003...................................................... 270,000
2004...................................................... 131,400
2005...................................................... --
--------
$671,400
========
</Table>
Rent expense incurred for office space and equipment leases amounted to
$121,847, $207,967 and $247,966 for the years ended December 31, 1999, 2000 and
2001.
Upon entering into the office lease agreement, a letter of credit of $67,000
was issued for the buildout of the office space, which expires May 31, 2002. A
certificate of deposit is being held as collateral for the letter of credit.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the convertible exchangeable promissory note outstanding
was $9,853,000 and $24,556,000 as of December 31, 2000 and 2001, respectively.
The fair value of the convertible promissory note outstanding was $3,668,000 and
$10,157,000 as of December 31, 2000 and 2001, respectively. The excess fair
value over the carrying amount is related to the increased value of the
conversion features in these notes since their issuance. The estimated
fair-value amounts have been determined using the Black-Scholes methodology. The
carrying amount of cash and cash equivalents approximates the fair value of
these instruments due to their short term nature. The fair value of the
certificate of deposit approximates its carrying value as the interest resets on
a quarterly basis.
F-22
<Page>
DOV PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. CONTINGENCIES
BIOVAIL MATTERS
In January 2001, the Company granted Biovail an exclusive worldwide license
under one of the Company's patents, the DOV diltiazem patent. Under that
agreement, the Company may be responsible for a portion of Biovail's legal
expenses up to $1,500,000, which are incurred in connection with the
infringement or defense of the DOV diltiazem patent. Following the license of
the DOV diltiazem patent to Biovail, Biovail listed it in the FDA's APPROVED
DRUG PRODUCTS WITH THERAPEUTIC EQUIVALENCE EVALUATION book, commonly known as
the "Orange Book," thereby claiming that the patent claims the drug, Tiazac,
covered by Biovail's new drug application, or NDA, 20-401. The effect of this
filing was to temporarily prevent Biovail's potential competitor, Andrx
Pharmaceuticals, Inc., from obtaining FDA approval of its abbreviated new drug
application for a generic version of Tiazac and marketing that generic drug.
Litigation in Florida federal court between Andrx and Biovail ensued, including
a patent infringement action brought by Biovail against Andrx in April 2001. The
Company is not a party to the litigation.
In the litigation, Andrx has sought relief under various causes of action,
including violations of antitrust laws and patent invalidity. While many of
Andrx's claims were dismissed by the court in September 2001, some of Andrx's
claims were not. The surviving claims include: a claim to invalidate the
Company's license agreement with Biovail; a request that Andrx's generic drug
does not infringe the DOV diltiazem patent; and a request for a declaration that
the patent is invalid. Andrx's motion for summary judgment on the latter two
open claims was denied by the court in November 2001. Currently, it is not
feasible to predict the outcome of this litigation. The Company believes that
the DOV diltiazem patent is valid and there is no reasonable basis to invalidate
the Biovail license agreement. However, the Biovail license agreement and the
DOV diltiazem patent are material to the Company thus, any unfavorable outcome
could have a material adverse effect on the Company's financial position,
liquidity and results of operations. Additionally, as of December 31, 2001,
Biovail has not asserted any claim for reimbursement of their legal expenses.
The Company believes that any legal expenses incurred by Biovail for this matter
are not subject to reimbursement by the Company under the license agreement and
no provision for the reimbursement of any such costs is included in the
financial statements as of December 31, 2001.
Related to the Andrx/Biovail litigation, on March 8, 2001, the Company
received a letter from the Federal Trade Commission, or FTC, stating that it was
conducting a nonpublic investigation of whether Biovail engaged in unfair
competition. The stated purpose of the FTC letter was to seek from the Company,
on a voluntary, confidential basis, disclosure to the FTC of certain requested
information related to the Biovail license agreement. The Company has cooperated
with the FTC in its requests.
In December 2001, the FTC staff advised the Company informally that it
intended to seek a formal complaint against Biovail, charging it with violations
of the Federal Trade Commission Act and other counts. The Company has met with
FTC staff and agreed informally not to object to a court order, if the FTC
achieves one, that changes Biovail's license to use our patent from exclusive to
non-exclusive. In return, the FTC would not name the Company as a defendant in
the case against Biovail. If the FTC ultimately approves the informal agreement,
the Company does not expect the resolution of this matter to have a material
impact on its financial position, liquidity or results of operations. It is not
feasible to predict the outcome of the FTC complaint if the FTC does not
ultimately approve the informal agreement. The Biovail license agreement and the
DOV diltiazem
F-23
<Page>
DOV PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. CONTINGENCIES (CONTINUED)
patent are material to the Company and thus any unfavorable outcome could have a
material adverse effect on the Company's financial position, liquidity and
results of operations.
