AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 5, 1996
REGISTRATION NO. 33-98706
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PHARMAVENE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 2834 52-1666548
(State or other (Primary standard (I.R.S. employer
jurisdiction industrial identification
of incorporation) classification code number)
number)
1550 EAST GUDE DRIVE
ROCKVILLE, MARYLAND 20850
(301) 838-2500
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------------------
JAMES D. ISBISTER
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
PHARMAVENE, INC.
1550 EAST GUDE DRIVE
ROCKVILLE, MARYLAND 20850
(301) 838-2500
(Name, including zip code, and telephone number, including area code, of agent
for service)
--------------------------
COPIES TO:
Sheldon E. Misher, Esq. Mark Kessel
Steven A. Fishman, Esq. Jonathan Jewett
Bachner, Tally, Polevoy & Misher LLP Shearman & Sterling
380 Madison Avenue 599 Lexington Avenue
New York, New York 10017 New York, New York 10022
(212) 687-7000 212-848-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO 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, please 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, please check the following box
and list the Securities Act registration statement number of the earlier
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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS OF AMOUNT TO AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED (1) OFFERING PRICE (2) REGISTRATION FEE
Shares of Common Stock, $.01 par value............... 2,530,000 $30,360,000 $10,469(3)
(1) Includes 330,000 shares subject to the Underwriters' over-allotment option.
(2) Estimated solely for purposes of calculating the registration fee.
(3) A registration fee of $9,518 has previously been paid.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH 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 COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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PHARMAVENE, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
ITEM AND CAPTION LOCATION IN PROSPECTUS
- ----------------------------------------------------------------- ------------------------------------------------------
Forepart of Registration Statement and Outside Front
Cover Page of Prospectus..............................
1. Outside Front Cover Page
Inside Front and Outside Back Cover Pages of
Prospectus............................................
2. Inside Front and Outside Back Cover Pages
Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.............................
3. Prospectus Summary; Risk Factors; Financial Statements
Use of Proceeds....................................... Prospectus Summary; Use of Proceeds
4.
Determination of Offering Price.......................
5. Outside Front Cover Page; Risk Factors;
Underwriting
Dilution.............................................. Risk Factors; Dilution
6.
Selling Security Holders..............................
7. Not Applicable
Plan of Distribution..................................
8. Outside Front Cover Page; Underwriting
Description of Securities to be Registered............
9. Outside Front Cover Page; Description of Capital Stock
Interests of Named Experts and Counsel................ Legal Matters; Experts
10.
Information With Respect to the Registrant............
11. Prospectus Summary; Risk Factors; Capitalization;
Selected Financial Data; Management's Discussion and
Analysis; Business; Management; Certain Transactions;
Principal Stockholders; Financial Statements
Disclosure of Commission Position on Indemnification
for Securities Act Liabilities........................ Not Applicable
12.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
2,200,000 SHARES
[LOGO]
PHARMAVENE, INC.
COMMON STOCK
----------------
All of the shares of Common Stock offered hereby are being sold by the
Company. Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently anticipated that the initial public
offering price will be between $10 and $12 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The Common Stock has been approved for listing on the Nasdaq
National Market under the symbol "PHVN," subject to official notice of issuance.
Athena Neurosciences, Inc., a wholly-owned subsidiary of Elan Corporation
plc, in connection with its license agreement with the Company, has been granted
the right to purchase 220,000 shares of Common Stock in this offering.
---------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting
Price to Discounts Proceeds to
Public and Commissions (1) Company (2)
Per Share............... $ $ $
Total (3)............... $ $ $
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $900,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
330,000 additional shares of Common Stock on the same terms and conditions
as set forth herein, solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
---------------------
The shares of Common Stock offered by this Prospectus are being offered by
the Underwriters, subject to prior sale, to withdrawal, cancellation or
modification of the offer without notice, to delivery and acceptance by the
Underwriters and to certain further conditions. It is expected that delivery of
certificates for the shares of Common Stock will be made at the offices of
Lehman Brothers Inc., New York, New York, on or about , 1996.
---------------------
LEHMAN BROTHERS VOLPE, WELTY & COMPANY
, 1996
The following table lists each of the Company's 12 product candidates and
its intended therapeutic indication, method of drug delivery and current stage
of development. There can be no assurance that any of these products will be
developed successfully or approved by the FDA in a timely manner.
PRODUCT CANDIDATE INDICATION DRUG DELIVERY TECHNOLOGY DEVELOPMENT STAGE
- ----------------------- ---------------------------- ---------------------------- ----------------------------
Carbatrol Epilepsy Oral sustained-release 505(b)(2) NDA accepted for
filing by the FDA on June
1, 1996/
licensed to Athena
Neurosciences, Inc.
Selegiline SR Cocaine craving and Oral sustained-release Phase III commenced in
withdrawal November 1994
Selegiline SR Parkinson's Disease Oral sustained-release Ready to enter Phase III
BChE Injectable Cocaine overdose Injectable Preclinical safety and
efficacy studies
substantially completed/
licensed to Rhone-Poulenc
Rorer
BChE Injectable Post-surgical apnea Injectable Preclinical safety and
efficacy studies
substantially completed/
licensed to Rhone-Poulenc
Rorer
Acyclovir CD Viral infection Peptitrol/sustained-release Formulation development
DHE IR Migraine headache Transmucosal Formulation development
immediate-release/
Peptitrol
Alprazolam TD Anxiety Transdermal sustained- Formulation development
release
Lorazepam TD Anxiety Transdermal sustained- Formulation development
release
PI 181.2 TD Emesis Transdermal sustained- Formulation development
release
Nifedipine SR Cardiovascular disease Oral sustained-release Formulation development
Insulin CD Diabetes Peptitrol Formulation development
The following are trademarks of the Company: Carbatrol-TM-, Peptitrol-TM-
and Peptiscreen-TM-.
All other trademarks appearing in this Prospectus are the property of their
respective holders.
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. SUCH
TRANSACTIONS MAY BE EFFECTED THROUGH THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE.
2
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET
FORTH UNDER THE HEADING "RISK FACTORS." EXCEPT AS OTHERWISE NOTED, ALL
INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION AND REFLECTS (I) THE ONE-FOR-SIX REVERSE SPLIT OF THE
COMMON STOCK EFFECTIVE IN MARCH 1996 AND (II) THE AUTOMATIC CONVERSION OF ALL
OUTSTANDING SHARES OF MANDATORILY REDEEMABLE SERIES A CONVERTIBLE PREFERRED
STOCK, $.01 PAR VALUE (THE "PREFERRED STOCK"), INTO SHARES OF COMMON STOCK AND
CERTAIN RELATED TRANSACTIONS UPON THE CLOSING OF THIS OFFERING.
THE COMPANY
Pharmavene, Inc. (the "Company") develops pharmaceutical products utilizing
advanced drug delivery systems. The Company has developed a portfolio of drug
delivery and screening technologies designed to produce optimal delivery of a
particular pharmaceutical product for a given indication. These technologies
include its proprietary Peptitrol systems for the oral delivery of
hard-to-deliver compounds, oral controlled-release and sustained-release
delivery, transmucosal delivery through tissues in the oral cavity and
transdermal delivery. Instead of emphasizing a specific drug delivery system,
the Company selects the drug delivery system that it believes is most effective
for delivery of a specific compound and that can result in such advantages as
convenient dosing, reduced side effects, improved bioavailability or easier
administration. The Company has also developed various screening technologies,
including its proprietary Peptiscreen system, to systematically and rapidly test
a large number of formulations.
The Company's strategy in selecting its current product candidates has been
to generally select pharmaceutical products for reformulation that the Company
believes have a significant commercial market, that are off-patent or for which
patent protection will no longer be available at the time the Company's product
is introduced and where enhancement of the method of delivery is expected to
have measurable clinical value as compared to the existing delivery method. The
Company generally selects products for reformulation that treat indications that
have relatively simple, clear-cut clinical end-points. Most of the Company's
product candidates are reformulations of existing compounds approved by the U.S.
Food and Drug Administration (the "FDA") and the Company's delivery systems
usually contain inactive ingredients that are generally recognized as safe
(GRAS) for food use as determined by the FDA or are inactive ingredients that
the Company believes are safe for such use. Therefore, the Company believes that
the development process for its products may be expedited and some of the
regulatory approval risks may be reduced. In addition to reformulating existing
compounds, the Company also intends to seek arrangements with other companies
developing pharmaceutical products based on new molecular entities to use the
Company's drug delivery systems to formulate these products.
The Company's initial product is expected to be Carbatrol, a
sustained-release, patented formulation of carbamazepine for the treatment of
epilepsy. In 1994, U.S. sales of carbamazepine were approximately $148 million.
A major cause of seizures in epileptic patients is patient noncompliance with
the treatment regimen, which can be caused by frequent dosing and an adverse
side effect profile. Carbatrol would provide convenient twice-a-day dosing and
could be administered orally as a capsule or sprinkled on food. On June 1, 1996,
the Company's New Drug Application ("NDA") under Section 505(b)(2) (a "505(b)(2)
NDA") of the Federal Food, Drug and Cosmetic Act, as amended, relating to
Carbatrol was accepted for filing by the FDA. If approved for marketing,
Carbatrol, which has been licensed to Athena Neurosciences, Inc. ("Athena"), a
wholly-owned subsidiary of Elan Corporation plc ("Elan"), will compete directly
with CIBA-Geigy's twice-a-day, extended-release formulation of carbamazepine.
The Company has 11 other product candidates, including oral
controlled-release formulations of Selegiline SR for treatment of cocaine
craving and for the treatment of Parkinson's Disease, Acyclovir CD for the
treatment of viral infections, Nifedipine SR (a generic version of Procardia XL)
for the treatment of cardiovascular disorders and Insulin CD for diabetes. The
Company is also developing a transmucosal formulation of dihydroergotamine (DHE)
for the treatment of migraine headache, an injectable formulation of
butyrylcholinesterase (BChE) for the treatment of cocaine overdose and for the
treatment of post-
3
surgical apnea, as well as three transdermal sustained-release products,
Alprazolam TD and Lorazepam TD for the treatment of anxiety and PI 181.2 TD for
the treatment of emesis. A number of these product candidates are in the early
stages of development.
The Company has developed its proprietary Peptitrol drug delivery
technologies for the enhanced oral delivery of pharmaceutical compounds that are
hard to deliver or have poor oral bioavailability, such as peptides and other
large molecules. The Peptitrol drug delivery systems use one or more hydrophobic
or hydrophilic materials to protect the pharmaceutical compound from degradation
and to increase absorption of the compound from the gastrointestinal tract. The
Company then uses its proprietary Peptiscreen cell culture screens to rapidly
test the formulations developed using Peptitrol technologies. The Company is
currently in the process of developing Acyclovir CD, Insulin CD and DHE IR using
its Peptitrol and Peptiscreen technologies.
The Company generally intends to develop its products and commence clinical
testing in humans and then to seek collaborators to undertake further testing,
obtain regulatory approval, manufacture and market such products. In August
1994, the Company entered into its first license agreement with Rhone-Poulenc
Rorer, Inc. and its Armour Pharmaceutical Company subsidiary, which subsequently
merged with Behringwerke to form the Centeon joint venture (together,
"Rhone-Poulenc Rorer") to develop, manufacture and market its BChE Injectable
products for the treatment of cocaine overdose and reversal of post-surgical
apnea. The Company's BChE Injectable products have been designated as Orphan
Drugs by the FDA for each of these indications. As a result, the Company may be
entitled to marketing exclusivity for these indications for a seven-year period,
subject to certain limitations, if it is the first sponsor to receive FDA
approval for such indications. See "Business -- Government Regulation."
On July 1, 1996, the Company entered into an exclusive license agreement
with Athena for the worldwide marketing, sale and distribution of Carbatrol.
Carbatrol will be marketed in the United States by Athena and by its affiliates
or sublicensees in the rest of the world. Under the agreement, Athena (i) will
make a $2.0 million payment within ten days of the execution of the agreement,
(ii) will fund all future development costs associated with Carbatrol which are
approved by a steering committee, (iii) will make a milestone payment of up to
$8.0 million upon FDA approval of the Company's Carbatrol NDA, of which $5.0
million is creditable against future royalty payments which may be earned on
product sales, and (iv) will make future royalty payments to the Company based
on net sales of Carbatrol. The milestone payment is conditioned upon the absence
of any finding of exclusivity for CIBA-Geigy's Tegretol XR or any actual or
threatened proceeding seeking such a finding. Athena has been granted the right
to purchase 220,000 shares of Common Stock in this offering.
The Company was incorporated in Delaware on December 22, 1989, as Substance
Abuse Sciences, Inc. In February 1990, the Company changed its name to
Pharmavene, Inc. The Company's executive offices are located at 1550 East Gude
Drive, Rockville, Maryland 20850 and its telephone number is (301) 838-2500.
THE OFFERING
Common Stock offered.......................... 2,200,000 shares
Common Stock to be outstanding after the
offering..................................... 8,672,332 shares (1)
Use of proceeds............................... To fund research and development activities,
including the continued development of
Carbatrol, and for general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market symbol........ "PHVN"
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(1) Includes an aggregate of 6,182,818 shares of Common Stock that will be
issued upon consummation of this offering, or that have been issued
subsequent to March 31, 1996, in connection with the conversion of
Preferred Stock and certain convertible notes and the exercise of options
under the Stock Option Plan. See "Capitalization." Excludes as of July 1,
1996: (i) 1,827,759 shares of Common Stock reserved for issuance upon
exercise of options granted, to be granted or available for grant under the
Company's 1991 Stock Option Plan (the "Stock Option Plan"); and (ii)
665,084 shares of Common Stock reserved for issuance upon exercise of
warrants that are outstanding or that the Company has agreed to issue. See
"Capitalization," "Management -- Stock Options," "Certain Transactions" and
"Description of Capital Stock."
4
SUMMARY FINANCIAL DATA
FOR THE
PERIOD
FOR THE THREE MONTHS FEBRUARY 16,
FOR THE YEARS ENDED DECEMBER 31, 1990 (DATE OF
ENDED MARCH 31, INCEPTION) TO
--------------------------------- ---------------------- MARCH 31,
1993 1994 1995 1995 1996 1996
----------- --------- --------- --------- ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Licensing revenue........................ $ -- $ 2,000 $ -- $ -- $ -- $ 2,000
Research and development revenue......... -- -- 111 95 19 130
Research and development grants.......... 269 194 -- -- -- 513
Interest income.......................... 19 46 35 5 10 201
----------- --------- --------- --------- ----------- -------------
Total revenues............................. 288 2,240 146 100 29 2,844
----------- --------- --------- --------- ----------- -------------
Expenses:
Research and development................. 3,932 4,936 4,987 1,230 1,266 20,397
General and administrative............... 1,413 1,317 1,392 369 478 6,777
Interest expense......................... 426 (1) 132 446 58 3,572 (1) 5,166
----------- --------- --------- --------- ----------- -------------
Total expenses............................. 5,771 6,385 6,825 1,657 5,316 32,340
----------- --------- --------- --------- ----------- -------------
Net loss................................... $ (5,483) $ (4,145) $ (6,679) $ (1,557) $ (5,287 ) $ (29,496 )
----------- --------- --------- --------- ----------- -------------
----------- --------- --------- --------- ----------- -------------
Net loss per common and common equivalent
share..................................... $ (1.59 ) $ (1.20) $ (1.91) $ (0.45) $ (1.51 ) $ (8.76 )
----------- --------- --------- --------- ----------- -------------
----------- --------- --------- --------- ----------- -------------
Weighted average common and common
equivalent shares outstanding............. 3,455 3,458 3,495 3,466 3,508 3,366
----------- --------- --------- --------- ----------- -------------
----------- --------- --------- --------- ----------- -------------
MARCH 31, 1996
-------------------------------------------
PRO FORMA
ACTUAL PRO FORMA (2) AS ADJUSTED(2)(3)
--------- ------------- -----------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 586 $ 2,590 $ 24,288
Working capital (deficit)........................................... (225) 1,067 22,766
Total assets........................................................ 3,802 4,901 26,600
Convertible notes................................................... 938 -- --
Capital lease obligations, less current portion..................... 784 784 784
Mandatorily Redeemable Series A Convertible Preferred Stock......... 24,697 -- --
Deficit accumulated during the development stage.................... (29,496) (32,694) (32,694)
Total stockholders' equity (deficit)................................ (24,293) 2,442 24,142
- ------------------
(1) Includes non-cash charges of $292,000 during the year ended December 31,
1993, relating to the issuance of warrants to purchase Common Stock at an
exercise price below the fair market value per share of the Common Stock
and $3,325,000 during the period ended March 31, 1996 in connection with
the conversion of an aggregate of $8,000,000 principal amount of
convertible notes (the "Convertible Notes") into Preferred Stock at a
conversion price below the originally agreed upon conversion price. See
"Management's Discussion and Analysis," "Certain Transactions" and Notes 5
and 11 of Notes to Financial Statements.
(2) Gives effect to the following events subsequent to March 31, 1996: (i) the
borrowing on April 25, 1996 and June 11, 1996 of an aggregate of $2,000,000
principal amount under a credit agreement with certain stockholders entered
into in 1996 (the "1996 Credit Agreement"); (ii) the conversion of all of
the shares of Preferred Stock outstanding into an aggregate of 5,636,452
shares of Common Stock upon the consummation of this offering; (iii) the
conversion of all borrowings under the 1996 Credit Agreement into 545,455
shares of Common Stock upon consummation of this offering ($3,000,000 of
such borrowings were outstanding on July 1, 1996 and the foregoing assumes
no additional borrowings under the 1996 Credit Agreement and an initial
public offering price of $11.00 per share); and (iv) the issuance on June
17, 1996 of 911 shares of Common Stock upon the exercise of options under
the Stock Option Plan. See "Capitalization," "Certain Transactions,"
"Description of Capital Stock" and the Notes to the Financial Statements.
(3) Adjusted to give effect to the sale of 2,200,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $11.00 per
share. See "Capitalization."
5
RISK FACTORS
AN INVESTMENT IN THE SHARES BEING OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN
EVALUATING AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY.
EARLY STAGE OF PRODUCT DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY. The Company
is in the development stage and the development of any products will require
significant further research, development, testing and regulatory approvals and
will be subject to the risks of failure inherent in the development of new
products based on innovative technologies. No assurance can be given that
product development expenditures will result in the generation of revenue by the
Company. Many of the products being developed by the Company are still in the
early stages of development. As the Company obtains results of particular
preclinical studies and clinical trials, the Company may abandon projects that
it might otherwise have believed to be promising, some of which may be described
in this Prospectus.
Additionally, the Company has only recently developed its Peptitrol drug
delivery systems for the oral delivery of hard-to-deliver compounds and the
Peptiscreen cell screens to test the extent to which such drugs may be
transported from the gastrointestinal tract. The Company is currently developing
reformulations of three drugs, DHE, acyclovir and insulin, using the Peptitrol
systems. The Company intends to focus an increasing portion of its efforts on
developing products using these technologies. Drugs developed using these
delivery systems have not yet been tested in humans and there can be no
assurance that they will prove to be effective in preclinical studies in animals
or in clinical studies in humans.