ELAN MATTER
Under the terms of the Company's joint venture agreements with Elan, Elan's
consent is required with respect to certain transactions entered into by the
Company. In the event that the Company does not obtain Elan's consent when it is
required, Elan has the right to terminate the license agreement with Nascime. In
January 2001, the Company entered into a license, research and development
agreement with Biovail, which is a named technological competitor of Elan under
Elan's license agreement with Nascime. The Company does not believe that Elan's
consent to the Biovail agreement was required and the Company does not believe
that Elan is entitled to terminate its license agreement with Nascime as a
result of the Company entering into the Biovail license agreement without Elan's
consent. Nonetheless, the Company sought consent from Elan, which Elan refused
to grant. While Elan has neither asserted that its consent was required, nor
objected to the Company entering into the Biovail license agreement or
threatened to terminate its license agreement with Nascime, it has stated that
it reserves its rights with respect to this issue. It is not feasible to predict
what the outcome would be if Elan were to seek to terminate its agreement based
on the Company's failure to obtain its consent. The Elan license with Nascime is
material to the Company and if the license were to be terminated, it could have
a material adverse impact on the Company's financial position and results of
operations.
F-24
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
DOV (Bermuda), Ltd.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, consolidated statements of changes in
stockholders' deficit and consolidated statements of cash flows present fairly,
in all material respects, the financial position of DOV (Bermuda), Ltd. (a
development stage company) and subsidiary (the "Company") as of December 31,
2000 and 2001, and the results of their operations and their cash flows for the
period from inception (January 21, 1999) through December 31, 1999 and the years
ended December 31, 2000 and 2001, and for the period from inception
(January 21, 1999) through December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. 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 of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers
Chartered Accountants
January 23, 2002
Hamilton, Bermuda
F-25
<Page>
DOV (BERMUDA), LTD.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
AS OF DECEMBER 31,
-------------------------
2000 2001
----------- -----------
ASSETS
Current assets
Cash and cash equivalents............................... $ 18,186 $ 7,623
Other current assets.................................... 3,980 --
----------- -----------
Total current assets.................................. $ 22,166 $ 7,623
=========== ===========
LIABILITIES
Current liabilities
Accrued liabilities..................................... $ 21,407 $ 29,863
Due to related parties.................................. 996,953 1,854,045
----------- -----------
Total current liabilities............................. 1,018,360 1,883,908
----------- -----------
Commitments and contingencies
Stockholders' deficit
Class A voting common stock, $1.00 par value; 16,020
shares authorized; 16,020 shares issued and
outstanding........................................... 16,020 16,020
Class B non-voting common stock, $1.00 par value; 3,980
shares authorized; 3,980 shares issued and
outstanding........................................... 3,980 3,980
Additional paid-in capital.............................. 12,764,227 17,798,642
Deficit accumulated during development stage............ (13,780,421) (19,694,927)
----------- -----------
Total stockholders' deficit........................... (996,194) (1,876,285)
----------- -----------
Total liabilities and stockholders' deficit......... $ 22,166 $ 7,623
=========== ===========
</Table>
The accompanying notes are an integral part of these financial statements.
F-26
<Page>
DOV (BERMUDA), LTD.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
PERIOD FROM PERIOD FROM
JANUARY 21, JANUARY 21,
1999 1999
(DATE OF (DATE OF
INCEPTION) INCEPTION)
THROUGH YEARS ENDED DECEMBER 31, THROUGH
DECEMBER 31, ------------------------- DECEMBER 31,
1999 2000 2001 2001
------------ ----------- ----------- ------------
OPERATING EXPENSES
Purchased in-process research and
development (Note 5)................. $ 8,271,448 $ -- $ -- $ 8,271,448
Research and development expenses
(Note 4)............................. 1,872,855 3,580,421 5,891,632 11,344,908
General and administrative expenses.... 32,067 31,461 23,351 86,879
------------ ----------- ----------- ------------
Total operating expenses............. 10,176,370 3,611,882 5,914,983 19,703,235
------------ ----------- ----------- ------------
Interest income...................... 184 7,647 477 8,308
------------ ----------- ----------- ------------
Net loss........................... $(10,176,186) $(3,604,235) $(5,914,506) $(19,694,927)
============ =========== =========== ============
</Table>
The accompanying notes are an integral part of these financial statements.
F-27
<Page>
DOV (BERMUDA), LTD.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE PERIODS FROM INCEPTION (JANUARY 21, 1999) THROUGH DECEMBER 31, 2001
<Table>
<Caption>
DEFICIT
COMMON STOCK COMMON STOCK ACCUMULATED
CLASS A CLASS B ADDITIONAL DURING
------------------- ------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE TOTAL
-------- -------- -------- -------- ----------- ------------ -----------
Contributed at inception
(January 21, 1999)........... 16,020 $16,020 3,980 $3,980 $ 8,251,448 $ -- $ 8,271,448
Capital contribution........... -- -- -- -- 1,600,957 -- 1,600,957
Net loss....................... -- -- -- -- -- (10,176,186) (10,176,186)
------ ------- ----- ------ ----------- ------------ -----------
Balance at December 31, 1999... 16,020 16,020 3,980 3,980 9,852,405 (10,176,186) (303,781)
Capital contribution........... -- -- -- -- 2,911,822 -- 2,911,822
Net loss....................... -- -- -- -- -- (3,604,235) (3,604,235)
------ ------- ----- ------ ----------- ------------ -----------
Balance at December 31, 2000... 16,020 16,020 3,980 3,980 12,764,227 (13,780,421) (996,194)
Capital contribution........... -- -- -- -- 5,034,415 -- 5,034,415
Net loss....................... -- -- -- -- -- (5,914,506) (5,914,506)
------ ------- ----- ------ ----------- ------------ -----------
Balance at December 31, 2001... 16,020 $16,020 3,980 $3,980 $17,798,642 $(19,694,927) $(1,876,285)
====== ======= ===== ====== =========== ============ ===========
</Table>
The accompanying notes are an integral part of these financial statements.
F-28
<Page>
DOV (BERMUDA), LTD.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
PERIOD FROM PERIOD FROM
JANUARY 21, JANUARY 21,
1999 1999
(DATE OF (DATE OF
INCEPTION) INCEPTION)
THROUGH YEARS ENDED DECEMBER 31, THROUGH
DECEMBER 31, ------------------------- DECEMBER 31,
1999 2000 2001 2001
------------ ----------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................... $(10,176,186) $(3,604,235) $(5,914,506) $(19,694,927)
Adjustments to reconcile net loss to
net cash used in operating activities
Purchased in-process research and
development.......................... 8,271,448 -- -- 8,271,448
Changes in operating assets and
liabilities
Other current assets............... -- (3,980) 3,980 --
Accrued liabilities................ 20,000 1,407 8,456 29,863
Due to related parties............. 284,299 712,654 857,092 1,854,045
------------ ----------- ----------- ------------
Net cash used in operating
activities......................... (1,600,439) (2,894,154) (5,044,978) (9,539,571)
------------ ----------- ----------- ------------
CASH FLOW FROM INVESTING ACTIVITY
Purchase of license agreements......... (10,000,000) -- -- (10,000,000)
------------ ----------- ----------- ------------
Net cash used by investing
activity........................... (10,000,000) -- -- (10,000,000)
------------ ----------- ----------- ------------
CASH FLOW FROM FINANCING ACTIVITY
Capital contributions.................. 1,600,957 2,911,822 5,034,415 9,547,194
Proceeds from sale of shares........... 10,000,000 -- -- 10,000,000
------------ ----------- ----------- ------------
Net cash provided by financing
activities......................... 11,600,957 2,911,822 5,034,415 19,547,194
------------ ----------- ----------- ------------
Increase (decrease) in cash and cash
equivalents.............................. 518 17,668 (10,563) 7,623
------------ ----------- ----------- ------------
Cash and cash equivalents--beginning of
period................................... -- 518 18,186 --
------------ ----------- ----------- ------------
Cash and cash equivalents--end of
period............................. $ 518 $ 18,186 $ 7,623 $ 7,623
============ =========== =========== ============
</Table>
The accompanying notes are an integral part of these financial statements.
F-29
<Page>
DOV (BERMUDA), LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
DOV (Bermuda), Ltd. (the "Company") was incorporated on January 21, 1999 in
Bermuda. The Company is owned jointly by Elan International Services, Ltd.
("EIS"), a wholly owned subsidiary of Elan Corporation, plc ("Elan"), and DOV
Pharmaceutical, Inc. ("DOV"). The primary objective of the Company is to carry
on the business of the development, testing, registration, manufacturing,
commercialization, and licensing of two pharmaceutical products (as defined in
the Joint Development and Operating Agreement ("JDOA") dated January 21, 1999
between DOV, EIS, the Company and its wholly-owned subsidiary Nascime, Ltd.
("Nascime")). The focus of the collaborative venture is to develop the products
using the intellectual property of Elan and DOV pursuant to the JDOA.
DOV owns 80.1% of the capital stock of the Company and EIS owns 19.9% of the
capital stock of the Company. DOV and EIS have preemptive rights to participate
in any equity offering by the Company in order to maintain their respective
equity positions. The Company shares are subject to certain transfer
restrictions. EIS and DOV may provide to the Company, by way of contributed
surplus or loan, as agreed, any additional funding to develop the Company's
products pursuant to the JDOA. This funding is to be provided on a pro-rata
basis.
To form the Company, Elan provided DOV with both equity and debt financing.
This included DOV issuing a convertible exchangeable promissory note, common
stock, preferred stock and warrants to Elan.
For financial reporting purposes the Company has reflected the investments
using carry-over basis of the investors. As such, values recorded for the
investment by DOV and Elan were based on DOV's basis in its contribution to the
Company. This was determined as the fair value of the common stock, preferred
stock, convertible exchangeable promissory note and warrants issued by DOV to
Elan in connection with the transaction of $11,271,448, net of cash retained by
DOV of $3,000,000, which was $8,271,448. No basis was assigned to the
contribution from Elan as the cash contributed was used to purchase technology
from Elan (see Note 5).
While each investor contributed $500 per share for $10,000,000 in total
proceeds to the Company at inception, the Company determined that the amount
assignable to the initial equity was $8,271,448. As a result, the Company
recorded the issuance of the common shares at their par value with $8,251,448
recorded as additional paid-in capital.
Elan has the right to exchange the principal amount of the convertible
exchangeable promissory note issued by DOV for additional Class B shares in the
Company such that the ownership by DOV and Elan would become equal.
LICENSES
Pursuant to the formation of DOV Bermuda and Nascime, Elan granted Nascime a
license for $10,000,000 to use its proprietary controlled release formulations
in connection with the development and commercialization of the products. For
its part, DOV has granted Nascime a sublicense and license for $5,000 to use the
oral formulations of bicifadine (analgesic) and ocinaplon (anxiolytic). DOV has
retained the rights to intravenous formulations of these products.