Additional risks include the possibility that the Company's products will
not be found to be safe and effective or will otherwise fail to receive
necessary regulatory approvals; that the products, if safe and effective, will
be difficult to manufacture on a large scale or will be uneconomical to market;
that the proprietary rights of third parties will preclude or delay the Company
from marketing products; or that third parties will market superior or
equivalent products. Accordingly, there can be no assurance that the Company's
research and development activities will result in any commercially viable
products. See "Business -- Products in Development" and "-- Manufacturing" and
"-- Marketing."
NO PRODUCT REVENUE; ACCUMULATED DEFICIT; CONTINUING LOSSES. The Company is
in the development stage. Through March 31, 1996, it had generated no revenues
from sales of any of its products and had incurred losses in each year since its
inception. As of March 31, 1996, the Company had an accumulated deficit of
$29,496,000, principally from costs incurred in research and development of the
Company's product candidates and from general and administrative costs
associated with the Company's development programs. As of March 31, 1996, the
Company had a working capital deficit of $225,000.
Although the Company has received initial license fees under its agreement
with Rhone-Poulenc Rorer during 1994, and Athena during 1996, there can be no
assurance that the Company will receive any additional milestone or royalty
payments under such agreements or will enter into any other collaborative
arrangements that will result in revenues. The Company currently does not have
any products ready to be marketed or any rights to receive royalties on any
products ready to be marketed, and there can be no assurance that it will be
able to generate any revenues from product sales, or that its operations will
become profitable, even if it is able to commercialize any products. The
Company's most advanced product candidate is Carbatrol, and the Company's
operations will be disproportionately dependent upon Carbatrol's successful
development. The Company expects to incur significant additional expenses for
research, development, testing and regulatory compliance activities, which,
together with projected general and administrative expenses, are expected to
result in significant continued operating losses for at least several years.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company
believes that the net proceeds of this offering, together with the Company's
available cash (including the $2 million payment due from Athena under its
license agreement with the Company), will be sufficient to fund the Company's
operations for at least the next 24 months. However, the Company's cash
requirements may vary materially from those now planned depending upon numerous
factors, including whether and when the Company enters into other license
agreements for its product candidates and the terms of any such agreements,
whether the Company
6
receives license fees or milestone payments under any collaborative
arrangements, the extent to which the Company may have working capital
requirements to carry necessary inventory and meet other manufacturing costs in
connection with the Company's product candidates, which will depend on the terms
of the license agreement entered into with respect to such potential products,
the progress of the Company's research and development programs, the results of
clinical studies, the timing of regulatory submissions, technological advances,
determinations as to commercial potential and the status of competitive
products. Expenditures will also be dependent upon the establishment of
collaborative arrangements with other companies, the availability of financing
and other factors.
The Company plans to seek collaborative arrangements for the development of
all of its product candidates at such time as significant funding is required
for clinical testing. If the Company is successful in obtaining such
collaborators, the collaborators may provide funding for such product
development. However, if the Company decides to conduct clinical trials or to
seek FDA approval of any of its product candidates in the future, or if the
Company decides to undertake the commercialization of any product candidate, it
would require substantial funds in addition to the proceeds of this offering.
There can be no assurance such collaborative arrangements will be entered into.
Accordingly, there can be no assurance that the Company will not require
additional financing or that additional financing, if required, will be
available on acceptable terms or at all. The Company may seek additional funding
through public or private financings, including equity financings. If additional
funds are raised by issuing equity securities, further dilution to stockholders
may result. If adequate funds are not available, the Company may be required to
delay, reduce the scope of or eliminate one or more of its research and
development programs, or to license the rights to certain of its product
candidates on terms that are less favorable to the Company than might otherwise
have been available. See "Use of Proceeds" and "Management's Discussion and
Analysis."
NO ASSURANCE OF FDA APPROVAL; GOVERNMENT REGULATION. The FDA and comparable
agencies in foreign countries impose substantial requirements upon the
introduction of therapeutic pharmaceutical products through lengthy and detailed
laboratory, animal and human clinical testing, sampling activities and other
procedures that are costly and time-consuming. Satisfaction of these
requirements typically takes several years or more and varies substantially
based upon the type, complexity and novelty of the compound. FDA regulations
also govern the manufacture and marketing of pharmaceutical products. In
addition, because the Company handles alprazolam and lorazepam, which are
controlled substances, it must be licensed and its facilities must be inspected
by the U.S. Drug Enforcement Administration (the "DEA") and the State of
Maryland. Failure to comply with applicable FDA, DEA and other regulatory
requirements can result in sanctions being imposed on the Company and any
contract manufacturers and distributors of its products. Typical sanctions can
include warning letters, fines, product recalls or seizures, injunctions,
refusals to permit products to be imported into or exported out of the United
States, refusals of the FDA to grant premarket approval of drugs or to allow the
Company to enter into government supply contracts, withdrawals of previously
approved applications and criminal prosecution.
A company seeking FDA approval of a drug for human use must file an
application with the FDA pursuant to the Federal Food, Drug and Cosmetic Act
(the "FDC Act"), as amended in 1984 by the Drug Price Competition and Patent
Term Restoration Act of 1984 (the "DPCPTRA"). The FDC Act, as amended, provides
for several types of applications, including an NDA, which may be filed under
either Section 505(b)(1) or Section 505(b)(2) of the FDC Act, and an Abbreviated
New Drug Application ("ANDA") under Section 505(j) of the FDC Act. The type of
application required to be filed depends upon a variety of factors, including
the nature of the drug and the extent and availability of scientific data
supporting the application. Biologics, such as the Company's BChE product, are
licensed pursuant to Section 351 of the Public Health Service Act and require
submission and FDA approval of both a product license application ("PLA") and an
establishment license application ("ELA") for the particular product and the
facility manufacturing the product.
The procedures that the Company and other drug sponsors must follow in
submitting these applications are sometimes uncertain and are subject to change.
The type of application that the FDA is willing or able to
7
accept to review a new drug product determines the nature of the information
that must be prepared and submitted in support of the application and the time
required to obtain FDA approval. Although the statutory requirements may be
subject to interpretation, under their current administration by the FDA,
Section 505(b)(2) of the FDC Act permits drug sponsors to submit applications
for which the investigations required in Section 505(b)(1)(A) and relied upon by
the applicant for approval of the application were not conducted by or for the
applicant and for which the applicant has not obtained a right of reference or
use from the person by or for whom the investigations were conducted. In this
connection, a petition was filed with the FDA by Pfizer, Inc. ("Pfizer") in 1993
seeking to prohibit reliance by an applicant under a 505(b)(2) NDA on safety and
other data previously submitted by Pfizer in support of its NDA for nifedipine
(Procardia XL). While the FDA recently denied the petition, it did not decide
the legal merits of the issues presented. Accordingly, any future decision by
the FDA to accept these or similar legal arguments could delay the approval of
505(b)(2) NDA applications generally. See "Business -- Government Regulation."
An NDA for Carbatrol for the treatment of epilepsy was accepted for filing
by the FDA on June 1, 1996 and the clinical portion of a Phase III study of
Selegiline SR for cocaine craving and withdrawal was completed in December 1995.
Selegiline SR for the treatment of Parkinson's Disease is ready to enter Phase
III clinical testing. Five of the Company's product candidates could be ready to
enter Phase I, II or III clinical trials during the next 12 months. See
"Business -- Products in Development." The Company believes that the development
process for its products may include reduced regulatory submissions and some of
the regulatory approval risks may be reduced because the Company's drug delivery
systems usually contain inactive ingredients that are GRAS for food use as
determined by the FDA or are inactive ingredients that the Company believes are
safe for such use. However, there are a number of other factors related to the
FDA approval process, including the requirement, for certain types of
applications, that manufacturers establish bioequivalence and bioavailability or
the safety and efficacy of proposed drug products and certain factors relating
to the manufacturing processes involved with making any drug product, that may
delay or preclude approval of one or more of the Company's product candidates.
There can be no assurance that the Company will not encounter problems in
clinical trials that will cause the Company or the FDA to delay or suspend
clinical trials. In addition, there can be no assurance that any of the
Company's product candidates will obtain FDA approval for any indication.
The effect of government regulation may be to delay marketing of new
products for a considerable period of time or to impose costly procedures upon
the Company's activities, which may give a competitive advantage to companies
with greater resources that compete with the Company. There can be no assurance
that FDA or other regulatory approval for any product candidates developed by
the Company will be granted on a timely basis, if at all. Any such delay in
obtaining, or failure to obtain, such approvals would adversely affect the
marketing of the Company's potential products and its ability to generate
revenues or royalties. Any additional regulation or changes in existing
regulations could result in limitations or restrictions on the Company's ability
to utilize one or more of its technologies or could delay regulatory approval of
the Company's potential products and could have a material adverse effect on the
Company. See "Business -- Government Regulation."
POSSIBLE DELAY IN BRINGING TO MARKET REFORMULATED DRUG PRODUCTS. The
Company could be delayed in bringing some of its potential drug product
candidates to market by marketing exclusivity rights accorded other
manufacturers under the DPCPTRA. Under the DPCPTRA, a drug sponsor may be
entitled to three years of marketing exclusivity in the United States for an
FDA-approved drug product if new clinical investigations (other than
bioavailability studies), conducted or sponsored by the drug sponsor, are
submitted to the FDA and found to be essential to the FDA's approval. Until FDA
approval of an NDA, FDA filings are not public and it is typically not known
what, if any, clinical studies are submitted by a sponsor. In this connection,
however, the Company received information pursuant to a Freedom of Information
Act ("FOIA") request that CIBA-Geigy obtained approval on March 25, 1996 for an
NDA supplement for an extended-release formulation of carbamazepine under its
brand name Tegretol. The FOIA documentation further discloses that CIBA-Geigy
requested that the FDA grant it three years marketing exclusivity commencing on
the date of approval of the Tegretol NDA supplement and that the FDA denied
CIBA-Geigy's request for such exclusivity. See "Business -- Government
Regulation."
8
DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS. The Company's success will
depend, in part, on its ability to obtain patent protection for its processes
for formulating drug delivery systems and products both in the United States and
in other countries, to preserve its trade secrets and to operate without
infringing upon the proprietary rights of others. The Company intends to file
applications as appropriate for patents covering its technologies, products and
processes. In 1994, a patent expiring in 2011 was issued to the Company covering
the process for obtaining BChE from plasma. The Company is aware that there may
be an approach for producing BChE using recombinant methods. As a result, other
parties may be able to manufacture BChE for any and all purposes without
infringing the Company's patent. In 1994, a patent expiring in 2011 was also
issued, covering the formulation of the Company's Carbatrol product. In 1995,
two patents were issued based on the Company's Peptitrol technologies. One of
the patents, which expires in 2014, is directed to a pharmaceutical preparation
of a drug which is poorly soluble in water, and which is incorporated into
particles comprised of hydrophobic fatty acid ester. The second patent, which
also expires in 2014, is directed to a pharmaceutical preparation of a drug
incorporated into particles formed of alternate layers of hydrophobic and
hydrophilic materials. The issued patents do not cover the microemulsion
formulations, which are a significant component of the Company's product
development efforts using its Peptitrol technologies. The Company is aware of
other pharmaceutical companies that are working with microemulsions and
hydrophobic materials for use in drug delivery. In 1996, a patent, expiring in
2015, was issued for the Company's formulation of Selegiline SR. No assurance
can be given that any additional patents will issue from any of the Company's
patent applications or that, if patents do issue, the claims allowed will be
sufficiently broad to protect the Company's technologies. Although a patent has
a statutory presumption of validity in the United States, the issuance of a
patent is not conclusive as to such validity or as to the enforceable scope of
the claims of the patent. There can be no assurance that the Company's issued
patents or any patents subsequently issued to or licensed by the Company will
not be successfully challenged in the future. The validity or enforceability of
a patent after its issuance by the patent office can be challenged in
litigation. If the outcome of the litigation is adverse to the owner of the
patent, third parties may then be able to use the invention covered by the
patent, in some cases without payment. There can be no assurance that the
Company's patents will not be infringed or successfully avoided through design
innovation.
There can be no assurance that patents or patent applications owned by or
licensed to the Company will result in patents being issued or that, if issued,
the patents will afford protection against competitors with similar technology.
For example, other companies are evaluating microemulsions, hydrophobic,
transdermal, transmucosal and sustained-release oral formulations. It is also
possible that third parties may obtain patent or other proprietary rights that
may be necessary or useful to the Company. In cases where third parties are
first to invent a particular product or technology, it is possible that those
parties will obtain patents that will be sufficiently broad so as to prevent the
Company from using certain technologies or from further developing or
commercializing certain products. If licenses from third parties are necessary
but cannot be obtained, commercialization of the related products would be
delayed or prevented. The Company is aware of patent applications and issued
patents that belong to competitors and it is uncertain whether any of these, or
any other filed patent applications of which the Company does not have any
knowledge, will require the Company to alter its potential products or
processes, pay licensing fees or cease certain activities.
The Company's principal product candidates are reformulations of existing
products. Therefore, patents, if any, issued to the Company will only cover the
Company's formulation of the product or the process for manufacturing the
product. Others may be able to develop formulations which provide similar
advantages to the Company's, but which do not infringe the Company's patent.
Additionally, patents issued or which may be issued in the future with respect
to Peptitrol or other drug delivery systems may not be sufficiently broad to
preclude others from developing products that compete with products developed by
the Company. For example, although the Company's issued patents and patent
applications relating to Peptitrol may prevent competitors from developing
products using formulations covered by the Company's patents, the patents would
not preclude other companies from formulating drugs using technologies that
could provide similar results.
9
The Company's product candidates may conflict with patents that have been or
may be granted to competitors, universities or others. In addition, such other
persons could bring legal actions against the Company claiming damages and
seeking to enjoin manufacturing and marketing of the affected products. If any
such actions are successful, in addition to any potential liability for damages,
the Company could be required to obtain a license in order to continue to
manufacture or market the affected products. There can be no assurance that the
Company would prevail in any such action or that any license required under any
such patent would be made available on acceptable terms. The Company believes
that there may be significant litigation in the industry regarding patent and
other intellectual property rights. If the Company becomes involved in such
litigation, it could consume substantial resources.
The Company is conducting research to identify and develop a formulation of
nifedipine that is bioequivalent to Procardia XL, marketed by Pfizer, without
infringing Pfizer's existing patents on Procardia XL. While the patent on the
compound nifedipine has expired, Pfizer has been issued patents with respect to
its once-a-day formulation, Procardia XL. There can be no assurance that the
Company will be successful in developing a generic reformulation that is
bioequivalent to Procardia XL and that does not infringe Pfizer's patents. If
the Company successfully develops a nifedipine reformulation, the Company
expects that it or its licensee will file an ANDA with the FDA with respect to
the reformulation. Since the filing of an ANDA or other drug application for a
product covered by a patent is an act of infringement, the Company believes
Pfizer would file a lawsuit against the Company and its licensee, if any, if it
believed that it had a claim that the Company's formulation was covered by
Pfizer's patents. The filing of a patent action could delay the approval of an
ANDA for a period of up to 30 months, or longer if so ordered by a court. If
Pfizer successfully asserts its patents, the Company may be enjoined from
selling its product until the Pfizer patent expires.
The Company also relies on trade secrets and proprietary know-how, which it
seeks to protect, in part, by confidentiality agreements with its corporate
partners, collaborators, employees and consultants. There can be no assurance
that these agreements will not be breached, that the Company will have adequate
remedies for any breach or that the Company's trade secrets will not otherwise
become known or be independently discovered by competitors.
OTHER GENERIC DRUG RISKS; MARKET ACCEPTANCE. Certain of the Company's
product candidates would compete with existing drugs for the treatment of
epilepsy, Parkinson's Disease, migraine headache, anxiety, cardiovascular
disease, viral infection and diabetes. The Company's strategy generally has been
to develop reformulations for existing compounds for which patent protection or
market exclusivity is no longer available or will no longer be available at the
time the Company's product is introduced. To the extent that the Company's
products consist of reformulations of available compounds, the Company's
products will be competing with the original brand-name product. Generally, such
brand-name versions of pharmaceutical compounds have a market advantage over
generic products using the same compound. Accordingly, the Company and any
potential collaborator may be required to demonstrate to physicians, other
heathcare providers and administrators that the Company's reformulations of
previously available compounds will in fact offer distinct advantages over such
products. In addition, to the extent that the manufacturers of the brand-name
products seek to develop their own generic or improved versions of these
products that provide benefits similar to the Company's reformulations, the
Company may find itself at a competitive disadvantage by virtue of its
competitors' ability to use the name-brand in the advertising of its products.
DEPENDENCE UPON OTHERS. The Company's strategy for commercialization of
products will generally require entering into various arrangements with
corporate collaborators. The Company has entered into a license agreement with
Rhone-Poulenc Rorer with respect to the development, production and marketing of
its two BChE Injectable products and with Athena with respect to the marketing,
sale and distribution of Carbatrol. The Company has also had discussions with
other parties concerning additional product development, manufacturing and
marketing agreements. Although the Company believes that its collaborators would
have an economic motivation to succeed in performing their contractual
responsibilities, the amount and timing of resources to be devoted to these
activities by them are not within the control of the Company. There can be no
assurance that such collaborators will perform their obligations as expected or
that the Company will derive any additional revenue from such arrangements.
There can also be no assurance that
10
the Company's collaborators will not pursue existing or alternative technologies
in preference to products being developed in collaboration with the Company. In
addition, there can be no assurance that the Company's collaborators will pay
any additional option or license fees to the Company or that they will develop
and market any products under the agreements. Furthermore, there can be no
assurance that the Company will be able to negotiate additional collaborative
arrangements in the future on acceptable terms, if at all, or that such
collaborative arrangements will be successful. See "Business -- Strategy."
LIMITED MANUFACTURING CAPABILITY AND EXPERIENCE. The Company generally
intends to enter into collaborative arrangements to complete development,
manufacture and market its product candidates. The Company expects that its
collaborators will assume responsibility for manufacturing, as Rhone-Poulenc
Rorer has done for the Company's BChE Injectable products and as Athena in the
future is obligated to do with respect to Carbatrol. Under the Company's
agreement with Athena, Athena has agreed to pay the Company's costs under its
current manufacturing agreements and, upon expiration of such agreements,
directly to arrange for manufacture of Carbatrol. However, there can be no
assurance that the Company will be able to enter into any other collaborative
arrangements or will enter into a collaborative arrangement where the
collaborator assumes responsibility for manufacturing. The Company currently
does not have facilities or personnel capable of directly manufacturing in
commercial quantities any of the products it may develop.
The Company has entered into an exclusive agreement with Niro Inc. ("Niro")
for the manufacture of the pellets to be used in Carbatrol. In addition, the
Company has entered into an agreement in with The P.F. Laboratories, Inc. ("P.F.
Labs") to encapsulate and package Carbatrol. Initially, the Company will be
relying solely on Niro for the manufacture of the pellets to be used in
Carbatrol and on P.F. Labs for encapsulation and packaging of this product. In
addition, the Company will initially have only a single source of carbamazepine
and capsules qualified by the FDA. Although the Company believes that there are
alternative sources available to manufacture Carbatrol and to supply
carbamazepine and the capsules, the substitution of an alternative manufacturer
would require additional FDA approval and could result in delays, which could
materially adversely affect the Company. In addition, Niro has no experience in
manufacturing pharmaceutical products and its facility will be subject to a
pre-approval inspection by the FDA. See "Business -- Government Regulation." No
assurance can be given that manufacturing or control problems will not arise or
that the manufacturing process will not be disrupted by circumstances beyond the
Company's control.
It is possible that, in the future, the Company may, if it becomes
economically attractive to do so, establish its own manufacturing facilities to
produce products, if any, that it may develop. In order to establish a
manufacturing facility, the Company will require substantial additional funding
and will be required to hire and retain significant additional personnel and
comply with the extensive current Good Manufacturing Practices ("cGMP")
regulations imposed by the FDA on such facilities. The Company has no experience
in manufacturing, and no assurance can be given that the Company will be able to
make the transition successfully to commercial production, should it choose to
do so. See "Business -- Manufacturing."
NO MARKETING AND SALES CAPABILITY; DEPENDENCE UPON THIRD PARTIES FOR
MARKETING. The Company has no marketing and sales staff and no experience with
respect to marketing pharmaceutical products. The Company generally intends to
enter into collaborative arrangements for completing the development,
manufacturing, distribution and marketing of its products. Therefore, the
Company will be dependent on the efforts of third parties to market its
products. There can be no assurance that the Company's collaborators will be
successful in penetrating the markets for any products developed. In the event
that the collaborator fails to develop a marketable product or fails to market a
product successfully, the Company's business may be adversely affected.
If the Company markets products directly, significant additional
expenditures and management resources would be required to develop an external
sales force and implement a marketing strategy for a product. The sale of
certain products outside the United States will also be dependent on the
successful completion of arrangements with future partners, licensees or
distributors in each territory. There can be no
11
assurance that the Company will be successful in establishing any collaborative
arrangements or that, if established, such future partners will be successful in
commercializing products. See "Business -- Marketing."
UNCERTAINTY OF SUPPLY OF BCHE; PRODUCT SAFETY. The Company has licensed
exclusive, worldwide rights for the development, production and marketing of its
BChE Injectable products to Rhone-Poulenc Rorer. Because BChE is purified from
human blood plasma, the ability of Rhone-Poulenc Rorer to produce BChE will
depend upon its ability to obtain an adequate supply of human blood plasma.
While Rhone-Poulenc Rorer obtains and fractionates blood for other of its
products, there can be no assurance it will have, or be able to, contract for an
adequate supply of blood plasma to meet commercial needs. Additionally, plasma
suppliers obtain their supply from human donors who are limited as to the amount
and frequency of donations. Should the supply of suitable plasma donors decline,
Rhone-Poulenc Rorer's ability to produce and sell the Company's BChE Injectable
products could be adversely affected. In addition, although the Company believes
that plasma from human donors is screened for infectious diseases, there can be
no assurance that regulatory agencies, such as the FDA, will not impose
additional restrictions on products derived from human plasma or take regulatory
actions such as recalls of finished products already on the market. See
"Business -- Manufacturing."
COMPETITION. There are many companies engaged in the research and
development of products using drug delivery systems that may compete with the
Company's, most of which have substantially greater financial, technological,
research and development, marketing and personnel resources than the Company.
The Company is aware of several drug delivery companies and large pharmaceutical
companies that develop or market sustained-release oral dosage systems,
transdermal or transmucosal drug delivery systems or have active research and
development programs in controlled-release methods. Many companies also are
developing technologies for the oral delivery of peptides and other poorly
absorbed molecules. The Company is aware that CIBA-Geigy has recently received
FDA approval to market an extended-release formulation of carbamazepine under
its brand name Tegretol, which will compete directly with Carbatrol, if and when
it is approved. In addition, the Company is aware of a number of other companies
developing generic formulations of sustained-release nifedipine, improved
formulations of selegiline, transmucosal formulations of DHE and transdermal
formulations of certain benzodiazepines, including alprazolam and lorazepam and
improved methods of delivering anti-emetics. The Company is also aware of
companies working on antivirals with less frequent dosing requirements and oral
delivery systems for insulin and other peptides or proteins. Many of these
competitors have significantly greater experience than the Company in
undertaking preclinical testing and human clinical trials of new pharmaceutical
products and obtaining FDA and other regulatory approvals. Accordingly, certain
of the Company's competitors may succeed in obtaining FDA approval for products
more rapidly than the Company. Furthermore, if the Company is permitted to
commence commercial sales of products, it will also be competing with respect to
manufacturing efficiency and marketing with companies having greater resources
and experience in these areas. The Company currently has limited or no
experience in these areas.
Some of the Company's competitors may succeed in developing products that
are more effective or less costly than any that may be developed by the Company
and may also prove to be more successful than the Company's products. The
Company will compete with off-patent drug manufacturers, brand-name
pharmaceutical companies that manufacture or market off-patent drugs, the
original manufacturers of brand-name drugs that continue to produce such drugs
after patents expire or introduce generic versions or improved reformulations of
their branded products, and manufacturers of new drugs that may compete with the
Company's products. In addition, the Company's products will compete not only
with products employing advanced drug delivery systems, but also with products
in traditional dosage forms. Because selling prices of off-patent drug products
typically decline as competition intensifies, the maintenance of profitable
operations will be dependent, in part, on the Company's cost of manufacturing,
its ability to demonstrate the benefits of the Company's product and its ability
to develop and introduce new products in a timely manner. The industry in which
the Company proposes to compete is characterized by extensive research and
12
development efforts and rapid technological progress. There can be no assurance
that developments by others will not render the Company's products or
technologies noncompetitive or obsolete. See "Business -- Competition."
DEPENDENCE UPON KEY PERSONNEL. The Company's success depends on the
continued contributions of its executive officers, scientific and technical
personnel and consultants. During the Company's limited operating history, many
key responsibilities within the Company have been assigned to a relatively small
number of individuals. The competition for qualified personnel is intense, and
the loss of services of certain key personnel could adversely affect the
business of the Company. As the Company's development of products advances, the
Company will require additional expertise in areas such as preclinical testing,
analytical testing, clinical trial management, regulatory affairs, quality
assurance and control and, if applicable, manufacturing. Such activities will
require the addition of new personnel, including management, and the development
of additional expertise by existing management personnel. The inability to
acquire such services or to develop such expertise could have a material adverse
effect on the Company's operations.
UNCERTAINTY RELATED TO HEALTH CARE REIMBURSEMENT AND REFORM MEASURES. In
recent years, there have been numerous proposals to reform the healthcare system
in the United States, including currently pending legislation relating to
Medicare and Medicaid. Some of these proposals have included measures that would
limit or eliminate payments for certain medical procedures and treatments or
subject the pricing of pharmaceuticals to government control. In addition,
significant uncertainty exists as to the reimbursement status of newly-approved
healthcare products. The Company's success in generating revenue from sales of
human therapeutic products may depend, in part, on the extent to which
reimbursement for the costs of such products and related treatments will be
available from third-party payors such as government health administration
authorities, private health insurers and other organizations. Third-party payors
are increasingly challenging the price and cost-effectiveness of medical
products, and significant uncertainty exists as to the reimbursement status of
newly-approved health care products. If the Company succeeds in bringing one or
more products to market, there can be no assurance that such products will be
considered cost-effective or that adequate third-party insurance coverage will
be available for the Company to establish and maintain price levels sufficient
to realize an appropriate return on its investment in product development.
Third-party payors are increasingly attempting to contain health care costs by
limiting both coverage and the level of reimbursement of new therapeutic
products approved for marketing by the FDA and by refusing, in some cases, to
provide any coverage of uses of approved products for disease indications for
which the FDA has not granted marketing approval. If adequate coverage and
reimbursement levels are not provided by government and third-party payors for
uses of the Company's therapeutic products, the market acceptance of these
products would be adversely affected.
RISK OF PRODUCT LIABILITY; AVAILABILITY OF INSURANCE. The use of the
Company's product candidates in clinical trials and the marketing of any
pharmaceutical products may expose the Company to product liability claims. The
Company has obtained a level of liability insurance coverage that it deems
appropriate for its current stage of development. However, there can be no
assurance that the Company's present insurance coverage is adequate. Such
existing coverage will not be adequate as the Company further develops products,
and no assurance can be given that in the future adequate insurance coverage
will be available in sufficient amounts or at a reasonable cost, or that a
successful product liability claim or recall would not have a material adverse
effect on the business or financial condition of the Company.
HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS. The Company's research and
development processes involve the use of hazardous, controlled and radioactive
materials. The Company is subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such materials and certain waste products. Although the Company believes that
its procedures for handling and disposing of such materials comply with the
standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company could be held liable for any damages
that result and any such liability could exceed the resources of the Company.
There can be no assurance that the Company will not be required to
13
incur significant costs to comply with environmental laws and regulations in the
future, or that the business or financial condition of the Company will not be
materially or adversely affected by current or future environmental laws or
regulations. See "Business -- Government Regulation."
CONTROL BY EXISTING STOCKHOLDERS; ANTI-TAKEOVER PROVISIONS. Upon the
completion of this offering, the principal stockholders of the Company will
beneficially own or control approximately 77% of the outstanding shares of
Common Stock, including immediately exercisable options and warrants
(approximately 74% if the Underwriters' over-allotment option is exercised in
full). As a result, such persons will be able to elect all of the Company's
directors, determine the outcome of all corporate actions requiring stockholder
approval and otherwise control the business of the Company. Such control could
preclude any unsolicited acquisition of the Company and consequently adversely
affect the market price of the Common Stock. In addition, the Company's Board of
Directors is authorized to issue from time to time shares of preferred stock,
without stockholder authorization, in one or more designated series or classes.
The issuance of preferred stock could make the possible takeover of the Company
or the removal of the Company's management more difficult, discourage hostile
bids for control of the Company in which stockholders may receive a premium for
their shares of Common Stock or otherwise dilute the rights of holders of Common
Stock and depress the market price of the Common Stock. See "Principal
Stockholders" and "Description of Capital Stock."
ABSENCE OF PRIOR TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior
to this offering, there has been no public market for the Common Stock, and
there is no assurance that an active market will develop or be sustained after
this offering. The initial public offering price will be determined by
negotiation between the Company and the Representatives of the Underwriters and
may not be indicative of the market price at which the Common Stock will trade
after completion of this offering. See "Underwriting" for factors to be
considered in determining such offering price. The market price of the shares of
Common Stock, like that of the common stock of many other early-stage
pharmaceutical companies, is likely to be highly volatile. Factors such as the
results of preclinical studies and clinical trials by the Company or its
competitors, other evidence of the safety or efficacy of products of the Company
or its competitors, announcements of technological innovations or new commercial
therapeutic products by the Company or its competitors, governmental regulation,
changes in reimbursement policies, healthcare legislation, developments in
patent or other proprietary rights, developments in the Company's relationships
with future collaborators, if any, public concern as to the safety and efficacy
of drugs developed by the Company, fluctuations in the Company's operating
results, and general market conditions may have a significant impact on the
market price of the Common Stock.
FUTURE SALES OF COMMON STOCK; REGISTRATION RIGHTS. Future sales of shares
of Common Stock by existing stockholders pursuant to Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"), through the exercise
of outstanding registration rights or through the issuance of shares of Common
Stock upon exercise of options, warrants or otherwise, could have an adverse
effect on the price of the Company's Common Stock. In addition to the 2,200,000
shares of Common Stock offered hereby, approximately 4,756,577 shares of Common
Stock will be eligible for sale in the public market subject to compliance with
Rule 144 and Rule 701 under the Securities Act, beginning 90 days from the date
of this Prospectus. All of the Company's executive officers and directors and
certain stockholders, beneficially owning an aggregate of 7,569,968 shares of
Common Stock (including 3,752,114 shares eligible for sale commencing 90 days
after the date of this Prospectus), however, have agreed with the Underwriters
not to sell or otherwise dispose of their shares for a period of 180 days from
the date of this Prospectus without the prior written consent of Lehman Brothers
Inc. Additionally, commencing 180 days after the date of this Prospectus,
holders of 7,015,616 shares of Common Stock, including shares of Common Stock
issuable upon exercise of warrants, will have registration rights under certain
conditions. Additional shares of Common Stock, including shares issuable upon
exercise of options and warrants, will also become eligible for sale in the
public market from time to time in the future. No prediction can be made as to
the effect, if any, that future sales of shares of Common Stock, or the
availability of such shares for future sale, will have on the market price of
the Common Stock prevailing from time to time. Sales of substantial amounts of
Common Stock (including shares issued upon exercise of stock options) in the
public market, or the perception that such sales could occur, could adversely
affect the
14
prevailing market price of the Common Stock or the ability of the Company to
raise capital through a public offering of its equity securities. See
"Description of Capital Stock -- Registration Rights" and "Shares Eligible for
Future Sale."
DILUTION. The initial public offering price will be substantially higher
than the book value per share of the Common Stock. Investors purchasing shares
of Common Stock in this offering will incur immediate net tangible book value
dilution of $8.22 per share, assuming an initial public offering price of $11.00
per share. See "Dilution."
ABSENCE OF DIVIDENDS. The Company has never paid any cash dividends on its
Common Stock and does not anticipate paying cash dividends in the foreseeable
future. See "Dividend Policy."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,200,000 shares of
Common Stock offered hereby, at an assumed initial public offering price of
$11.00 per share and after deducting the underwriting discount and estimated
expenses payable by the Company, are estimated to be approximately $21,700,000
($25,085,000 if the Underwriters' over-allotment option is exercised in full).
The Company currently anticipates using substantially all of the net proceeds,
including interest thereon, for research and development and other product
development activities and the balance of the net proceeds will be used for
general corporate purposes.
The amounts and timing of such expenditures may vary significantly depending
upon numerous factors, including whether and when the Company enters into
license agreements for product candidates and the terms of any such agreements,
whether the Company receives license fees or milestone payments under any
collaborative arrangements, the progress of the Company's research and
development programs, the results of clinical studies, the timing of regulatory
submissions, technological advances, determinations as to commercial potential
and the status of competitive products. Expenditures will also be dependent upon
the establishment of collaborative arrangements with other companies, the
availability of financing and other factors. Subject to the foregoing, the
Company believes that the net proceeds of this offering, together with its
available cash (including the $2 million payment due from Athena under its
license agreement with the Company), will be sufficient to finance its
operations for at least the next 24 months.
Pending such uses, the net proceeds from this offering will be temporarily
invested by the Company in short-term, interest bearing investment grade
securities.
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock and does not
anticipate paying cash dividends in the foreseeable future. The Company
currently intends to retain all earnings, if any, for the development of its
business.
15
CAPITALIZATION
The following table sets forth as of March 31, 1996: (a) the actual
capitalization of the Company, (b) the pro forma capitalization of the Company
after giving effect to the transactions described in the footnotes to the table
below, and (c) the pro forma capitalization as adjusted to reflect the sale by
the Company of 2,200,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $11.00 per share. This table should be read in
conjunction with the Financial Statements and the Notes thereto included
elsewhere in this Prospectus.
AS OF MARCH 31, 1996
------------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -----------
(IN THOUSANDS)
Long-term debt, less current portion
Convertible Notes................................................... $ 938 $ -- $ --
Obligations under capital leases.................................... 784 784 784
---------- ----------- -----------
Total long-term debt............................................ 1,722 784 784
---------- ----------- -----------
Mandatorily Redeemable Series A Convertible Preferred Stock, $.01 par
value, 25,363,997 issued and outstanding, actual; no shares
authorized, issued or outstanding, pro forma and as adjusted......... 24,697 -- ( (2) --
---------- ----------- -----------
Stockholders' (deficit) equity:
Preferred Stock -- $.01 par value; 5,000,000 shares authorized, no
shares issued and outstanding...................................... -- -- --
Common Stock -- $.01 par value; 25,000,000 shares authorized,
289,514 shares issued and outstanding, actual; 6,472,332 shares
issued and outstanding, pro forma; 8,672,332 shares issued and
outstanding, as adjusted (3)(4).................................... 3 65 87
Paid-in capital..................................................... 5,200 35,071 56,749
Deficit accumulated during the development stage.................... (29,496) (32,694) (32,694)
---------- ----------- -----------
Total stockholders' (deficit) equity............................ (24,293) 2,442 24,142
---------- ----------- -----------
Total capitalization........................................ $ 2,126 $ 3,226 $ 24,926
---------- ----------- -----------
---------- ----------- -----------
- --------------
(1) Upon consummation of this offering, the 25,363,997 shares of Preferred Stock
then outstanding will be converted into an aggregate of 5,636,452 shares of
Common Stock.
(2) In January 1996, the Company amended its Certificate of Incorporation to
authorize the issuance of an additional 5,000,000 shares of undesignated
preferred stock. Upon conversion of the outstanding Preferred Stock upon
consummation of this offering, such shares of Preferred Stock will be
cancelled and, accordingly, immediately thereafter, the Company will be
authorized to issue 5,000,000 shares of preferred stock.
(3) 6,182,818 shares of Common Stock were or will be issued subsequent to March
31, 1996, as follows: (i) 5,636,452 shares to be issued at the time of the
consummation of this offering upon conversion of the Preferred Stock (see
Note (2) above); (ii) 545,455 shares to be issued at the time of the
consummation of this offering upon conversion of all borrowings under the
1996 Credit Agreement into Common Stock ($3,000,000 of such borrowings were
outstanding on July 1, 1996 and the foregoing assumes no additional
borrowings under the 1996 Credit Agreement and an initial public offering
price of $11.00 per share); and (iii) the issuance on June 17, 1996 of 991
shares of Common Stock upon exercise of options under the Stock Option Plan.
(4) Excludes as of July 1, 1996: (i) 1,827,759 shares of Common Stock reserved
for issuance upon exercise of options granted, to be granted or available
for grant under the Stock Option Plan, as follows: (a) options to purchase
an aggregate of 1,202,608 shares that have been granted, (b) options to
purchase 53,336 shares that the Company has committed to grant to certain
officers upon consummation of this offering at an exercise price equal to
the initial public offering price, and (c) options to purchase 571,815
shares that are available for grant; and (ii) 665,084 shares of Common Stock
reserved for issuance upon exercise of warrants that are outstanding or that
the Company has agreed to issue. See "Management -- Stock Options," "Certain
Transactions" and "Description of Capital Stock."
16
DILUTION
The pro forma net tangible book value of the Company at March 31, 1996,
after giving effect to transaction described in footnote (1) to "Selected
Financial Data," would have been $2,441,727, or $0.38 per share. Net tangible
book value per share is equal to the Company's total tangible assets less its
total liabilities, divided by the number of shares of Common Stock outstanding.