Under the licenses with DOV and Elan, Nascime will be required to make
royalty payments to DOV and Elan based on net sales, if any. In addition,
Nascime will be required to pay DOV up to
F-30
<Page>
DOV (BERMUDA), LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
$7,500,000 if Nascime achieves certain developmental milestones in connection
with the development of the products.
The license agreements terminate on a product-by-product and
country-by-country basis 15 years from the first product sale date or the last
to expire of the patents covering the product, whichever is later. Elan has the
right to terminate its license if a named technological competitor of Elan
acquires a ten percent interest in DOV or the Company, or becomes materially
engaged in the business or development of DOV or the Company. Upon termination
of the joint venture or the licenses to the joint venture, all intellectual
property rights Elan and DOV have licensed to the joint venture terminate.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. These principles
require that the financial statements be prepared on a going concern basis. The
Company's ability to continue as a going concern is entirely dependent upon the
funds it receives from its stockholders in connection with the stockholders'
respective obligations to fund the Company's operations (see Note 1). DOV and
Elan have committed to provide funding to the Company through at least
December 31, 2002.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiary, Nascime. All significant intercompany transactions and
balances have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
90 days or less when purchased to be cash equivalents.
RESEARCH AND DEVELOPMENT EXPENSES
Research costs are charged as an expense of the period in which they are
incurred.
USE OF ESTIMATES
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amount of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
FOREIGN EXCHANGE
Both the Company and Nascime use the United States dollar as their
functional currency and substantially all of their transactions are in United
States dollars.
F-31
<Page>
DOV (BERMUDA), LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEGMENT AND GEOGRAPHIC INFORMATION
The Company has determined it has one reportable operating segment as
defined by Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information."
RISKS AND UNCERTAINTIES
The Company is subject to risks common to companies in the biopharmaceutical
industry, including, but not limited to, successful commercialization of product
candidates, protection of proprietary technology, reliance on stockholders to
fund operations, and compliance with FDA regulations.
3. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) equals net loss for all periods.
4. RELATED PARTY TRANSACTIONS
At the end of the period, the amount due to related parties represents costs
for research and development that are subcontracted to DOV and Elan. For the
periods ended December 31, 1999, 2000 and 2001 research and development expenses
of $1,363,376, $1,958,367 and $4,124,366, respectively, were charged by DOV and
$509,479, $1,622,054 and $1,767,266 were charged by Elan, which represent costs
charged by DOV and Elan for research and development services performed, as
agreed to by the parties under the agreements. At the end of 2000 and 2001, the
Company owed $554,674 and $1,330,821 to DOV and $442,279 and $523,224 to Elan.
5. IN-PROCESS RESEARCH AND DEVELOPMENT
During January 1999, the Company entered into license arrangements with Elan
and DOV to acquire rights to certain intellectual property (as described in
Note 1). The license acquired from DOV related to early stage technology that,
in the opinion of management, had not reached technological feasibility as it
will ultimately require regulatory approval prior to commercialization. In
addition, management concluded that the license from Elan was only to be used in
conjunction with DOV's compounds and had no alternative future uses. Therefore,
all the license fees were deemed to be research and development expense and were
charged to expense when incurred. (See Note 2.)
6. TAXES
BERMUDA
Under current Bermuda law the Company is not required to pay any taxes in
Bermuda on either income or capital gains. The Company has received an
undertaking from the Minister of Finance in Bermuda that in the event of such
taxes being imposed, the Company will be exempted from taxation until the year
2016.
F-32
<Page>
DOV (BERMUDA), LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. TAXES (CONTINUED)
IRELAND
Nascime is not subject to Irish corporation tax based on its current
business activities. As such, no amounts have been provided for any such tax.
7. CONTINGENCIES
As described in Note 1, Elan has certain termination rights under the
license agreement with Nascime. In January 2001, DOV entered into a license,
research and development agreement with Biovail Laboratories Incorporated
("Biovail"), which is a named technological competitor of Elan under the license
agreement with Nascime. DOV does not believe that Elan's consent to the Biovail
agreement was required and neither DOV nor the Company believes that Elan is
entitled to terminate its license agreement with Nascime as a result of DOV
entering into the Biovail license agreement without Elan's consent. Nonetheless,
DOV sought consent from Elan, which Elan refused to grant. While Elan has
neither asserted that its consent was required, nor objected to the DOV entering
into the Biovail license agreement or threatened to terminate its license
agreement with Nascime, it has stated that it reserves its rights with respect
to this issue. It is not feasible to predict what the outcome would be if Elan
were to seek to terminate its agreement based on DOV's failure to receive its
consent. The Elan license with Nascime is material to the Company and if the
license were to be terminated, it would have a material adverse impact on the
Company's financial position and results of operations.