After giving effect to the sale of the 2,200,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $11.00 per share, and
after deducting the underwriting discount and estimated expenses payable by the
Company, the pro forma net tangible book value at March 31, 1996 would have been
$24,141,727, or $2.78 per share. This represents an immediate increase in such
net tangible book value of $2.40 per share to existing stockholders and an
immediate dilution in net tangible book value of $8.22 per share to new
investors purchasing shares in this offering. The following table illustrates
this per share dilution:
Assumed initial public offering price per share........... $ 11.00
Pro forma net tangible book value per share............. $ 0.38
Increase per share attributable to new investors........ 2.40
---------
Pro forma net tangible book value per share after
offering................................................. 2.78
---------
Dilution per share to new investors....................... $ 8.22
---------
---------
The following table summarizes on a pro forma basis, as of March 31, 1996,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
existing stockholders and by new investors in this offering (assuming an initial
public offering price of $11.00 per share and before deducting the underwriting
discount and estimated expenses payable by the Company):
AVERAGE TOTAL
SHARES PURCHASED CONSIDERATION
----------------------- -------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ----------- ------------- ----------- -----------
Existing Stockholders...................... 6,472,332 74.6% $ 27,748,168 53.4% $ 4.29
New Investors.............................. 2,200,000 25.4 24,200,000 46.6 11.00
---------- ----- ------------- -----
Total.................................. 8,672,332 100.0% $ 51,948,168 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
The foregoing assumes no exercise of the Underwriters' over-allotment option
and assumes no exercise of any outstanding stock options or warrants. At July 1,
1996: (i) there were outstanding options under the Stock Option Plan to purchase
an aggregate of 1,202,608 shares of Common Stock at a weighted average exercise
price of $4.39 per share; (ii) the Company had agreed to grant options under the
Stock Option Plan to purchase 53,336 shares of Common Stock to certain officers
upon consummation of this offering, at an exercise price equal to the initial
public offering price; and (iii) there were outstanding warrants to purchase up
to an aggregate of 665,084 shares of Common Stock at a weighted average exercise
price of $4.17 per share, assuming an initial public offering price of $11.00
per share. To the extent additional shares and warrants are issued and such
outstanding options and warrants are exercised, there will be further dilution
to new investors. However, if all of the foregoing options and warrants were
exercised, the amount of dilution per share to new investors would decrease. See
"Management -- Stock Options," "Certain Transactions," "Description of Capital
Stock" and Notes 5 and 6 of Notes to Financial Statements.
17
SELECTED FINANCIAL DATA
The statement of operations data for each of the three years in the period
ended December 31, 1995 and for the period February 16, 1990 (date of inception)
to December 31, 1995 and balance sheet data at December 31, 1994 and 1995 have
been derived from the financial statements of the Company included elsewhere in
this Prospectus that have been audited by Coopers & Lybrand L.L.P., independent
accountants, as indicated in their report included elsewhere in this Prospectus.
The statement of operations data for the years ended December 31, 1991 and 1992
and the balance sheet data at December 31, 1991, 1992 and 1993 have been derived
from the financial statements audited by Coopers & Lybrand L.L.P. but not
included in this Prospectus. The statement of operations data for the three
months ended March 31, 1995 and 1996 and the balance sheet data at March 31,
1996 are derived from unaudited financial statements included in this Prospectus
and, in the opinion of management, include all adjustments (consisting only of
normal recurring adjustments) necessary for the fair presentation of the
Company's financial position and results of operations at the end of and for
such periods. Operating results for the three months ended March 31, 1996 are
not necessarily indicative of results that may be expected for the full year.
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis" and the Financial Statements and Notes
related thereto included elsewhere in this Prospectus.
FOR THE
PERIOD
FEBRUARY 16, FOR THE THREE MONTHS
1990 (DATE OF
FOR THE YEARS ENDED DECEMBER 31, INCEPTION) TO ENDED MARCH 31,
----------------------------------------------------- DECEMBER 31, --------------------
1991 1992 1993 1994 1995 1995 1995 1996
--------- --------- --------- --------- --------- ------------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Licensing revenue................... $ -- $ -- $ -- $ 2,000 $ -- $ 2,000 $ -- $ --
Research and development revenue.... -- -- -- -- 111 111 95 19
Research and development grants..... 50 -- 269 194 -- 513 -- --
Interest income..................... 59 27 19 46 35 191 5 10
--------- --------- --------- --------- --------- ------------- --------- ---------
Total revenues.................... 109 27 288 2,240 146 2,815 100 29
--------- --------- --------- --------- --------- ------------- --------- ---------
Expenses:
Research and development............ 1,570 3,385 3,932 4,936 4,987 19,131 1,230 1,266
General and administrative.......... 675 1,164 1,413 1,317 1,392 6,299 369 478
Interest expense.................... 5 581(1) 426(1) 132 446 1,594 58 3,572(1)
--------- --------- --------- --------- --------- ------------- --------- ---------
Total expenses.................... 2,250 5,130 5,771 6,385 6,825 27,024 1,657 5,316
--------- --------- --------- --------- --------- ------------- --------- ---------
Net loss.............................. $ (2,141) $ (5,103) $ (5,483) $ (4,145) $ (6,679) $ (24,209) $ (1,557) $ (5,287)
--------- --------- --------- --------- --------- ------------- --------- ---------
--------- --------- --------- --------- --------- ------------- --------- ---------
Net loss per common and common
equivalent share..................... $ (0.66) $ (1.54) $ (1.59) $ (1.20) $ (1.91) $ (7.19) $ (0.45) $ (1.51)
--------- --------- --------- --------- --------- ------------- --------- ---------
--------- --------- --------- --------- --------- ------------- --------- ---------
Weighted average common and common
equivalent shares outstanding........ 3,243 3,307 3,455 3,458 3,495 3,366 3,466 3,508
--------- --------- --------- --------- --------- ------------- --------- ---------
--------- --------- --------- --------- --------- ------------- --------- ---------
FOR THE
PERIOD
FEBRUARY 16,
1990 (DATE OF
INCEPTION) TO
MARCH 31,
1996
-------------
STATEMENT OF OPERATIONS DATA:
Revenues:
Licensing revenue................... $ 2,000
Research and development revenue.... 130
Research and development grants..... 513
Interest income..................... 201
-------------
Total revenues.................... 2,844
-------------
Expenses:
Research and development............ 20,397
General and administrative.......... 6,777
Interest expense.................... 5,166
-------------
Total expenses.................... 32,340
-------------
Net loss.............................. $ (29,496)
-------------
-------------
Net loss per common and common
equivalent share..................... $ (8.76)
-------------
-------------
Weighted average common and common
equivalent shares outstanding........ 3,366
-------------
-------------
(FOOTNOTES ON FOLLOWING PAGE)
18
MARCH 31, 1996
DECEMBER 31, ------------------------
-----------------------------------------------------
1991 1992 1993 1994 1995 ACTUAL PRO FORMA (2)
--------- --------- --------- --------- --------- --------- -------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 1,163 $ 529 $ 1,187 $ 1,045 $ 408 $ 586 $ 2,590
Working capital (deficit)........... 550 (2,096) 348 (2,470) (955) (225) 1,067
Total assets........................ 1,626 1,189 2,016 1,737 2,613 3,802 4,901
Series A Convertible Preferred
Stock.............................. 3,700 5,697 13,372 14,697 16,697 24,697 --
Capital lease obligations, less
current portion.................... 80 196 218 167 748 784 784
Deficit accumulated during the
development stage.................. (2,800) (7,902) (13,385) (17,530) (24,209) (29,496) (32,694)
Paid-in capital..................... 6 515 808 811 838 5,200 35,071
Total stockholders' (deficit)
equity............................. (2,793) (7,384) (12,574) (16,716) (23,368) (24,293) 2,442
PRO FORMA
AS ADJUSTED(2)(3)
-----------------
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 24,288
Working capital (deficit)........... 22,766
Total assets........................ 26,600
Series A Convertible Preferred
Stock.............................. --
Capital lease obligations, less
current portion.................... 784
Deficit accumulated during the
development stage.................. (32,694)
Paid-in capital..................... 56,749
Total stockholders' (deficit)
equity............................. 24,142
- --------------
(1) Includes non-cash charges of $501,000 and $292,000 during the fiscal years
ended December 31, 1992 and 1993, respectively, relating to the issuance of
warrants to purchase Common Stock at an exercise price below the fair market
value per share of the Common Stock and of $3,325,000 during the period
ended March 31, 1996 in connection with the conversion of an aggregate of
$8,000,000 principal amount of Convertible Notes into Preferred Stock at a
conversion price below the originally agreed upon conversion price. See
"Management's Discussion and Analysis," "Certain Transactions" and Notes 5
and 11 of Notes to Financial Statements.
(2) Gives effect to following events subsequent to March 31, 1996: (i) the
borrowing on April 25 and June 11, 1996 of an aggregate of $2,000,000
principal amount under the 1996 Credit Agreement; (ii) the conversion of all
of the shares of Preferred Stock outstanding into an aggregate of 5,636,452
shares of Common Stock upon the consummation of this offering; (iii) the
conversion of all borrowings under the 1996 Credit Agreement into 545,455
shares of Common Stock upon consummation of this offering ($3,000,000 of
such borrowings were outstanding on July 1, 1996 and the foregoing assumes
no additional borrowings under the 1996 Credit Agreement and an initial
public offering price of $11.00 per share); and (iv) the issuance on June
17, 1996 of 911 shares of Common Stock upon the exercise of options under
the Stock Option Plan. See "Capitalization," "Certain Transactions,"
"Description of Capital Stock" and the Notes to the Financial Statements.
(3) Adjusted to give effect to the sale of 2,200,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $11.00 per
share. See "Capitalization."
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
The Company commenced operations in February 1990. The Company is in the
development stage and has devoted substantially all of its resources to the
research and development of its product candidates and general and
administrative expenses. Since inception, the Company has not generated any
revenue from product sales, but has received an aggregate of $2,643,000 in
licensing and research and development revenues and grants, its sole sources of
revenue. There can be no assurance that the Company will receive any such
revenue in the future.
The Company has not been profitable since inception and expects to incur
substantial operating losses for at least the next few years. For the period
from inception to March 31, 1996, the Company incurred a cumulative net loss of
$29,496,000 and, as of March 31, 1996, had a working capital deficit of
$225,000. The Company expects its expenses to increase substantially as it
expands its product development activities. The Company's results of operations
may vary significantly from quarter to quarter due to timing of license
payments, if any, as well as the pace of research and development expenses.
Accordingly, quarterly operating results may not necessarily be indicative of
results that may be expected for the full year.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Total revenues were $29,000 in the three months ended March 31, 1996
compared to $100,000 in the same period in 1995. Research and development
revenue was $19,000 in the three months ended March 31, 1996 compared to $95,000
in the same period in 1995 as a result of payments under the Company's licensing
agreement with Rhone-Poulenc Rorer for the BChE technology in the three months
ended March 31, 1995. The Company does not expect that research and development
revenue will be significant in the future unless additional licensing or other
collaborative agreements are completed. Interest income increased to $10,000 in
the three months ended March 31, 1996 from $5,000 for the same period in the
prior year due primarily to higher average cash balances available for
short-term investment.
Research and development expenses primarily consist of compensation expenses
for research and development personnel, contract research and development costs,
costs of clinical trials, clinical and laboratory supplies and facilities.
Research and development expenses increased 3% to $1,266,000 in the three months
ended March 31, 1996 from $1,230,000 in the three months ended March 31, 1995.
The increase was attributable to higher compensation expenses and facility
costs, partially offset by lower costs of clinical trials and clinical supplies.
Research and development expenses accounted for 73% and 77% of total operating
expenses for the three months ended March 31, 1996 and 1995 respectively.
General and administrative expenses primarily consist of compensation
expenses for management and administrative personnel, professional fees and
other expenses. General and administrative expenses increased 30% to $478,000 in
the three months ended March 31, 1996 from $369,000 in the same period in the
prior year due primarily to higher compensation costs and recruiting costs of
management and administrative personnel.
Interest expense increased to $3,572,000 in the three months ended March 31,
1996 from $58,000 for the same period in the prior year. Interest expense in
1996 included a non-cash charge of $3,394,000 related primarily to the
conversion of Convertible Notes into Preferred Stock at a conversion price below
the originally negotiated conversion price. See "Liquidity and Capital
Resources" and Note 11 of Notes to Financial Statements. Excluding the non-cash
charge, interest expense increased to $178,000 in the three months ended March
31, 1996 from $58,000 in the same period of the prior year as a result of
increased borrowings under credit agreements and capitalized leases.
FISCAL YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Total revenues were $146,000 in 1995, $2,240,000 in 1994 and $288,000 in
1993. Research and development revenue was $111,000 in the year ended December
31, 1995 resulting from payments under the licensing agreement with
Rhone-Poulenc Rorer relating to the BChE technology transfer. In 1994, the
20
Company received licensing revenue of $2,000,000, attributable to the initial
payment under the Company's licensing agreement with Rhone-Poulenc Rorer for its
BChE technology and $194,000 in research and development revenue from a Phase II
Small Business Innovation Research ("SBIR") grant from the National Institute on
Drug Abuse ("NIDA") for the study of cocaine detoxification. The study was
completed in 1994. The Company was awarded the grant in 1993 in the total amount
of $500,000, under which $194,000 was recognized as revenue in 1994 and $220,000
was recognized as revenue in 1993. The remaining balance of $86,000 has expired.
In addition, the Company was awarded a $49,000 Phase I SBIR grant from the
National Institute of General Medical Sciences ("NIGMS") to study post-surgical
apnea. The study was completed in 1993, and the $49,000 was recognized as
revenue in 1993. Interest income was $34,000 in 1995, $46,000 in 1994 and
$19,000 in 1993. Interest income resulted primarily from the temporary
investment of proceeds from the Company's private placements of Preferred Stock.
Research and development expenses increased 1% to $4,987,000 in the year
ended December 31, 1995 from $4,936,000 in the year ended December 31, 1994.
Research and development expenses increased 26% in 1994 from $3,932,000 in 1993.
In 1995, higher compensation expenses and recruiting costs for additional
research and development personnel, consulting expenses relating to review of
clinical and regulatory progress on the Carbatrol 505(b)(2) NDA and higher
facilities costs due to the Company's relocation, were offset by lower costs of
clinical trials, clinical and laboratory supplies and lower contract research
and development costs. The increase in 1994 from 1993 were primarily due to
higher compensation expenses and recruiting costs for additional research and
development personnel, costs of clinical and laboratory supplies, equipment
costs and the costs of clinical trials. The number of full-time employees in
research and development was 44 at December 31, 1995, 35 at December 31, 1994
and 30 at December 31, 1993. Research and development expenses accounted for
78%, 79% and 74% of total operating expenses of the Company in 1995, 1994 and
1993, respectively.
General and administrative expenses increased 6% to $1,392,000 in the year
ended December 31, 1995 from $1,317,000 in the year ended December 31, 1994,
primarily as a result of increased professional fees. General and administrative
expenses in 1994 decreased 7% from $1,413,000 in 1993, primarily due to lower
recruiting and relocation expenses for management and administrative personnel
and lower professional fees, which were partially offset by an increase in
compensation expenses.
Interest expense increased 238% to $446,000 in 1995 from $132,000 in 1994.
Interest expense decreased 69% in 1994 from $426,000 in 1993. Interest expense
in 1993 included $292,000 of non-cash charges relating to interest expense on
warrants issued at an exercise price below fair market value in connection with
the Company's credit agreements. See "-- Liquidity and Capital Resources,"
"Certain Transactions" and Note 4 of Notes to Financial Statements. Excluding
the non-cash charges, increased interest expense resulted from additional
financings under credit agreements and capitalized leases.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in 1990, the Company has financed its operations
primarily from (i) private sales of its Preferred Stock, (ii) loans from certain
of its stockholders, (iii) licensing and research and development revenues and
grants and (iv) to a lesser extent, capital leases.
Through March 31, 1996, the Company had received proceeds of $24,697,000
from the sale of its Preferred Stock, primarily to HealthCare Ventures II, L.P.,
HealthCare Ventures III, L.P., HealthCare Ventures IV, L.P. and certain other
institutional investors. Upon consummation of this offering, the Preferred Stock
will be converted into Common Stock.
Since 1991, the Company has also obtained loans from certain of its
stockholders. In 1994, the Company entered into the 1994 Credit Agreement
permitting it to borrow, under certain circumstances, up to $4,395,000 at the
rate of 7 1/4% per annum. The Company borrowed $2,000,000 under the 1994 Credit
Agreement. These loans were converted into Preferred Stock and the facility was
terminated in May 1995.
In May 1995, the Company entered into the 1995 Credit Agreement with certain
of its stockholders permitting it to borrow up to $8,000,000 at the rate of 9%
per annum. The Company issued $8,000,000 of
21
Convertible Notes under the 1995 Credit Agreement through January 1996. All of
the Convertible Notes were converted into 8,000,000 shares of Preferred Stock in
March 1996. In connection with the conversion of the Convertible Notes into
Preferred Stock at a conversion price of $1.00 per share, which was $0.25 per
share less than the originally negotiated conversion price, the Company recorded
a non-cash expense of $3,325,000 in the first quarter of 1996.
Also in March 1996, the Company entered into the 1996 Credit Agreement,
permitting it to borrow up to $7,300,000 at the rate of 8 1/2% per annum prior
to the consummation of this offering. As of July 1, 1996, the Company had
borrowed $3,000,000 under the 1996 Credit Agreement. All borrowings under the
1996 Credit Agreement will convert into Common Stock at one-half of the initial
public offering price upon consummation of this offering and the 1996 Credit
Agreement will be terminated. The Company expects to record a $2,100,000
non-cash expense upon closing of this offering to reflect this discount. In
connection with the issuance of 880,000 warrants to purchase Preferred Stock
under the 1996 Credit Agreement, the Company expects to record, upon closing of
this offering, a non-cash expense of $1,098,000 to reflect ascribed debt
issuance costs. See Note 12 of Notes to Financial Statements.
From its inception through March 31, 1996, the Company received an aggregate
of $2,643,000 in licensing and research and development revenues and grants. Of
this amount, $2,000,000 represented an upfront fee from Rhone-Poulenc Rorer
under the BChE license agreement and most of the balance represented grants from
NIDA, an organization that is part of the National Institutes of Health, to fund
the Company's research of a treatment for cocaine addiction. Over this period,
the Company also entered into capital leases of certain equipment, which had a
balance of $1,167,000 at March 31, 1996.
On July 1, 1996, the Company entered into an exclusive licensing agreement
with Athena for the worldwide marketing, sale and distribution of Carbatrol.
Under the agreement, Athena (i) will make a $2.0 million payment within ten days
of execution of the agreement, (ii) will fund all future development costs
associated with Carbatrol which are approved by a steering committee, (iii) will
make a milestone payment, upon satisfaction of certain conditions, of up to $8.0
million, of which $5.0 million is creditable against future royalty payments
which may be earned on product sales, and (iv) will make future royalty payments
to the Company based on net sales of Carbatrol. See "Business -- Licensing
Agreements."
The cash generated by the Company was used to fund its operating activities,
which used $24,778,000 through March 31, 1996, as well as its capital
expenditures for the purchase of equipment and leasehold improvements of
$866,000 and principal payments on its capital leases of $817,000. At March 31,
1996, the Company had $586,000 of cash and cash equivalents and negative working
capital of $225,000. The increase at December 31, 1995 from December 31, 1994 in
prepaid assets of $117,000 and in fixed assets of $999,000 related primarily to
deposits, equipment and leasehold improvements for the renovation of the
subleased facility the Company occupied in 1995 in Rockville, Maryland. The
increase in other assets of $416,000 related primarily to the deferred costs of
this offering.
At December 31, 1995, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $18,002,000, which may be available
to reduce future federal income taxes. The utilization of the loss carryforwards
to reduce future income taxes will depend on the Company's ability to generate
sufficient taxable income prior to the expiration of the net operating loss
carryforwards. The carryforwards begin to expire in the year 2005. However, the
Tax Reform Act of 1986 limits the maximum annual use of net operating loss and
tax credit carryforwards in certain situations where changes occur in the stock
ownership of a corporation. As a result of a private sale of Preferred Stock in
June 1993, a change of ownership was deemed to occur restricting the Company's
use of its net operating loss carryforwards. As a result, the Company estimates
that its use of approximately $7,500,000 of these net operating loss
carryforwards (those incurred before June 1993) will be subject to an annual use
limitation. See Note 8 of Notes to Financial Statements.
Following this offering, the Company will require funds to continue its
research and development and other product development activities, to fund its
other operating activities and to fund its capital expenditures. In 1996 and
1997, the Company plans to substantially increase its research and development
and other product development activities.
22
Following this offering, the Company will not have any credit facilities in
place and will not be entitled to a significant amount of licensing payments or
research and development payments or grants, unless certain milestones are
achieved under its BChE license agreement, its Carbatrol license agreement or it
enters into a license agreement relating to another of its product candidates.
The Company's future capital requirements will depend on many factors, including
the progress of the Company's research and development programs, its success in
entering into new collaborative arrangements and the amount of payments it
receives thereunder, the results and costs of preclinical and clinical testing
for the Company's product candidates, the costs associated with and the timing
of regulatory approvals and product introductions, technological advances, the
status of competitive products and the commercial success of the Company's
products. There can be no assurance that additional funds, if required, will be
available to the Company on favorable terms, if at all, to permit the Company to
continue with its plan for operations. Subject to the foregoing, the Company
believes that the net proceeds of this offering, together with its available
cash (including the $2 million payment due from Athena under its license
agreement with the Company) will be sufficient to finance its operations for at
least the next 24 months. See "Risk Factors -- Future Capital Needs; Uncertainty
of Additional Funding" and "Use of Proceeds."
23
BUSINESS
GENERAL
The Company develops pharmaceutical products utilizing advanced drug
delivery systems. The Company has developed a portfolio of drug delivery and
screening technologies designed to produce optimal delivery of a particular
pharmaceutical product for a given indication. These technologies include its
proprietary Peptitrol systems for the oral delivery of hard-to-deliver
compounds, oral controlled-release and sustained-release delivery, transmucosal
delivery through tissues in the oral cavity and transdermal delivery. Instead of
emphasizing a specific drug delivery system, the Company selects the drug
delivery system that it believes is most effective for delivery of a specific
compound and that can result in such advantages as convenient dosing, reduced
side effects, improved bioavailability or easier administration. The Company has
also developed various screening technologies, including its proprietary
Peptiscreen system, to systematically and rapidly test a large number of
formulations.
The Company's strategy in selecting its current product candidates has been
to select a pharmaceutical product for reformulation based on its analysis of
the potential market and the likely time and expense required to develop the
reformulated pharmaceutical product. Accordingly, the Company has selected
pharmaceutical products that the Company believes have a significant commercial
market, that are off-patent or for which patent protection will no longer be
available at the time the Company's product is introduced and where enhancement
of the method of delivery is expected to have measurable clinical value as
compared to the existing delivery method. The Company generally selects products
for reformulation that treat indications which have relatively simple, clear-cut
clinical end-points. Most of the Company's product candidates are reformulations
of existing compounds approved by the FDA and the Company's delivery systems
usually contain inactive ingredients that are generally recognized as safe
(GRAS) for food use as determined by the FDA or are inactive ingredients that
the Company believes are safe for such use. Therefore, the Company believes that
the development process for its products may be expedited and some of the
regulatory approval risks may be reduced. In addition to reformulating existing
compounds, the Company also intends to seek arrangements with other companies
developing pharmaceutical products based on new molecular entities to use the
Company's drug delivery systems to formulate these products.
DRUG DELIVERY SYSTEMS
Many pharmaceutical products on the market are administered using
conventional oral, injectable and other delivery methods that have certain
limitations. For example, injections are uncomfortable and frequently can be
given only in a hospital or physician's office and, accordingly, are generally
not suitable for home use. Conventional immediate-release pharmaceutical
compounds can initially produce higher drug levels in blood than required,
increasing risks of side effects and subsequently producing lower drug levels in
blood than are therapeutically optimal as the drug is metabolized and cleared
from the body. While some of these problems can be alleviated through more
frequent administration of lower doses or continuous infusions, these modes of
drug therapy can increase costs and can result in patient inconvenience and
patient noncompliance.
Advanced drug delivery technologies are designed to allow for more
consistent and appropriate drug levels in the bloodstream than conventional
methods of drug delivery, thereby usually improving a drug's efficacy and
reducing its side effects. Sustained-release delivery technologies also allow
for the development of dosage forms that reduce the need for frequent
administration, thus improving patient compliance. Additionally, these
technologies may permit the more convenient oral delivery of drugs that
otherwise could only be delivered by injection.
The Company believes that, for most indications, oral delivery is the
preferred method of administration and that once- or twice-a-day dosing is
convenient and results in greater patient compliance than more frequent dosing.
The Company uses a variety of oral technologies for the sustained-release of
drugs aimed at controlling the pattern of drug delivery. These technologies
include multiparticulate formulations that use a variety of controlled-release
coatings and sustained-release matrix tablet technologies. In addition, the
Company has developed its Peptitrol drug delivery systems, which enhance the
oral delivery of hard-to-deliver pharmaceutical products by using materials that
increase absorption of a compound from the gastrointestinal tract.
24
In reformulating hard-to-deliver pharmaceutical compounds, the Company seeks
to improve the "bioavailability" of a drug. Bioavailability, which is the rate
and extent to which the active ingredient of a drug is absorbed into the
bloodstream and becomes available at the site of action, is an important
component of the determination of the effectiveness of a drug. The Company is
seeking to increase the bioavailability of certain hard-to-deliver drugs using
its Peptitrol delivery systems.
The Company also designs controlled-release reformulations through which it
seeks to develop formulations which have more convenient dosing but are
bioequivalent to the existing drug in order to expedite the regulatory review
process and the time for the development of a commercial pharmaceutical product.
When the administration of one compound results in the same bioavailability,
peak drug concentration and time to reach peak concentration in the blood as the
already FDA-approved drug, the compounds are said to be "bioequivalent."
STRATEGY
PRODUCT SELECTION. The Company's strategy in selecting its current product
candidates has been to select a pharmaceutical product for reformulation based
on its analysis of the potential market and the likely time and expense required
to develop the reformulated pharmaceutical product. The Company selects
pharmaceutical products for reformulation that have a significant commercial
market, that are off-patent or that have patent protection expiring prior to the
expected market introduction of the Company's product and where enhancement of
the method of delivery is expected to have measurable clinical value as compared
to the existing delivery method. The Company generally selects products for
reformulation that treat indications that have relatively simple, clear-cut
clinical end-points, which the Company believes should result in a more
straightforward development and regulatory review process. In addition to
reformulating existing compounds, the Company also intends to seek arrangements
with other companies developing pharmaceutical products based on new molecular
entities to use the Company's drug delivery systems to formulate these products.
SELECTION OF DRUG DELIVERY SYSTEM. Instead of focusing on a single drug
delivery system, the Company has developed an expertise in a number of drug
delivery technologies. The Company selects the drug delivery system that it
believes will optimize delivery and address the clinical needs that are not
being met by existing formulations. The drug delivery systems used by the
Company generally do not chemically modify the compounds being delivered and
usually contain inactive ingredients that are GRAS for food use as determined by
the FDA or are inactive ingredients that the Company believes are safe for such
use. Therefore, the Company believes that the development process for its
reformulated products may be expedited and some of the regulatory approval risks
may be reduced.
SCREENING. Because of the time and expense involved in clinical testing,
the Company seeks to optimize each reformulation of a drug before such testing
begins. The Company has developed efficient, high-throughput screening
technologies to evaluate specific drug delivery approaches. The Company
generally uses these screening systems to rapidly and systematically test
different reformulations of a compound to determine the formulation with the
greatest chance of success.
COMMERCIALIZATION. The Company generally intends to develop its products
and commence clinical testing in humans and then to seek collaborators to
undertake further testing, obtain regulatory approval, manufacture, distribute
and market such products. The Company intends to evaluate each product under
development to determine the optimal time for seeking a collaborator. Generally,
the Company believes that the optimal time to seek collaborators is after
successful results from the first bioavailability studies in humans have been
obtained. The Company believes that this is the stage in the development process
which will allow the Company to obtain the most favorable terms for up-front
licensing fees, milestone payments and royalties in relation to the Company's
costs for developing the product.
PRODUCTS IN DEVELOPMENT
The Company currently has 12 product candidates, one for which an NDA was
accepted for filing by the FDA on June 1, 1996 and one of which is in Phase III
clinical trials. The Company has been concentrating its recent efforts on
developing and commercializing Carbatrol for the treatment of epilepsy and, to a
lesser extent, on the development of Selegiline SR for the treatment of cocaine
craving, Nifedipine SR and Acyclovir CD. During the next two years, the Company
expects to focus substantial efforts to support the 505(b)(2) NDA approval
process for Carbatrol and market introduction of Carbatrol. In addition to
Carbatrol, the Company intends to focus most of its development efforts during
the next year on Nifedipine SR and Acyclovir CD.
25
The following table lists each of the Company's 12 product candidates and
its intended therapeutic indication, method of drug delivery and current stage
of development. There can be no assurance that any of these products will be
developed successfully or approved by the FDA in a timely manner.
PRODUCT CANDIDATE INDICATION DRUG DELIVERY TECHNOLOGY DEVELOPMENT STAGE(1)
- ----------------------- ---------------------------- ---------------------------- ----------------------------
Carbatrol Epilepsy Oral sustained-release 505(b)(2) NDA accepted for
filing by the FDA on June
1, 1996/
licensed to Athena
Selegiline SR Cocaine craving and Oral sustained-release Phase III commenced in
withdrawal November 1994
Selegiline SR Parkinson's Disease Oral sustained-release Ready to enter Phase III
BChE Injectable Cocaine overdose Injectable Preclinical safety and
efficacy studies
substantially completed/
licensed to Rhone-Poulenc
Rorer
BChE Injectable Post-surgical apnea Injectable Preclinical safety and
efficacy studies
substantially completed/
licensed to Rhone-Poulenc
Rorer
Acyclovir CD Viral infection Peptitrol/sustained-release Formulation development
DHE IR Migraine headache Transmucosal Formulation development
immediate-release/
Peptitrol
Alprazolam TD Anxiety Transdermal sustained- Formulation development
release
Lorazepam TD Anxiety Transdermal sustained- Formulation development
release
PI 181.2 TD Emesis Transdermal sustained- Formulation development
release
Nifedipine SR Cardiovascular disease Oral sustained-release Formulation development
Insulin CD Diabetes Peptitrol Formulation development
- ------------------
(1) The tests required by the FDA before approval of a pharmaceutical product
are generally divided into three categories. "Phase I clinical trials" refer
to the first phase of human pharmaceutical trials required to gain evidence
of safety and to characterize the pharmacokinetic and/or pharmacodynamic
profile of a drug. "Phase II clinical trials" are designed to provide
evidence of efficacy, dose response and safety in a limited number of
patients with the targeted disease. "Phase III clinical trials" are
generally designed to provide evidence of the efficacy and further safety of
a compound in a large number of patients with the targeted disease. See "--
Government Regulation."
"Preclinical safety and efficacy studies" are conducted in the laboratory
using animal models to evaluate the potential safety and efficacy of a
product.
"Formulation development" refers to the process of developing a prototype of
a drug using a variety of materials to achieve a desired pattern of delivery
of the drug and screening and optimizing the formulation.
26
CARBATROL: Carbatrol is an oral, controlled-release, twice-per-day
formulation of carbamazepine for the treatment of epilepsy. A major problem in
the treatment of epilepsy is patient noncompliance with treatment regimen, which
often may be caused by frequent daily dosing requirements or unpleasant side
effects. A consequence of patient noncompliance is a greater risk of developing
seizures. Utilizing a novel multiparticulate oral drug delivery system,
Carbatrol consists of three different types of pellets incorporated into a
capsule. The Company believes Carbatrol has the potential to improve patient
compliance since its twice-a-day dosing regimen is more convenient than the
dosing requirements of currently marketed immediate-release formulations of
carbamazepine, which should be taken three to four times a day. Carbatrol 200 mg
and 300 mg capsules are designed to deliver steady blood levels of the drug,
both during the day and at night. Finally, Carbatrol offers the potential of
being administered orally as a capsule, or sprinkled on the food of patients who
have difficulty swallowing (e.g., young children, the elderly); however, such
use is specifically subject to FDA approval. In 1994, a patent covering the
Company's formulation of Carbatrol was issued.
Approximately one percent of the population in the United States (e.g.,
2.0-2.5 million people) suffers from epilepsy. There are several types of
seizures associated with epilepsy. Carbamazepine is a drug of choice in treating
two types of epileptic seizures, complex partial and secondarily generalized
tonic-clonic seizures (occurring in approximately one-half of all epilepsy
patients). In 1993, three products -- CIBA-Geigy's Tegretol (carbamazepine),
Warner Lambert's Dilantin (phenytoin) and Abbott's Depakene/ Depakote
(valproate) accounted for approximately 70% of the prescriptions written for
anti-convulsants.
In 1993, U.S. sales of carbamazepine were $142 million, of which
approximately 80% represented sales of Tegretol. Since 1993, three new products
have been introduced -- Carter Wallace's Felbatol, Warner Lambert's Neurontin
and Glaxo Wellcome's Lamictal. The latter two of these products are indicated
for use as adjunct therapy in the treatment of complex partial seizures. The
Company is aware that CIBA-Geigy received FDA approval on March 25, 1996 to
market Tegretol XR, an extended-release formulation of carbamazepine permitting
twice-a-day dosing, and has announced a possible third quarter 1996 market
introduction of the product. Carbatrol, should it be approved, will compete
directly in the marketplace with Tegretol XR.
The Company completed a Phase II/III double blind, double dummy,
placebo-controlled clinical trial in 24 patients with epilepsy, which the
Company believes demonstrated that Carbatrol given every 12 hours was
bioequivalent with Tegretol given every six hours. In 1995, the Company also
completed a multi-center Phase III efficacy/safety study of Carbatrol. In this
study, 75% of the patients furnished Carbatrol did not have a level of seizures
requiring withdrawal from the study as compared to 20% of the patients in a
control group. The Company believes that the study showed that Carbatrol was
statistically significantly more efficacious than the control medication. In
1996, the Company completed an additional multi-center Phase III safety study.
To date, the Company has documented no serious treatment-related adverse side
effects from Carbatrol. The Company's 505(b)(2) NDA which was based on the
bioequivalence of its product to Tegretol, was accepted for filing by the FDA on
June 1, 1996.
In July 1996, the Company licensed the exclusive worldwide marketing, sale
and distribution rights relating to Carbatrol to Athena. Athena has agreed to
fund all future costs of development of Carbatrol. See "-- Licensing
Agreements."
SELEGILINE SR FOR COCAINE CRAVING AND WITHDRAWAL: Selegiline SR, an oral
sustained-release formulation of selegiline, a drug currently used for the
treatment of Parkinson's Disease, is being developed by the Company as a
medication to reduce craving for cocaine. Selegiline SR, a once-a-day
formulation, uses the Company's oral sustained-release delivery technology.
Since there are no adequate animal models for cocaine craving, the Company
selected selegeline for clinical evaluation based on the pharmacology of cocaine
and the presumed mechanism of action of selegeline. Cocaine, among other
actions, increases levels of the neurotransmitter dopamine in the brain. The
Company believes that, in chronic cocaine users, the levels of dopamine decrease
below normal levels in the absence of cocaine. The Company also believes that
such decreased levels of dopamine may lead to a craving for cocaine and
withdrawal symptoms. Selegiline
27
elevates dopamine levels by inhibiting the enzyme, monoamine oxidase B (MAO-B),
which degrades dopamine. The Company believes that this increase in dopamine may
suppress the craving for cocaine and the symptoms of withdrawal.
The National Institute on Drug Abuse ("NIDA") has estimated that
approximately five million people in the United States used cocaine at least
once during 1992 and approximately 1.3 million people used cocaine at least once
a month during such year. The Company believes that many of these individuals
could benefit from treatment. Despite the need for an effective medication to
reduce physiological craving and serve as part of an integrated treatment
program, no such product exists. The Company believes that Selegiline SR, if
safe and effective, could be used in treatment programs as part of an integrated
approach for treatment of cocaine addiction.
Since there are no adequate animal models for this indication, the Company
proceeded directly into clinical studies in humans to evaluate Selegiline SR's
safety and efficacy. A Phase II safety/drug interaction study of Selegiline SR
and cocaine was conducted in a limited number of cocaine addicts. The study,
supported by NIDA, showed no problematic effects when cocaine and Selegiline SR
were administered together. In November 1994, the Company commenced a Phase III
multi-center clinical trial of Selegiline SR as a cocaine craving reducer, which
is being funded by NIDA. The clinical portion of this trial was completed in
December 1995. This Phase III trial will be the first indication of Selegiline
SR's potential efficacy. If Selegiline SR proves to be effective, the Company
plans to seek a collaborative partner for the remainder of the development and
testing of this product. In 1996, a patent was issued to the Company with
respect to its formulation of Selegiline SR.
SELEGILINE SR FOR PARKINSON'S DISEASE: The Company is also developing
Selegiline SR for the treatment of Parkinson's Disease. Selegiline, marketed as
Eldepryl by Somerset/Sandoz, is currently indicated for the treatment of
Parkinson's Disease as an adjunct to levodopa therapy. Orphan Drug exclusivity
for the use of Eldepryl for this indication expires in 1996. Selegiline is a
selective inhibitor of the enzyme monoamine oxidase type B (MAO-B), which is
responsible for the degradation of dopamine in the human brain. By inhibiting
MAO-B, selegiline increases dopamine levels, thereby potentiating and prolonging
the effect of levodopa, which is the primary drug currently used in the
treatment of Parkinson's Disease. Certain studies have also indicated that
selegiline may be effective as monotherapy in early Parkinson's Disease.
There are approximately 500,000 patients with Parkinson's Disease in the
United States. In 1994, the U.S. market for selegiline (Eldepryl) was
approximately $84 million.
Selegiline SR is designed to provide more convenient dosing than Eldepryl
(once versus twice-a-day). The Company has completed a Phase I clinical study of
Selegiline SR, which the Company believes, demonstrated that it selectively
inhibits MAO-B and that it has equivalent bioavailability to Eldepryl given
twice-a-day. The Company anticipates that if it enters into an agreement for the
development and testing of Selegiline SR for cocaine craving, development of
Selegiline SR for Parkinson's Disease will also be included. The Company has
received a patent in 1996 with respect to its formulation of Selegiline SR.