F-33
<Page>
Shares
[LOGO]
Common Stock
------------------
PROSPECTUS
, 2002
---------------------
JOINT BOOKRUNNING MANAGERS
LEHMAN BROTHERS
CIBC WORLD MARKETS
----------------
LAZARD
FIDELITY CAPITAL MARKETS
<Page>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses payable by us in
connection with this offering (excluding underwriting discounts and
commissions):
<Table>
<Caption>
NATURE OF EXPENSE AMOUNT
- ----------------- ----------
SEC registration fee........................................ $ 7,935
NASD filing fee............................................. 9,125
Nasdaq National Market listing fee.......................... *
Accounting fees and expenses................................ *
Legal fees and expenses..................................... *
Printing expenses........................................... *
Blue sky qualification fees and expenses.................... *
Transfer Agent's fee........................................ *
Miscellaneous............................................... *
----------
Total................................................... $ *
==========
</Table>
The amounts set forth above, except for the Securities and Exchange Commission,
National Association of Securities Dealers, Inc. and Nasdaq National Market
fees, are in each case estimated.
- ------------------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with Section 145 of the Delaware General Corporation Law,
Article IX of our certificate of incorporation provides that none of our
directors will be personally liable to us or our stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability
(1) for any breach of the director's duty of loyalty to us or our stockholders,
(2) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, (3) with regard to unlawful dividend
payments, stock repurchases or redemptions, or (4) for any transaction from
which the director derived any improper personal benefit.
Article V of our by-laws provides for our indemnification for our past or
present directors, officers, and members of our scientific advisory board
against expenses, judgments, penalties, fines and amounts reasonably paid in
settlement incurred in connection with any threatened, pending or completed
legal proceeding in which any such person is involved by reason of the fact that
such person is or was a director or officer or member of our scientific advisory
board if such person acted in good faith and in a manner that such person
reasonably believed to be in or not opposed to our best interests, and with
respect to any criminal proceeding, if such person had no reasonable cause to
believe his or her conduct was unlawful. Such person shall also be indemnified
in connection with a legal proceeding initiated by such person only if the legal
proceeding was authorized by our board of directors, unless such legal
proceeding was brought to enforce such person's rights to indemnification or, in
the case of our directors, advancement of certain expenses in accordance with
our by-laws. Article V of our by-laws also provides, at the discretion of our
board, similar indemnification for past or present employees or agents who have
not served as a director or officer. The by-laws allow us to maintain insurance,
at our expense, to protect us or any of the parties mentioned in this section
against liability of any character asserted against or incurred by us or any of
the parties mentioned in this section, whether or not we would have the power to
indemnify such person against such liability under the Delaware General
Corporation Law or the provisions of Article V of the by-laws.
II-1
<Page>
Any amendment to or repeal of these provisions will not eliminate or reduce
the effect of these provisions in respect of any acts or omissions occurring
prior to such amendment or repeal. If the Delaware General Corporation Law is
amended to provide for further limitations on the personal liability of
directors of corporations, then the personal liability of our directors will be
further limited to the greatest extent permitted by the Delaware General
Corporation Law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below in reverse chronological order is information regarding the
number of shares of capital stock, options and warrants issued by us since 1999.
Also included is the consideration if any received by us for the securities.
There was no public offering in any such transaction and we believe that
each transaction was exempt from the registration requirements of the Securities
Act of 1933 by reason of Regulation D and Section 4(2) of the 1933 Act, based on
the private nature of the transactions and the financial sophistication of the
purchasers, all of whom had access to complete information concerning us and
acquired the securities for investment and not with a view to the distribution
thereof. In addition, we believe that the transactions described below with
respect to the issuance of option grants to our employees and directors and
exercise of such options were exempt from registration requirements of the 1933
Act by reason of Section 4(2) or Rule 701 promulgated thereunder.
(a) ISSUANCE OF COMMON STOCK
(i) On January 3, 2001, we issued 7,500 shares of our common stock to an
employee upon the exercise of stock options at an exercise price of
$31,250.
(ii) From December 1999 to September 2000 we issued 10,000 shares of our
common stock to a consultant as compensation for services rendered.
(iii) On January 21, 1999 we issued 99,547 shares of our common stock to the
holders of our series A convertible preferred shares upon conversion
thereof, representing a per share price of $4.42, equaling an aggregate
price of $440,000.
(iv) On January 21, 1999 we issued 324,090 shares of our common stock for an
aggregate purchase price of $1,432,078.
(b) ISSUANCE OF PREFERRED STOCK. The series C and D convertible preferred stock
listed in this section will automatically convert upon completion of this
offering. The conversion price per share for common shares underlying the
series B, C and D preferred stock is $4.42, $4.04 and $10, respectively.
(i) On October 15, 2001, we issued 120,000 shares of our series D
convertible preferred for an aggregate purchase price of $1,200,000.
(ii) On August 30, 2001, we issued 920,000 shares of our series D
convertible preferred stock for an aggregate purchase price of
$9,200,000.
(iii) On June 20, 2000, we issued 500,000 shares of our series C convertible
preferred stock for an aggregate purchase price of $2,020,000.
(iv) On May 31, 2000, we issued 1,250,000 shares of our series C convertible
preferred stock for an aggregate purchase price of $5,050,000.
(v) On January 21, 1999 we issued 354,643 shares of our series B convertible
preferred stock for an aggregate purchase price of $1,567,522.
II-2
<Page>
(c) ISSUANCE OF STOCK OPTIONS
(i) As of December 31, 2001, options to purchase 554,000 shares of common
stock were outstanding under our 2000 Stock Option and Grant Plan, of
which options to purchase 10,288 shares are exercisable within 60 days
of such date. All such options were granted between October 2000 and
November 2001 to officers, directors and employees.