BCHE INJECTABLE FOR COCAINE OVERDOSE: The Company is developing an
injectable form of BChE as an antidote for use in the treatment of cocaine
overdose. BChE is an enzyme found principally in human blood plasma that acts
rapidly to metabolize cocaine. The Company's BChE Injectable formulation is a
highly stable solution that can be stored at room temperature, making it
convenient for use in emergency rooms and emergency vehicles. Historically,
there have been approximately 100,000 emergency room visits in the United States
each year for cocaine overdose. There is currently no antidote for cocaine
overdose and current therapies focus on the treatment of its symptoms.
The Company has completed preclinical safety and efficacy studies funded by
grants from NIDA, which the Company believes showed BChE to be safe and
well-tolerated in animal models. These studies showed no effects of BChE on
cardiovascular and central nervous system parameters or general behavior. They
also showed that BChE significantly reduced the development of seizures and
death in animals given large doses of
28
cocaine. Preclinical toxicity and viral inactivation studies need to be
completed prior to submission of an Investigational New Drug ("IND") filing for
this product. Clinical testing cannot begin until the Company files an IND to
which the FDA does not object.
A patent was issued in January 1994 covering the Company's process for
obtaining BChE derived from human plasma. See "-- Patents, Licenses and
Proprietary Rights." In March 1992, the FDA granted Orphan Drug designation for
the use of the BChE in the reduction and clearance of toxic blood levels of
cocaine encountered during a drug overdose. See "-- Government Regulation."
In August 1994, the Company licensed exclusive, worldwide rights to develop,
produce and market its two BChE Injectable products to Rhone-Poulenc Rorer.
Rhone-Poulenc Rorer has the responsibility for conducting the necessary
preclinical and clinical studies, obtaining regulatory approvals and
manufacturing and marketing the product worldwide. The Company will, upon
request, provide consultation to Rhone-Poulenc Rorer pursuant to the terms of
the license agreement. See "-- Licensing Agreements."
BCHE INJECTABLE FOR POST-SURGICAL APNEA: The Company has also been
developing BChE Injectable as a treatment for post-surgical apnea, a condition
that sometimes results in death. Anesthesiologists use muscle blocking agents
such as succinylcholine or mivacurium in connection with the administration of
general anesthesia to patients undergoing surgery. After surgery, most patients
resume breathing on their own because plasma BChE, which is naturally found in
the blood, inactivates the neuromuscular blocker over a period of time. A small
number of patients who have BChE deficiency, which can be genetic or acquired,
do not resume breathing on their own and require mechanical ventilation. In
addition, BChE could be useful in those situations where the anesthesiologist
may wish to have control over neuromuscular blockade (such as with failed
intubation, interrupted surgery, or surgery involving high risk patients). The
Company estimates that there are approximately 30,000 surgical patients in the
United States each year with a genetic or an acquired BChE deficiency.
There is currently no adequate treatment for post-surgical apnea. Current
treatments include ventilating the patient or using neostigmine. Neostigmine,
although effective in certain situations, is ineffective during complete
neuromuscular paralysis with mivacurium. The Company believes that its BChE
Injectable product may be useful in these circumstances.
The Company has completed preclinical studies suggesting BChE is safe and
effective in reversing neuromuscular blockade. The Company has been granted
Orphan Drug Designation for BChE Injectable in the treatment of post-surgical
apnea. Such designation, however, does not assure that the FDA has not granted
or will not grant orphan drug designation to similar products under development
nor does it assure that the Company or its licensee will receive or maintain
marketing exclusivity nor that it may be blocked from the market by a
competitor's product. See "Business -- Government Regulations." The license
granted to Rhone-Poulenc Rorer to develop, produce and market BChE Injectable
also applies to BChE Injectable for post-surgical apnea. See "-- Licensing
Agreements."
ACYCLOVIR CD FOR VIRAL INFECTION: The Company is developing a
controlled-release formulation of acyclovir, a compound used in the treatment of
viral infections. The Company's formulation uses its Peptitrol technologies and
is designed to enhance oral bioavailability and to be administered less
frequently (e.g., once or twice-a-day). Acyclovir is currently available in oral
form (tablets, capsules or as a suspension), as a topical application and as an
injectable. The oral formulations are indicated for the treatment of initial
episodes and management of recurrent episodes of genital herpes infections and
acute treatment of herpes zoster ("shingles"). In addition to these uses, the
injectable is approved for the treatment of herpes simplex encephalitis and for
use in immunocompromised patients (e.g., AIDS and transplantation patients.).
Acyclovir, marketed by Glaxo Wellcome as Zovirax, is the largest selling
antiviral drug, with 1994 U.S. sales of approximately $569 million. Acyclovir
will be off-patent in 1997.
While current oral formulations of acyclovir allow the use of acyclovir
outside of the institutional setting, there are problems associated with these
formulations. Acyclovir is poorly and erratically absorbed (i.e., about 10% to
20% of the dose is absorbed), and bioavailability decreases with increasing dose
levels. Therefore, in certain circumstances, the drug may need to be
administered in very large doses
29
(e.g., 600-4000 mg per day). In addition, the drug may need to be given several
times a day (e.g., every four hours, five times a day). This profile can result
in poor patient compliance that can, in turn, compromise efficacy. The Company
believes that these limitations can be addressed by a formulation that has good
oral bioavailablity and that can be dosed more conveniently (e.g., once- or
twice-a-day).
The Company has substantially completed formulation development on two
prototypes of Acyclovir CD. The Company has observed substantial increases in
cellular transport in its Peptiscreen model using these formulations. The
Company intends to file an IND for Acyclovir CD during 1997. The Company has
applied for a patent covering one of its formulations of Acyclovir CD and
intends to file a patent application covering the other formulation of Acyclovir
CD, which is currently the Company's lead formulation for this product
candidate.
DHE IR FOR MIGRAINE HEADACHE: Using its Peptitrol technologies, the Company
is designing a transmucosal formulation of DHE for treatment of migraine
(vascular) headache by means of a buccal or sublingual tablet or a sublingual
spray.
Approximately 10% of the population (i.e., 25 million people) suffer from
migraine headache. Of these, the Company believes that only about 40% (i.e., 10
million people) seek treatment. Currently marketed drugs can be classified into
those used to: (a) terminate headache, (b) prevent headache or (c) provide
symptomatic relief. Despite the large potential market and the availability of a
large number of medications, none is ideal. Many products have poor efficacy or
side effect profiles. In addition, the means of administration of many of the
available medications (e.g., injectables or suppositories) are poorly accepted
by patients.
An injectable form of DHE, marketed as DHE-45 by Sandoz, is a highly
effective medication that is indicated for both the termination and the
prevention of migraine headache. Sumatriptan, indicated for the termination of
migraine headache, was introduced originally by Glaxo Wellcome as an injectable,
and in 1995 in oral form. In 1994, sumatriptan had sales in the U.S. of $241
million. The Company believes that the headache market has expanded with the
introduction of sumatriptan formulations and could be expanded further if DHE
were available in a formulation that could be administered transmucosally or
orally instead of by injection.
The current method of administering DHE-45 by injection is poorly accepted
by patients and most patients need to see their physician or go to a clinic or
hospital emergency room for treatment. In addition, a delay in treatment may
reduce the potential efficacy of DHE because the longer the migraine headache
lasts, the more difficult it is to terminate. The formulation being developed by
the Company is designed for administration at first sign of migraine. The
Company's DHE product candidate could be self-administered by the patient. The
transmucosal approach would offer the additional advantage over an oral
formulation of rapid absorption of the drug directly into the bloodstream (with
no first pass metabolism by the liver), resulting in more rapid termination of
the headache.
The Company initiated a Phase I clinical study of a rapidly dissolving
buccal tablet formulation of DHE, but the results of this study were not
favorable. Thereafter, the Company has used its Peptitrol drug delivery system,
which is designed for oral delivery, to develop a new formulation of DHE.
Preliminary screening in Peptiscreen has shown positive results in transport of
DHE formulations across cell lines, as well as from the gastrointestinal tracts
of animals. Because of the advantages of transmucosal delivery, the Company
intends to initially focus on transmucosal delivery of DHE. If transmucosal
delivery is not successful, the Company will focus on oral delivery of this
product. The Company is seeking a collaborator prior to conducting further
research and development of its DHE IR product.
ALPRAZOLAM TD AND LORAZEPAM TD FOR ANXIETY: The Company is developing a
once-a-day transdermal formulation of alprazolam and of lorazepam, both of which
are benzodiazepine compounds for the treatment of anxiety. Currently available
medications for the treatment of anxiety are immediate release and, although
effective, result in fluctuating blood levels that the Company believes can lead
to product dependence. The Company has utilized its transdermal delivery
technology using flux enhancers to facilitate
30
delivery of both alprazolam and lorazepam across skin. Alprazolam TD and
Lorazepam TD, the Company's products under development, are both once-a-day
transdermal formulations, designed to deliver steady blood levels of the
medication.
Research conducted by the American Psychiatric Association indicates that
8.3% of Americans (i.e. approximately 21 million people) suffer from anxiety. In
1992, $1.2 billion of anti-anxiety agents were marketed in the United States and
Canada, and $2.4 billion were marketed worldwide. Alprazolam (marketed as Xanax
by Upjohn) was the largest selling anti-anxiety medication in the United States,
with sales in 1993 of approximately $510 million, which sales fell significantly
in 1994 due to sales of generic versions of the drug. Lorazepam (marketed as
Ativan by Wyeth Ayerst) is the second largest selling benzodiazepine medication,
with 1994 sales of $148 million in the United States.
Although the currently marketed anti-anxiety products are therapeutically
effective, they have frequent dosing requirements (typically three to four times
a day), the potential for adverse side effects (attributable to peak blood
levels seen with administration of immediate-release products) and the potential
for patients becoming dependent on the anti-anxiety product (which the Company
believes is related to the sharp peaks and troughs in blood levels seen with
immediate-release formulations). The Company believes that these drawbacks can
be overcome with a sustained-release, long-acting (e.g., once-a-day) transdermal
product. Should undesirable side effects occur, delivery of the medication can
be stopped by simple removal of the transdermal patch.
The Company is in the process of formulating prototypes of Lorazepam TD and
Aprazolam TD to deliver the required dosage in transdermal screening models. The
Company has developed a prototype of Lorazepam TD that is of a cosmetically
acceptable size and that delivers the proper drug dosage but further development
work is necessary in order to control the stability of the formulation.
Preclinical testing in animal models has not yet commenced. The development of
Lorazepam TD and Alprazolam TD is still in the very early stages and there can
be no assurance that the Company will be successful in formulating a stable
formulation of a cosmetically acceptable size.
PI 181.2 TD FOR EMESIS: The Company is developing a long-acting
(once-a-day) transdermal formulation of an FDA-approved compound that the
Company believes has anti-emetic (anti-vomiting) properties. The Company
believes that this compound (which it calls PI 181.2) could be used for a
variety of indications, including chemotherapy-induced emesis, post-surgical
nausea, pre-surgical nausea prophylaxis and weight maintenance in patients with
AIDS. The Company estimates that there are 2.5 million episodes annually of
chemotherapy in the United States requiring administration of an anti-emetic.
Post-operative nausea occurs in about one-third of the estimated 25 million
surgical procedures performed annually in the United States. Additionally,
weight loss is a significant complication in many AIDS patients, and an easily
administered, well-tolerated anti-emetic is expected to have benefits in this
area.
Most of the products sold in this area are off-patent medications that are
administered orally or by injection. The major new entrant into this market is
Zofran, an injectable marketed by Glaxo Wellcome. Both injectables and oral
medications have certain drawbacks for this indication. Injectables must be
given every few hours by a caregiver, are uncomfortable and can exacerbate an
already traumatic procedure. Administration of oral medications can trigger
emesis (vomiting) and, if emesis occurs subsequently, it is impossible to
determine how much of the anti-emetic the patient absorbed. Transdermal delivery
is the preferred route of administration because a patch can be easily applied,
either by a caregiver in the hospital setting or by the patient at home, making
it more cost effective than an injectable. Transdermal delivery also provides
steady blood levels and a transdermal patch can be removed when desired.
The Company has conducted experiments with different flux enhancers for
transdermal delivery of PI 181.2 TD and has found drug delivery vehicles that
deliver targeted amounts of the drug through human skin samples. The development
of PI 181.2 TD is still in the very early stages and there can be no assurance
that the Company will be successful in formulating a stable formulation of a
cosmetically acceptable size.
NIFEDIPINE SR FOR CARDIOVASCULAR DISEASE: The Company is conducting
research for the purpose of developing a generic version of a once-a-day oral
sustained-release formulation of nifedipine. Nifedipine is a
31
calcium channel blocker used for the treatment of hypertension and angina.
Nifedipine is marketed as Procardia by Pfizer in the United States and as Adalat
by Bayer AG both inside and outside of the United States. Procardia was
originally introduced as a three to four times a day product for the treatment
of angina. Subsequently, Pfizer introduced Procardia XL, an extended-release
tablet that has expanded labeling (as a treatment for hypertension as well as
angina) and is administered once a day. In 1993, sales of calcium channel
blockers were estimated at $2.4 billion in the United States. In 1994, Procardia
XL, the leading calcium channel blocker, had approximately $1.2 billion in sales
in the United States.
The Company believes that there is a significant market opportunity for
products that are bioequivalent to Procardia XL. The Company is conducting
research for the purpose of identifying and developing a formulation of
nifedipine that is bioequivalent to Procardia XL, but which does not infringe
Pfizer's existing patents on Procardia XL. The Company is aware that a number of
companies are also attempting to develop generic formulations of Procardia XL.
Although the patent on the compound nifedipine has expired, Pfizer has been
issued patents with respect to its once-a-day formulation of nifedipine, which
it markets as Procardia XL. There can be no assurance that the Company will be
successful in developing a generic formulation that is bioequivalent to
Procardia XL and that does not infringe Pfizer's patents. If the Company
successfully develops the reformulation, the Company expects that it or its
licensee will file an ANDA with the FDA with respect to the reformulation. Since
the filing of an ANDA for a product covered by a patent is an act of
infringement, the Company believes Pfizer would file a lawsuit against the
Company and its licensee, if any, if it believed it had a claim that the
Company's formulation was covered by Pfizer's patents. The Company is also aware
that Pfizer has raised objections with the FDA in connection with attempts by
other developers of generic sustained-release nifedipine to file ANDAs on the
basis of bioequivalence to Procardia XL and Pfizer may institute other legal or
regulatory challenges against developers of sustained-release generic
nifedipine. See "Risk Factors -- Dependence on Patents and Proprietary Rights."
INSULIN CD FOR DIABETES: The Company is in the process of evaluating a
microemulsion formulation of insulin using its Peptitrol technologies. The
Company's product candidate is designed to be administered orally as a liquid or
in a soft gelatin capsule, with either immediate or sustained-release
characteristics. Diabetes mellitus is the most common endocrine disease. The
American Diabetes Association estimates that 14 million Americans have diabetes,
only half of which are diagnosed; about 10% have insulin-dependent disease
(IDDM) and 90% have non-insulin-dependent disease (NIDDM). Insulin is required
for treatment of all patients with IDDM and many patients with NIDDM.
In preliminary tests using the Company's Peptiscreen model, a microemulsion
formulation of insulin has exhibited increased cellular transport. A significant
number of companies have attempted to develop an oral insulin product and,
because of the difficulties of development, have not been successful. The
development and testing of the Company's formulation of insulin is still in the
very early stages and there can be no assurance that the Company will be
successful in developing a product based on this research. The Company has filed
a patent application on its formulation of insulin.
PEPTITROL AND PEPTISCREEN TECHNOLOGIES
The Company has developed a portfolio of drug delivery and screening
technologies designed to produce optimal delivery of a particular pharmaceutical
product for a given indication. These technologies include its proprietary
Peptitrol systems for the oral delivery of hard-to-deliver compounds, oral
controlled-release and sustained-release delivery, transmucosal delivery through
tissues in the oral cavity and transdermal delivery.
The Company has developed its proprietary Peptitrol drug delivery
technologies for the enhanced oral delivery of poorly absorbed pharmaceutical
compounds that are hard to deliver or have poor oral bioavail-
ability, such as peptides and other large molecules. The Peptitrol drug delivery
systems use one or more hydrophobic or hydrophilic materials to protect the
pharmaceutical compound from degradation and to increase absorption of the
compound from the gastrointestinal tract. The Company then uses its Peptiscreen
cell culture screens to rapidly test formulations developed using Peptitrol
technologies. Peptitrol consists of
32
several drug delivery approaches -- a drug delivery system consisting of
hydrophobic materials to enhance absorption; a multilamellar system comprised of
alternating layers of hydrophobic and hydrophilic materials that can incorporate
the compound as well as sustained-release materials, and two microemulsion
systems.
The Company uses its Peptiscreen system to systematically screen its
formulations. Peptiscreen permits high throughput screening of a large number of
formulations to test the extent to which various formulations may be absorbed
from the gastrointestinal tract and which of the formulations may result in
commercially acceptable levels of transport. The screens utilize cell lines that
mimic different aspects of the gastrointestinal mucosa. One principal screen,
for example, uses cells that grow and differentiate, develop tight junctions,
which prevent most materials from passing between the cells, actively transport
glucose, develop a brush border, and have barrier properties, all similar to
gastrointestinal cells. Different screens are used depending on the formulation
characteristics desired.
The Company believes that its Peptitrol systems have general applicability
to the formulation of peptides and proteins (such as those developed by
biotechnology companies), as well as small molecular weight compounds (such as
those traditionally developed by pharmaceutical companies). The Company has
tested its systems in its Peptiscreen cell cultures on peptides having a
molecular weight of up to approximately 5600 daltons, and the systems appear to
be able to transport peptides having a molecular weight up to this level.
However, the Company's testing is preliminary and there can be no assurance of
the extent to which the technology will prove to be effective for peptides or
other large molecules in clinical testing.
LICENSING AGREEMENTS
On August 25, 1994, the Company and Rhone-Poulenc Rorer signed a worldwide
licensing agreement to develop BChE for use in the treatment of cocaine overdose
and the reversal of post-surgical apnea. The agreement grants Rhone-Poulenc
Rorer the exclusive right to develop, produce and market, at its sole expense,
human pharmaceutical or diagnostic products that contains BChE as an active
ingredient for the diagnosis, prevention or treatment of any human disease or
medical condition. Under the terms of the agreement, the Company received a
$2,000,000 license fee upon execution and will receive certain milestone
payments and royalties based on net sales. Rhone-Poulenc Rorer has assumed
responsibility for the further preclinical and clinical development and
commercialization of this product and the Company has agreed to assist in such
development by providing consultation, at the request and expense of
Rhone-Poulenc Rorer. Rhone-Poulenc Rorer has the right to investigate additional
indications for this product.
On July 1, 1996, the Company entered into an exclusive license agreement
with Athena for the worldwide marketing, sale and distribution of Carbatrol.
Carbatrol will be marketed (under the name Carbatrol or under another name
selected by Athena) in the United States by Athena and by its affiliates or
sublicensees in the rest of the world. Under the agreement, Athena (i) will make
a $2.0 million payment within ten days of execution of the agreement, (ii) will
fund all future development cost associated with Carbatrol which are approved by
a steering committee, (iii) will make a milestone payment of up to $8.0 million
upon FDA approval of the Company's Carbatrol NDA, of which $5.0 million is
creditable against future royalty payments which may be earned on product sales,
and (iv) will make future royalty payments to the Company based on net sales of
Carbatrol and sublicensing revenues. The milestone payment is conditioned upon
the absence of any finding of exclusivity for CIBA-Geigy's Tegretol XR or any
actual or threatened proceeding seeking such a finding. Further, the agreement
may be terminated in Athena's discretion under certain circumstances. The
Company is responsible initially for supplying Carbatrol to Athena. The Company
has entered into an exclusive agreement with a third party to manufacture the
pellets that contain the active ingredient of Carbatrol and has entered into an
agreement with another third party to encapsulate and package the product.
Athena has agreed to be responsible for the costs under these agreements and for
the manufacture of Carbatrol after the expiration of these agreements. See " --
Manufacturing." Athena has been granted the right to purchase 220,000 shares of
Common Stock in this offering.
COMPETITION
Most of the Company's product candidates are reformulations of drugs that
will be off-patent when the Company's products are introduced. All of the
Company's proposed products will face competition from
33
existing therapies, more traditional forms of drug delivery and advanced
delivery systems and drugs being developed by others. Competition for the
development of drug delivery products is intense and expected to increase. The
Company is aware of a number of drug delivery companies and large pharmaceutical
companies that develop or market sustained-release oral dosage systems, have
developed transdermal drug delivery systems, transmucosal systems or have active
research and development programs in controlled-release methods. Many companies
also are developing technologies for the oral delivery of peptides and other
poorly absorbed molecules. Most of the Company's competitors have substantially
greater financial resources and larger research and development staffs than the
Company, as well as substantially greater experience in developing products, in
obtaining regulatory approvals and in manufacturing and marketing pharmaceutical
products. There can be no assurance that the Company will successfully develop
technologies and products that are more convenient, more effective, result in
fewer side effects or are more affordable than those being developed by its
competitors. Furthermore, there can be no assurance that product introductions
or developments by others will not render the Company's products or technologies
noncompetitive or obsolete or that patents issued to competitors may not prevent
the Company from pursuing certain products.
The Company will compete with off-patent drug manufacturers, brand-name
pharmaceutical companies that manufacture or market off-patent drugs, the
original manufacturers of brand-name drugs that continue to produce such drugs
after patent expirations or introduce generic or improved versions of their
branded products, drug companies developing formulations of off-patent drugs and
manufacturers of new drugs that may compete with the Company's formulations of
off-patent products and other drug delivery companies developing formulations of
off-patent drugs or new chemical entities. For example, CIBA-Geigy has developed
an extended-release formulation of Tegretol which was approved in March 1996 and
will compete directly with Carbatrol, if and when it is approved. In addition,
the Company is aware of several companies with significantly greater resources
that are seeking to develop generic formulations of sustained-release nifedipine
(Procardia XL).
The Company's products under development will compete with existing
therapies for epilepsy, Parkinson's Disease, migraine headache, anxiety, emesis,
cardiovascular disease, viral infection and diabetes. Specifically, to the
extent that the active ingredient in the Company's products consist of available
compounds such as carbamazepine or selegiline, the Company's products will be
competing with the brand-name product originally making use of the compound.
Generally, brand-name versions of pharmaceutical compounds have a market
advantage over other products using the same compound. In addition, to the
extent that the manufacturers of the brand-name products seek to develop or
market their own sustained-release versions of products, such as CIBA-Geigy's
extended-release formulation of Tegretol, the Company may find itself at a
competitive disadvantage by virtue of their ability to use the name-brand in the
advertising of their products.
The Company's competitive position also depends upon its ability to attract
and retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the often lengthy period between technological conception and commercial sales.
MANUFACTURING
The Company generally intends to develop its products and commence clinical
testing in humans and then to seek a collaborator to undertake further testing,
obtain regulatory approval, manufacture, distribute and market such products.
The Company expects that its collaborators will assume responsibility for
manufacturing, distribution and marketing. If the Company is unable to enter
into a collaborative arrangement for a particular product on acceptable terms or
enters into a license agreement where the licensee is unwilling to assume the
responsibility for manufacturing, then the Company may assume responsibility for
manufacturing the product. The Company has no manufacturing facilities and
generally plans to rely upon contract manufacturers to manufacture its initial
products. The Company believes that there is currently sufficient capacity
worldwide for the production of its product candidates. The Company intends to
establish manufacturing arrangements with manufacturers that comply with
FDA-mandated cGMP requirements and other applicable regulations, although there
is no assurance that the Company will be able to do so.
34
The Company has contracted with Niro Inc. ("Niro") for the production of
pellets for Carbatrol. The Company's agreement with Niro provides for Niro to
act as the exclusive manufacturer of carbamazepine pellets according to the
Company's specification for a minimum period of three years from the
commencement of production. The Company is obligated to order a minimum quantity
of pellets and pay Niro a fixed price per kilogram of pellets for the first
three years of production under the agreement. Niro has further agreed not to
manufacture any carbamazepine product for a third party so long as the agreement
is in effect. The agreement with Niro will automatically renew from year to year
on terms mutually agreed upon not less than two years prior to such renewal.
Niro must provide a minimum of two-years prior written notice of non-renewal and
the Company must provide a minimum of one-year prior notice of non-renewal. If
the Company cancels this agreement prior to the initial year of production or
does not give notice to commence production on or before October 1, 1996, the
Company may be required to reimburse Niro for certain direct costs incurred by
Niro. The Company has also entered into an agreement with The P.F. Laboratories,
Inc. ("P.F. Labs") for the encapsulation and packaging of Carbatrol. The
Company's agreement with P.F. Labs provides for P.F. Labs to act as the
exclusive encapsulator of Carbatrol according to the Company's specifications
and requirements. The Company is obligated to order a minimum number of capsules
from P.F. Labs at a fixed price for the first year of the agreement, which price
shall be subject to negotiation thereafter. Under its agreement with Athena, the
Company will be responsible for supplying Carbatrol through its contract
manufacturers and Athena has agreed to pay the costs of manufacture under such
contracts. Athena is obligated to assume responsibility for manufacture of
Carbatrol after expiration of these agreements.
The Company has no experience in volume manufacturing. The Company intends
to establish and maintain its own quality control program for certain of its
products, including a set of standard operating procedures designed to assure
that the Company's products are manufactured in accordance with cGMP and other
applicable regulations. Should the Company need or elect to establish a
manufacturing facility, it will require substantial additional funds and will
need to hire significant additional qualified personnel.
The Company's revenues from BChE are dependent upon the ability of
Rhone-Poulenc Rorer to develop, produce, register and market the BChE Injectable
products and to obtain an adequate supply of blood plasma necessary to produce
commercial quantities of BChE. Additionally, plasma suppliers obtain their
supply from human donors who are limited as to the amount and frequency of
donations. Should the supply of suitable plasma donors decline, the ability of
Rhone-Poulenc Rorer to produce and sell BChE Injectable products could be
adversely affected. See "Risk Factors -- Limited Manufacturing Capability and
Experience" and "-- Uncertainty of Supply of BChE; Product Safety."
MARKETING
The Company's revenues from BChE will be dependent upon the ability of
Rhone-Poulenc Rorer to develop and market the BChE Injectable products. Revenues
from Carbatrol will be dependent upon Athena's ability to market, sell and
distribute Carbatrol on its own in the United States and by its affiliates or
sublicensees in the rest of the world. The Company generally intends to enter
into collaborative arrangements to complete development, manufacturing,
distribution and marketing of its product candidates or enter into agreements
for the distribution and marketing of the product. In either case, third parties
would be primarily responsible for marketing. However, in the future, the
Company may co-promote or retain U.S. marketing rights to certain of its
products. In selecting these products, the Company expects to target
concentrated market segments that can be addressed adequately by a relatively
small sales force; however, significant additional expenditures and management
resources will be required to develop an external sales force and implement its
marketing strategy if the Company decides to market products directly. There can
be no assurance that the Company's collaborators will be successful in marketing
products, or that the Company will be able to establish a successful marketing
force. See "Risk Factors -- No Marketing and Sales Capability; Dependence Upon
Third Parties for Marketing."
PATENTS, LICENSES AND PROPRIETARY RIGHTS
The Company's policy is to protect its technology by, among other things,
filing patent applications for technologies and products it considers important
in the development of its business. In addition to filing
35
patent applications in the United States, the Company has filed, and intends to
file, patent applications in foreign countries on a selective basis. The Company
also relies on trade secrets, unpatented know-how and technological innovation
to develop and maintain its competitive position.
In 1994, a patent expiring in 2011 was issued to the Company covering the
process for obtaining BChE from plasma. The Company believes that another
approach may be available for producing BChE using recombinant methods. As a
result, other parties may be able to manufacture BChE for any and all purposes
without infringing the Company's patent. In 1994, a patent expiring in 2011 was
also issued covering the formulation of the Company's Carbatrol product. In
1995, two patents were issued based on the Company's Peptitrol technologies. One
of the patents, which expires in 2014, is directed to a pharmaceutical
preparation of a drug which is poorly soluble in water and which is incorporated
into particles comprised of hydrophobic fatty acid ester. The second patent,
which also expires in 2014, is directed to a pharmaceutical preparation of a
drug incorporated into particles formed of alternate layers of hydrophobic and
hydrophilic materials. In addition, in 1996, a patent, which expires in 2015,
was issued covering the formulation of the Company's Selegiline SR product.
Applications have also been filed for patents covering specific formulations
of acyclovir and insulin based on the Company's Peptitrol technologies. The
Company is aware of other pharmaceutical companies that are working with
microemulsions or hydrophobic materials for use in drug delivery. The Company
intends to prepare additional patent applications relating primarily to its
transdermal products and products using its Peptitrol technologies. Although a
patent has a statutory presumption of validity in the United States, the
issuance of a patent is not conclusive as to such validity or as to the
enforceable scope of the claims of the patent. There can be no assurance that
the Company's issued patents or any patents subsequently issued to or licensed
by the Company will not be successfully challenged in the future. The validity
or enforceability of a patent after its issuance by the patent office can be
challenged in litigation. If the outcome of the litigation is adverse to the
owner of the patent, third parties may then be able to use the invention covered
by the patent, in some cases without payment. There can be no assurance that the
Company's patents will not be infringed or successfully avoided through design
innovation.
There can be no assurance that patents or patent applications owned by or
licensed to the Company will result in patents being issued or that, if issued,
the patents will afford protection against competitors with similar technology.
For example, other companies are evaluating microemulsion, hydrophobic,
transdermal, transmucosal and sustained-release oral formulations. It is also
possible that third parties may obtain patent or other proprietary rights that
may be necessary or useful to the Company. In cases where third parties are
first to invent a particular product or technology, it is possible that those
parties will obtain patents that will be sufficiently broad so as to prevent the
Company from using certain technology or from further developing or
commercializing certain products. If licenses from third parties are necessary
but cannot be obtained, commercialization of the related products would be
delayed or prevented. The Company is aware of patent applications and issued
patents belonging to competitors and it is uncertain whether any of these, or
other filed patent applications of which the Company may not have any knowledge,
will require the Company to alter its potential products or processes, pay
licensing fees or cease certain activities.
The Company's principal products are reformulations of existing products.
Therefore, patents, if any, issued to the Company will only cover the Company's
formulation of the product or the process for manufacturing the product. Others
may be able to develop formulations which provide similar advantages to the
Company's, but which do not infringe the Company's patent. Additionally, patents
issued or which may be issued in the future with respect to Peptitrol or other
drug delivery systems may not be sufficiently broad to preclude others from
developing products that compete with products developed by the Company. For
example, although the Company's issued patents and patent applications relating
to Peptitrol may prevent competitors from developing products using formulations
covered by the Company's patents, the patents would not completely preclude
other companies from formulating drugs using these technologies or other
technologies that could provide similar results.
The Company's product candidates may conflict with patents that have been or
may be granted to competitors, universities or others. In addition, such other
persons could bring legal actions against the
36
Company claiming damages and seeking to enjoin manufacturing and marketing of
the affected products. If any such actions are successful, in addition to any
potential liability for damages, the Company could be required to obtain a
license in order to continue to manufacture or market the affected products.
There can be no assurance that the Company would prevail in any such action or
that any license required under any such patent would be made available on
acceptable terms. The Company believes that there may be significant litigation
in the industry regarding patent and other intellectual property rights. If the
Company becomes involved in such litigation, it could consume substantial
resources.
The Company is conducting research to identify and develop a reformulation
of nifedipine which is bioequivalent to Procardia XL, without infringing
Pfizer's existing patents on Procardia XL. While the patent on the compound
nifedipine has expired, Pfizer has been issued patents with respect to its
once-a-day formulation of nifedipine, which it markets as Procardia XL. If the
Company successfully develops a nifedipine reformulation, the Company expects
that it or its licensee will file an ANDA with the FDA with respect to the
reformulation. There can be no assurance that the Company will be successful in
developing a generic reformulation that is bioequivalent to Procardia XL and
that does not infringe Pfizer's patents. Since the filing of an ANDA for a
product covered by a patent is an act of infringement, the Company believes
Pfizer would file a lawsuit against the Company and its licensee, if any, if it
believed it had a claim that the Company's formulation was covered by Pfizer's
patents. The good faith filing of a patent action could delay the approval of an
ANDA for a period of up to 30 months or longer if so ordered by a court. If
Pfizer successfully asserts its patents, the Company may be enjoined from
selling its product until Pfizer's patents expire.
The Company also relies on unpatented technology, trade secrets and
information and no assurance can be given that others will not independently
develop substantially equivalent information and techniques or otherwise gain
access to the Company's technology or disclose such technology, or that the
Company can meaningfully protect its rights in such unpatented technology, trade
secrets and information. The Company requires each of its employees, consultants
and advisors to execute a confidentiality agreement at the commencement of an
employment or consulting relationship with the Company. The agreements generally
provide that all inventions conceived by the individual in the course of
employment or in the providing of services to the Company and all confidential
information developed by, or made known to, the individual during the term of
the relationship shall be the exclusive property of the Company and shall be
kept confidential and not disclosed to third parties except in limited specified
circumstances. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's information in the event of
unauthorized use or disclosure of such confidential information.
GOVERNMENT REGULATION
The Company's activities and products are subject to extensive and rigorous
regulation by a number of governmental entities, especially by the FDA in the
United States and by comparable authorities in other countries. These entities
regulate, among other things, research and development activities and the
testing, manufacture, safety, effectiveness, labeling, storage, record keeping,
approval, advertising, promotion, distribution and sale of the Company's
products. Product development and approval within this regulatory framework
takes a number of years and involves the expenditure of substantial resources
and is often uncertain. Many products that initially appear promising ultimately
do not reach the market because they are not found to be safe or effective, as
demonstrated by testing required by government regulation during the development
process. In addition, there can be no assurance that this regulatory framework
will not change or that additional regulation will not arise at any stage of the
Company's product development that may affect approval, delay an application or
require additional expenditure by the Company. Moreover, even if approval is
obtained, failure to comply with present or future regulatory requirements, or
new information adversely reflecting on the safety or effectiveness of the
approved drug, can lead to FDA withdrawal of approval to market the product.
Failure to comply with applicable FDA and other regulatory requirements can
result in sanctions being imposed on the Company and any of its contract
manufacturers or distributors. Typical sanctions include warning letters, fines,
product recalls or seizures, injunctions, refusals to permit products to be
imported into or exported out of the United States, refusals of the FDA to grant
premarket approval of drugs or to allow the Company to enter into government
supply contracts, withdrawals of previously approved marketing applications and
criminal prosecution.
37
The activities required before a pharmaceutical product may be marketed in
the U.S. primarily begin with preclinical testing. Preclinical tests include
laboratory evaluation of product chemistry and other end points and animal
studies to assess the potential safety and efficacy of the product as
formulated. Many preclinical studies are regulated by the FDA under a series of
regulations called the current Good Laboratory Practice (cGLP) regulations.
Violations of these regulations can, in some cases, lead to invalidation of the
studies, requiring such studies to be replicated.
The entire body of preclinical development work necessary to administer
investigational drugs to volunteers or patients is summarized in an IND
submission to the FDA. FDA regulations provide that human clinical trials may
begin 30 days following the submission and receipt of an IND, unless the FDA
advises otherwise or requests additional information, clarification or
additional time to review the IND submission. There is no assurance that the
submission of an IND will eventually allow a company to commence clinical
trials. Once trials have commenced, the FDA may stop the trials, or particular
types of trials, by placing a "clinical hold" on such trials because of concerns
about, for example, the safety of the product being tested or the adequacy of
the trial design. Such holds can cause substantial delay and in some cases may
require abandonment of a product.
The regulatory process required to be completed by the FDA before a new drug
delivery system may be marketed in the United States depends significantly on
whether the drug (which will be delivered by the drug delivery system in
question) has existing approval for use and in what dosage forms. If the drug is
a new chemical entity that has not been approved, then the process includes (i)
preclinical laboratory and animal tests, (ii) an IND application that has become
effective, (iii) adequate and well-controlled human clinical trials to establish
the safety and efficacy of the drug in its intended indication and (iv) FDA
approval of an NDA. If the drug has been previously approved, then the approval
process is similar, except that certain toxicity tests normally required for the
IND may not be necessary. Even with previously approved drugs, additional
toxicity testing may be required when the delivery form is substantially
changed. Approval of a drug in a new delivery system may require demonstration
of bioequivalence or clinical studies to demonstrate safety and efficacy.
Because certain of the Company's drug delivery mechanisms, by design, produce
high drug concentrations at the surface of the oral mucosa or skin, new toxicity
tests at this site may need to be performed.
Clinical testing involves the administration of the drug to healthy
volunteers or to patients under the supervision of a qualified principal
investigator, usually a physician pursuant to an FDA reviewed protocol. Each
clinical study is conducted under the auspices of independent Institutional
Review Boards (IRBs) at the institutions at which the study will be conducted.
An IRB will consider, among other things, ethical factors, the safety of human
subjects and the possible liability of the institution. Human clinical trials
are typically conducted in three sequential phases, but the phases may overlap.
Phase I trials consist of testing the product in a small number of patients or
normal volunteers, primarily for safety, in one or more dosages, as well as
characterization of a drug's pharmacokinetic and/or pharmacodynamic profile. In
Phase II, in addition to safety, the efficacy of the product is evaluated in a
patient population. Phase III trials typically involve additional testing for
safety and clinical efficacy and an expanded population at geographically
dispersed test sites. A clinical plan, or "protocol," accompanied by the
approval of the IRB, must be submitted to the FDA prior to the commencement of
each clinical trial. All patients involved in the clinical trials must provide
informed consent prior to their participation. The FDA has the authority to
order the temporary or permanent discontinuation of a clinical trial.