(ii) As of December 31, 2001, options to purchase 698,000 shares of common
stock were outstanding under our 1998 Stock Option Plan, all of which
are exercisable within 60 days of such date. All such options were
granted between December 1998 and August 2000 to our officers,
directors, consultants and advisers. No future grants of stock options
can be made under the 1998 Stock Option Plan.
(iii) On January 19, 2001, we issued 250,000 options to purchase common stock
to an employee.
(d) ISSUANCE OF WARRANTS
(i) On October 15, 2001, we issued warrants to purchase 3,600 shares of our
common stock at an initial exercise price of $10 per share to financial
advisors in exchange for services rendered.
(ii) On August 30, 2001, we issued warrants to purchase 37,600 shares of our
common stock at an initial exercise price of $10 per share to financial
advisors in exchange for services rendered.
(iii) On June 20, 2000, we issued warrants to purchase an aggregate of
131,250 shares of our common stock at an initial exercise price of
$4.04 per share to a financial advisor for services rendered.
(iv) On January 17, 2000, we issued warrants to purchase 25,000 shares of
our common stock at an initial exercise price of $4.00 per share to a
consultant in connection with advisory and financial consulting
services.
(v) On January 21, 1999 we issued warrants to purchase an aggregate of
67,873 shares of our common stock at an initial exercise price of $4.42
per share to a financial advisor for services rendered.
(vi) On January 21, 1999 we issued warrants to purchase 75,000 shares of our
common stock at an initial exercise price of $5.52 per share to Elan
International Services, Ltd., in connection with a private offering
contemporaneous with the joint venture agreement.
(e) ISSUANCE OF NOTES
(i) On January 21, 1999, we issued a convertible exchangeable promissory
note to Elan International Services, Ltd. in the principal amount of
$8,010,000, in connection with establishing a joint venture with Elan
International Services, Ltd. The note can be converted, together with
accrued interest thereon, into that number of shares of our common stock
equal to the sum of the principal amount of the note plus the interest
accrued thereon divided by the conversion rate of $6.44. Alternatively,
Elan International Services, Ltd. can exchange the outstanding principal
balance of the note for that number of shares of DOV Bermuda, Ltd., the
joint venture entity, that will increase its equity shares in DOV
Bermuda, Ltd. from 19.9% to 50%. The convertible exchangeable promissory
note may not be prepaid without the consent of Elan International, Ltd.
As of December 31, 2001, the outstanding principal balance and accrued
unpaid interest on the note was approximately $9.8 million.
(ii) On January 21, 1999 we issued a convertible promissory note to Elan
International Services, Ltd. in connection with establishing a line of
credit to finance our joint venture with Elan International
Services, Ltd. The note can be converted, together with accrued
interest thereon, into that number of shares of our common stock equal
to the sum of the amount
II-3
<Page>
that is outstanding under the line of credit plus interest accrued
thereon on drawdowns divided by the conversion rate of $5.52. The
convertible promissory note may not be prepaid without the consent of
Elan International Services, Ltd. As of December 31, 2001, the
outstanding principal balance and accrued unpaid interest on the line
of credit was approximately $3.0 million.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBIT INDEX. The following is a complete list of exhibits filed or
incorporated by reference as part of this Registration Statement.
<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
1.1 Form of Underwriting Agreement.*
3.1 Second Amended and Restated Certificate of Incorporation of
Registrant.
3.2 Form of Third Amended and Restated Certificate of
Incorporation of Registrant.*
3.3 By-Laws of Registrant.
3.4 Form of Amended and Restated By-laws of Registrant.*
4.1 See Exhibits 3.1 and 3.3 for provisions of Second Amended
and Restated Certificate of Incorporation and By-laws of the
Registrant defining rights of the holders of Common Stock of
Registrant.
4.2 Specimen certificate for shares of Common Stock, $0.0001 par
value, of Registrant.*
5.1 Opinion of Goodwin Procter LLP as to the legality of
securities offered.*
10.1 Lease Agreement dated as of May 24, 1999, by and between
Continental Investors, L.P. and Registrant for commercial
premises located at 433 Hackensack Avenue, Hackensack, New
Jersey.
10.2 License Agreement dated as of May 29, 1998, by and between
Registrant and American Cyanamid Company.*
10.3 Sublicense and Development Agreement dated as of June 30,
1998, by and between Registrant and Neurocrine
Biosciences, Inc.+
10.4 License, Research and Development Agreement dated as of
January 12, 2001, by and between Registrant and Biovail
Laboratories Incorporated.*
10.5 Guaranty dated as of January 12, 2001, by Biovail
Corporation in favor of Registrant.
10.6 Securities Purchase Agreement dated as of January 21, 1999,
by and between Registrant and Elan International Services.
10.7 Joint Development and Operating Agreement dated as of
January 21, 1999, by and among Registrant, Elan Corporation,
plc, Elan International Services, Ltd., DOV Bermuda, Ltd.
(formerly known as DOV Newco, Ltd.), and Nascime Limited.*
10.8 Letter Agreement dated as of January 21, 1999, by and among
Registrant, Elan Corporation, plc, Elan International
Services, Ltd., DOV Bermuda, Ltd. (formerly known as DOV
Newco, Ltd.), and Nascime Limited signed in connection with
the Joint Development and Operating Agreement referred to in
10.7.
10.9 License Agreement dated as of January 20, 1999, by and
between Registrant and Nascime Limited.*
10.10 License Agreement dated as of January 20, 1999, by and
between Nascime Limited and Elan Corporation, plc.*
</Table>
II-4
<Page>
<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
10.11 Convertible Exchangeable Promissory Note of Registrant
issued to Elan International Services, Ltd.
10.12 Convertible Promissory Note of Registrant issued to Elan
International Services, Ltd.
10.13 Registration Rights Agreement dated as of January 21, 1999,
by and between Registrant and Elan International
Services, Ltd. for shares of common stock received pursuant
to the Securities Purchase Agreement referred to in 10.6.
10.14 Registration Rights Agreement dated as of January 21, 1999,
by and among Registrant, DOV Bermuda, Ltd. (formerly known
as DOV Newco, Ltd.), and Elan International Services, Ltd.
for shares of common stock received pursuant to the Joint
Development and Operating Agreement referred to in 10.7.
10.15 Preferred Stock Purchase Agreement dated as of June 20,
2000, by and among Registrant and Series C Investors.
10.16 Registration Rights Agreement dated as of June 20, 2000, by
and between Registrant and Series C Investors.
10.17 Stock Purchase Agreement dated as of August 30, 2001, by and
among Registrant and Series D Investors.
10.18 Amended and Restated Stockholders Agreement dated as of
August 30, 2001 by and among Registrant, Arnold Lippa,
Bernard Beer, Series C Investors and Series D Investors.
10.19 Registration Rights Agreement dated as of August 30, 2001 by
and among Registrant, Series C Investors and Series D
Investors.
10.20 Form of Warrant Agreement.
10.21 1998 Stock Option Plan.
10.22 2000 Stock Option and Grant Plan.
10.23 Stock Option Agreement dated as of July 10, 2000 between
Registrant and Philip Skolnick for the grant of 250,000
stock options.*
10.24 Employment Agreement dated as of December 10, 1998, between
Registrant and Arnold Lippa.
10.25 Extension of Employment Agreement dated as of December 10,
2001, between Registrant and Arnold Lippa.*
10.26 Employment Agreement dated as of December 10, 1998, between
Registrant and Bernard Beer.
10.27 Extension of Employment Agreement dated as of December 10,
2001, between Registrant and Bernard Beer.*
10.28 Employment Agreement dated as of July 10, 2000, between
Registrant and Philip Skolnick.
10.29 Employment Agreement dated as of July 1, 1999, and amended
by that certain Letter Agreement dated January 23, 2002,
between Registrant and Stephen Petti.*
10.30 Employment Agreement dated as of July 12, 1999, and amended
by that certain Leter Agreement dated Janury 23, 2002,
between Registrant and Paul Schiffrin.*
21.1 Subsidiaries of Registrant.
23.1 Consent of Goodwin Procter LLP (included in Exhibit 5.1).
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of PricewaterhouseCoopers.
24.1 Power of Attorney (see Signature Page).
</Table>
II-5
<Page>
(b) Financial Statement Schedules
All schedules have been omitted because they are not required or because the
required information is given in the financial statements or the notes to those
statements.
- ------------------------
+ Incorporated by reference to Exhibit 10.3 to Neurocrine's Quarterly Report on
Form 10-Q filed with the Securities and Exchange Commission on August 14,
1998.
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.
II-6
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Hackensack, New Jersey,
on January 28, 2002.
<Table>
DOV PHARMACEUTICAL, INC.
By: /s/ ARNOLD S. LIPPA
-----------------------------------------
Arnold S. Lippa
CHIEF EXECUTIVE OFFICER
</Table>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each individual whose signature appears
below constitutes and appoints each of Arnold S. Lippa and Bernard Beer such
person's true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for such person and in such person's name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement (or to any
other registration statement for the same offering that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act), and to file the same,
with all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto each said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that any said attorney-in-fact and agent, or any
substitute or substitutes of any of them, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------ ------------------
/s/ ARNOLD S. LIPPA Chief Executive Officer and Director
--------------------------------- (Principal Executive Officer) January 28, 2002
Arnold S. Lippa
/s/ BERNARD BEER
--------------------------------- President and Director January 28, 2002
Bernard Beer
/s/ BARBARA G. DUNCAN Chief Financial Officer
--------------------------------- (Principal Financial and Accounting January 28, 2002
Barbara G. Duncan Officer)
/s/ PATRICK ASHE
--------------------------------- Director January 28, 2002
Patrick Ashe
/s/ ZOLA HOROVITZ
--------------------------------- Director January 28, 2002
Zola Horovitz
/s/ MARK LAMPERT
--------------------------------- Director January 28, 2002
Mark Lampert
</Table>
II-7
<Page>
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
1.1 Form of Underwriting Agreement.*
3.1 Second Amended and Restated Certificate of Incorporation of
Registrant.
3.2 Form of Third Amended and Restated Certificate of
Incorporation of Registrant.*
3.3 By-Laws of Registrant.
3.4 Form of Amended and Restated By-laws of Registrant.*
4.1 See Exhibits 3.1 and 3.3 for provisions of Second Amended
and Restated Certificate of Incorporation and By-laws of the
Registrant defining rights of the holders of Common Stock of
Registrant.
4.2 Specimen certificate for shares of Common Stock, $0.0001 par
value, of Registrant.*
5.1 Opinion of Goodwin Procter LLP as to the legality of
securities offered.*
10.1 Lease Agreement dated as of May 24, 1999, by and between
Continental Investors, L.P. and Registrant for commercial
premises located at 433 Hackensack Avenue, Hackensack, New
Jersey.
10.2 License Agreement dated as of May 29, 1998, by and between
Registrant and American Cyanamid Company.*
10.3 Sublicense and Development Agreement dated as of June 30,
1998, by and between Registrant and Neurocrine
Biosciences, Inc.+
10.4 License, Research and Development Agreement dated as of
January 12, 2001, by and between Registrant and Biovail
Laboratories Incorporated.*
10.5 Guaranty dated as of January 12, 2001, by Biovail
Corporation in favor of Registrant.
10.6 Securities Purchase Agreement dated as of January 21, 1999,
by and between Registrant and Elan International Services.
10.7 Joint Development and Operating Agreement dated as of
January 21, 1999, by and among Registrant, Elan Corporation,
plc, Elan International Services, Ltd., DOV Bermuda, Ltd.
(formerly known as DOV Newco, Ltd.), and Nascime Limited.*
10.8 Letter Agreement dated as of January 21, 1999, by and among
Registrant, Elan Corporation, plc, Elan International
Services, Ltd., DOV Bermuda, Ltd. (formerly known as DOV
Newco, Ltd.), and Nascime Limited signed in connection with
the Joint Development and Operating Agreement referred to in
10.7.
10.9 License Agreement dated as of January 20, 1999, by and
between Registrant and Nascime Limited.*
10.10 License Agreement dated as of January 20, 1999, by and
between Nascime Limited and Elan Corporation, plc.*
10.11 Convertible Exchangeable Promissory Note of Registrant
issued to Elan International Services, Ltd.
10.12 Convertible Promissory Note of Registrant issued to Elan
International Services, Ltd.
10.13 Registration Rights Agreement dated as of January 21, 1999,
by and between Registrant and Elan International
Services, Ltd. for shares of common stock received pursuant
to the Securities Purchase Agreement referred to in 10.6.
</Table>
II-8
<Page>
<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
10.14 Registration Rights Agreement dated as of January 21, 1999,
by and among Registrant, DOV Bermuda, Ltd. (formerly known
as DOV Newco, Ltd.), and Elan International Services, Ltd.
for shares of common stock received pursuant to the Joint
Development and Operating Agreement referred to in 10.7.
10.15 Preferred Stock Purchase Agreement dated as of June 20,
2000, by and among Registrant and Series C Investors.
10.16 Registration Rights Agreement dated as of June 20, 2000, by
and between Registrant and Series C Investors.
10.17 Stock Purchase Agreement dated as of August 30, 2001, by and
among Registrant and Series D Investors.
10.18 Amended and Restated Stockholders Agreement dated as of
August 30, 2001 by and among Registrant, Arnold Lippa,
Bernard Beer, Series C Investors and Series D Investors.
10.19 Registration Rights Agreement dated as of August 30, 2001 by
and among Registrant, Series C Investors and Series D
Investors.
10.20 Form of Warrant Agreement.
10.21 1998 Stock Option Plan.
10.22 2000 Stock Option and Grant Plan.
10.23 Stock Option Agreement dated as of July 10, 2000 between
Registrant and Philip Skolnick for the grant of 250,000
stock options.*
10.24 Employment Agreement dated as of December 10, 1998, between
Registrant and Arnold Lippa.
10.25 Extension of Employment Agreement dated as of December 10,
2001, between Registrant and Arnold Lippa.*
10.26 Employment Agreement dated as of December 10, 1998, between
Registrant and Bernard Beer.
10.27 Extension of Employment Agreement dated as of December 10,
2001, between Registrant and Bernard Beer.*
10.28 Employment Agreement dated as of July 10, 2000, between
Registrant and Philip Skolnick.
10.29 Employment Agreement dated as of July 1, 1999, and amended
by that certain Letter Agreement dated January 23, 2002,
between Registrant and Stephen Petti.*
10.30 Employment Agreement dated as of July 12, 1999, and amended
by that certain Leter Agreement dated Janury 23, 2002,
between Registrant and Paul Schiffrin.*
21.1 Subsidiaries of Registrant.
23.1 Consent of Goodwin Procter LLP (included in Exhibit 5.1).
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of PricewaterhouseCoopers.
24.1 Power of Attorney (see Signature Page).
</Table>
(b) Financial Statement Schedules
II-9
<Page>
All schedules have been omitted because they are not required or because the
required information is given in the financial statements or the notes to those
statements.
- ------------------------
+ Incorporated by reference to Exhibit 10.3 to Neurocrine's Quarterly Report on
Form 10-Q filed with the Securities and Exchange Commission on August 14,
1998.
* To be filed by amendment.
II-10