A company seeking FDA approval of a drug must file an application with the
FDA pursuant to the FDC Act, as amended in 1984 by the DPCPTRA. The FDC Act, as
amended, provides for several types of applications, including an NDA, which may
be filed under either Section 505(b)(1) or Section 505(b)(2) of the Act, and an
ANDA under Section 505(j) of the FDC Act. The type of application required to be
filed depends upon a variety of factors, including the nature of the drug and
the extent and availability of scientific data supporting the application.
A 505(b)(2) NDA is an NDA submitted under section 505(b) of the FDC Act for
a drug for which the investigations described in section 505(b)(1)(A) of the FDC
Act (full reports of safety and effectiveness) and relied upon by the applicant
for approval of the application were not conducted by or for the applicant and
38
are not investigations for which the applicant has obtained a right of reference
or use from the person by or for whom the investigations were conducted. In
contrast, an ANDA may not contain human clinical data other than bioavailability
studies. Under the DPCPTRA, the FDA may not approve any version of a pioneer
drug for marketing which is submitted to FDA either in the form of a 505(b)(2)
NDA or an ANDA until all relevant patents for the pioneer drug have expired, or
until the patent owner is notified of the application and given an opportunity
to litigate any patent related disputes. The patent holder can bring a patent
suit against the ANDA or 505(b)(2) NDA applicant. If such a lawsuit is filed,
the DPCPTRA mandates an automatic stay of approval of the ANDA or 505(b)(2) NDA
application for up to 30 months (subject to extension), unless a court of last
appeal has ruled in favor of the ANDA or 505(b)(2) NDA applicant. A petition
submitted by Pfizer in 1993 to the FDA sought to prohibit reliance by an
applicant under a 505(b)(2) NDA on safety and other data in an approved NDA
file. The FDA recently denied the petition but did not decide the legal merits
of the issues presented. Accordingly, any future FDA decision in favor of legal
arguments similar to those in the denied petition could have a significant
adverse effect on the FDA's approval of 505(b)(2) NDAs because 505(b)(2)
applicants would have to obtain required data on the original pioneer drug
formulation that otherwise meets the data definition in 505(b)(2) or that the
applicant conducts itself. This could delay submission and/or approval of such
an application.
The DPCPTRA permits the FDA to approve for marketing a generic drug (i.e., a
duplicated or related version of an approved pioneer new drug) that has been
shown to be as safe and effective as a pioneer new drug whose patents have
expired, but without the submission of "full reports" of safety and
effectiveness. These provisions do not apply to insulin or biological products.
A sponsor may seek to obtain FDA approval through the submission of an ANDA if
the drug product is: (1) the same as an approved pioneer new drug product with
respect to active ingredient(s), route of administration, dosage form, strength
and conditions of use recommended in the labeling; or (2) a product with certain
changes from an approved product (i.e., a combination drug with one different
active ingredient or a product with a different route of administration, dosage
form or strength) if the FDA has approved a petition from the prospective
applicant. Generally, a sponsor of an ANDA need not conduct clinical
investigations of safety and effectiveness other than to demonstrate that its
product is bioequivalent to the pioneer new drug product. By law, the FDA cannot
approve an ANDA unless it finds that the generic drug product is both
bioequivalent and therapeutically equivalent to the pioneer drug product. Some
states, however, make their own bioequivalency determinations for purposes of
listing the generic drug on the state pharmacy formulary, which is necessary to
allow the generic drug to be substituted for the pioneer drug.
If the FDA does ultimately approve an NDA or 505(b)(2) NDA for a product, it
may require, among other things, postmarketing testing, including potentially
expensive Phase IV studies, and surveillance to monitor the safety and
effectiveness of the drug. In addition, the FDA may in some circumstances impose
restrictions on the use of the drug that may be difficult and expensive to
administer. Product approvals may be withdrawn if compliance with regulatory
requirements are not maintained or if problems occur after the product reaches
the market. After a product is approved for a given indication in an NDA (or
PLA/ELA), subsequent new indications or dosages for the same product are
reviewed by FDA via the filing and upon approval of a supplemental application
("sNDA"). The appropriate sNDA is much more focused than the NDA and deals
primarily with safety and efficacy data related to the new indication or dosage,
and labeling information for the sNDA indication or dosage. Finally, the FDA
requires reporting of certain information that becomes known to a manufacturer
of an approved drug.
Biologics, such as the Company's BChE product, are licensed pursuant to
Section 351 of the Public Health Service Act, rather than approved pursuant to
an NDA, 505(b)(2) NDA or ANDA under the FDC Act, as amended by the DPCPTRA. FDA
approval of both a product license application ("PLA") and an establishment
license application ("ELA") for the particular product and the facility
manufacturing the product, respectively, are required. The requirements for
approval of a PLA/ELA or supplemental PLA for new dosages or indications are
comparable to the requirements for approval of an NDA. However, there is no
procedure comparable to an ANDA for the approval of generic biologics based on
bioquivalence to an approved pioneer biologic.
39
Under the Orphan Drug Act, the FDA may designate a product or products as
having Orphan Drug status to treat a "rare disease or condition," which is a
disease or condition that affects populations of less than 200,000 individuals
in the United States, or, if victims of a disease number more than 200,000, the
sponsor establishes that it does not realistically anticipate its product sales
will be sufficient to recover its costs. If a product is designated as an Orphan
Drug, then the sponsor is entitled to receive certain incentives to undertake
the development and marketing of the product, including high-priority FDA review
of an NDA (or PLA/ELA) if the indication is for a serious or life-threatening
disease. In addition, the sponsor that obtains the first marketing approval for
a designated Orphan Drug for a given indication is eligible to receive marketing
exclusivity for a period of seven years. There may be multiple designations of
Orphan Drug status for a given drug and for different indications. However, only
the sponsor of the first approved NDA (or PLA/ ELA) for the same drug (as
defined by the FDA) for its use in treating a given rare disease may receive
marketing exclusivity for such use. Similar products considered the same drug
will be blocked from the market for seven years from the approval of the first
Orphan Drug for that indication. Even if a sponsor of a product for an
indication for use with an Orphan Drug designation is the first to obtain FDA
approval of an NDA (or PLA) for that designation and obtains marketing
exclusivity, another sponsor's application for the same drug product may be
approved by the FDA during the period of exclusivity if the FDA concludes that
the second drug product is clinically superior or if the first sponsor is not
able to supply adequate quantities of the drug product.
Although it may be advantageous to obtain Orphan Drug status for eligible
products, there can be no assurance that the precise scope of protection that is
currently afforded by Orphan Drug status will be available in the future or that
the current level of exclusivity will remain in effect. The Company's BChE
Injectable product has been designated an Orphan Drug for both cocaine overdose
and post-surgical apnea indications by the FDA and, under current laws, the
Company is eligible to receive seven years of market exclusivity for each
indication if it is the first sponsor to receive FDA approval for such
indications. Such designation, however, does not assure that the FDA has not
granted Orphan Drug designation to similar products under development nor does
it assure that it will receive or maintain marketing exclusivity nor that it may
not be blocked from the market by a competitor's product. The Company has
granted Rhone-Poulenc Rorer an exclusive worldwide license to develop,
manufacture and market BChE Injectable, and its subsidiary Armour is pursuing
the clinical investigation necessary to obtain the required safety and efficacy
data to support the filing of a PLA for this product for the two Orphan Drug
indications. Only if Rhone-Poulenc Rorer successfully completes the required
clinical investigations and is the first sponsor to obtain FDA approval of a PLA
for the two Orphan Drug indications will it be eligible to receive market
exclusivity. There is no assurance, however, that Rhone-Poulenc Rorer will be
the first sponsor to obtain FDA approval to market BChE for either of these
indications for use or obtain a period of market exclusivity. The FDA may
approve a second application to market a drug for the same indication if the
developer establishes that its drug is a clinically superior product or not the
same drug as defined by FDA regulations. If FDA should approve BChE for an
indication broader than the Orphan Drug designation, the product might not be
entitled to exclusive marketing rights. The failure of Rhone-Poulenc Rorer to
obtain such marketing exclusivity could have an adverse affect on Rhone-Poulenc
Rorer's ability to market the BChE Injectable product.
Manufacture of a biologic product, such as the Company's BChE Injectable,
must be in a facility covered by an FDA-approved ELA. Manufacture, holding and
distribution of both biologic and non-biologic drugs must be in compliance with
cGMP. Manufacturers must continue to expend time, money and effort in the area
of production and quality control to ensure full technical and other compliance
with those requirements. The labeling, advertising and promotion of a drug or
biologic product must be in compliance with FDA regulatory requirements. Failure
to comply with applicable requirements relating to manufacture, distribution or
promotion can lead to FDA demands that manufacturing, production and shipment
cease until changes are made and approved by the FDA. In some cases, such
failures can lead to product recalls, or to enforcement actions that can include
seizures, injunctions and criminal prosecution or FDA withdrawal of approval to
market the product. If the Company is required to improve manufacturing
operations prior to receiving FDA approval of the product, marketing approval
could be substantially delayed.
40
To date, the Company has filed INDs and is conducting clinical trials on two
of its products, and an additional five of the Company's product candidates
could be ready to enter either Phase I or Phase III clinical trials during the
next 12 months. The Company's NDA for Carbatrol was accepted for filing on June
1, 1996 and the Company has completed the clinical portion of the Phase III
study on its Selegiline SR product for the cocaine craving indication (although
the results of such study are not yet available). The Company has completed
Phase I clinical trials on its Selegiline SR product for the Parkinson's Disease
indication and intends to commence Phase III clinical studies on Selegiline SR
for the foregoing indication upon obtaining a collaborative partner. See "--
Products In Development." There can be no assurance that any required FDA or
other governmental approval will be granted or, if granted, will not be
withdrawn. Governmental regulation may prevent or substantially delay the
marketing of the Company's proposed products and cause the Company to undertake
costly procedures. A number of other factors related to the FDA approval
process, however, may delay or preclude approval of any of the Company's
products. In addition, the extent of potentially adverse government regulations
that might arise from future administrative action or legislation cannot be
predicted. Failure to obtain FDA approval to market Carbatrol, Selegiline SR or
any of its other products under development could have a material adverse effect
on the Company.
The Company has submitted or intends to submit 505(b)(2) NDAs or ANDAs for
Carbatrol, Selegiline SR and certain of its other non-biological drug products
under development. There can be no assurance, however, that the FDA would permit
the Company to obtain marketing approval of these products through such
submissions. Nor can there be any assurance that the Company, if challenged,
would be able to demonstrate that any applicable patent relating to the approved
new drug product will not be infringed or is invalid or be able to defend
successfully against any litigation brought by the patent holder. Failure to
obtain marketing approval for Carbatrol, Selegiline SR or any other drug product
for which the Company seeks to obtain approval through the submission of an ANDA
or 505(b)(2) NDA on a timely basis, if at all, could have a material adverse
effect on the Company.
The DPCPTRA grants marketing exclusivity to certain NDAs and NDA supplements
submitted to the FDA after 1984. To qualify for three years of marketing
exclusivity for an NDA supplement, the pioneer must submit an NDA supplement
that contains reports of new clinical investigations (other than bioavailability
studies) that are "essential to approval" and "conducted or sponsored by the
applicant." The three-year exclusivity will cover "a change approved in the
supplement." While the FDA has declined to formally define what changes are
covered by this language, it could include a new indication, dosage form,
strength, route of administration or dosing regimen. Therefore, if the FDA
approves a sponsor's NDA supplement and such NDA supplement contains clinical
studies (other than bioavailability studies) that are new, are essential to
approval, and are conducted or sponsored by the applicant, the FDA may not
approve a 505(b)(2) NDA or an ANDA for the same "change approved in the
supplement" for three years from the date of approval of the pioneer's NDA
supplement. Thus, 505(b)(2) NDAs or ANDAs submitted after the sponsor's NDA
supplement has been approved may not be approved or the product may not be
marketed in the United States until the end of that three-year period.
Until FDA approval of an NDA, FDA filings are not public and it is typically
not known what, if any, clinical studies are submitted by a sponsor. In this
connection, however, the Company received information pursuant to a FOIA request
that CIBA-Geigy has filed, and obtained approval on March 25, 1996, for, an NDA
supplement for an extended-release formulation of carbamazepine under its brand
name Tegretol. The FOIA documentation further discloses that CIBA-Geigy
requested that the FDA grant it three years market exclusivity commencing on the
date of approval of the Tegretol NDA supplement and that the FDA denied
CIBA-Geigy's request for such exclusivity.
In order to export an unapproved drug or biologic for commercial sale in a
foreign country, a company must comply with the FDA Export Reform and
Enhancement Act of 1996 (the "EREA"). The EREA permits a product not approved
for sale in the United States to be exported to any country, without FDA export
approval, if the following two requirements are met: first, the product must be
lawful in the country of destination; second, the product must have been
approved for marketing in one of the following countries:
41
Australia, Canada, Israel, Japan, New Zealand, Switzerland, South Africa and
countries in the European Union (EU) or European economic area. The EREA also
provides other methods which require FDA authorization for the export of
unapproved products.
In recent years, there have been numerous proposals to reform the healthcare
system in the United States, including currently pending legislation relating to
Medicare and Medicaid. Some of these proposals have included measures that would
limit or eliminate payments for certain medical procedures and treatments or
subject the pricing of pharmaceuticals to government control. In addition,
significant uncertainty exists as to the reimbursement status of newly approved
healthcare products. The Company's ability to commercialize its products
successfully may also depend in part on the extent to which reimbursement for
the cost of such products and related treatment will be available from
government health administration authorities, private health insurers and other
organizations. Such third-party payors are increasingly challenging the price of
medical products and services. It is uncertain what legislative proposals will
be adopted or what actions federal, state or private payors for healthcare goods
and services may take in response to proposed or actual legislation. The Company
cannot predict the effect health care reform may have on its business, and no
assurance can be given that any such reforms will not have a material adverse
effect on the company. Significant uncertainty exists as to the reimbursement
status of newly approved health care products, and there can be no assurance
that adequate third-party coverage will be available to enable the Company to
maintain price levels sufficient to realize an appropriate return on this
investment in product development.
The Company is also subject to regulation by the Occupational Safety and
Health Administration ("OSHA"), the Environmental Protection Agency ("EPA"), the
Drug Enforcement Administration ("DEA") and to regulation under the Toxic
Substances Control Act, the Resource Conservation and Recovery Act and other
regulatory statutes, and may in the future be subject to other federal, state or
local regulations. Either or both of OSHA or the EPA may promulgate regulations
that may affect the Company's research and development programs. Establishments
handling controlled substances, such as alprazolam and lorazepam, must be
licensed and are inspected by the DEA. The Company is unable to predict whether
any agency will adopt any regulation which would have a material adverse effect
on the Company's operations.
To market its products abroad, the Company is also subject to numerous and
varying foreign regulatory requirements, implemented by foreign health
authorities, governing, among other things, the design and conduct of human
clinical trials, pricing regulations and obtaining marketing approval. The
approval procedure varies among countries and can involve additional testing,
and the time required to obtain approval may be longer or shorter from that
required to obtain FDA approval, and approval or other product requirements may
differ. At present, foreign marketing authorizations are applied for at a
national level, although within the EU, certain registration procedures are
available to companies wishing to market a product in more than one EU member
country. If a regulatory authority is satisfied that adequate evidence of
safety, quality and efficacy has been presented, marketing authorization is
almost always granted. The foreign regulatory approval includes all of the risks
associated with obtaining FDA approval set forth above. Approval by the FDA does
not ensure approval by other countries.
FACILITIES
The Company is located in a 44,500 square foot facility containing both
office and laboratory space in Rockville, Maryland. The facility is subleased
from Corning Clinical Laboratories, Inc. The sublease has a five-year term,
beginning May 1, 1995, with the first and second month rent abated, and nine
months of additional free rent. The initial rental rate is $601,000 per annum,
increasing by 3% per annum in each year of the sublease term.
HUMAN RESOURCES
As of July 1, 1996, the Company had 55 employees, 45 of whom were engaged in
research and development activities. The Company's employees are not governed by
any collective bargaining agreement and the Company believes that its
relationship with its employees is good.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
42
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
July 1, 1996, are as follows:
NAME AGE POSITION
- --------------------------------------- --- ---------------------------------------------------
James D. Isbister (1) 59 Chief Executive Officer and Chairman of the Board
of Directors
Robert S. Cohen 53 President and Chief Operating Officer
Krystyna Belendiuk, Ph.D. 45 Senior Vice President -- Business Development,
Director and Secretary
James D. Russo 49 Senior Vice President -- Chief Financial Officer
and Treasurer
Edward M. Rudnic, Ph.D. 40 Senior Vice President -- Development and Technical
Operations
James H. Cavanaugh, Ph.D. (1)(3) 59 Director
Max Link, Ph.D. (2)(3) 55 Director
Lawrence C. Hoff (2) 67 Director
- --------------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
The Board of Directors currently consists of five members. All directors
hold office until the next annual meeting of stockholders and until their
successors are duly elected and qualified. Officers are elected to serve,
subject to the discretion of the Board of Directors, until their successors are
appointed.
JAMES D. ISBISTER has been President, Chief Executive Officer and a Director
of the Company since January 1990 and was appointed to serve as the Chairman of
the Board of Directors in October 1995. Effective July 1, 1996, Mr. Isbister
resigned as President of the Company with the appointment of Robert S. Cohen as
President, but continues to serve as Chairman of the Board and Chief Executive
Officer. Mr. Isbister plans to retire as Chief Executive Officer no later than
January 1, 1997. From 1986 until January 1989, Mr. Isbister was Senior Vice
President of Consolidated HealthCare and served as President of its subsidiary,
Combined Technologies, Inc. Mr. Isbister served as Senior Vice President of the
National Blue Cross and Blue Shield Association (the "Association") from 1980 to
1986 and as a consultant to the Association from January 1989 to January 1990.
From 1978 to 1980, Mr. Isbister was the Associate Director for Management of the
U.S. International Communication Agency. Mr. Isbister served as Deputy Director
of the National Institute of Mental Health from 1970 to 1974 and as the first
Director of the U.S. Alcohol, Drug Abuse, and Mental Health Administration from
1974 to 1977.
ROBERT S. COHEN joined the Company as President and Chief Operating Officer
effective July 1, 1996. Prior to joining the Company, Mr. Cohen had extensive
experience as a pharmaceutical company executive. From September 1995 until June
1996, Mr. Cohen served as President and Chief Operating Officer of Trophix
Pharmaceuticals, Inc. ("Trophix"), where he remains a member of the Board of
Directors. From June 1993 until August 1995, Mr. Cohen served as President and
Chief Executive Officer of Gynopharma, Inc. From June 1980 to June 1993, Mr.
Cohen was employed by Berlex Laboratories, Inc., a division of Schering AG,
serving as Chief Operating Officer commencing in 1989. Mr. Cohen will continue
to assist Trophix with some projects through 1996 on a part-time basis. Mr.
Cohen has a B.S. and M.S. in Pharmacy from the Brooklyn College of Pharmacy and
is a registered pharmacist.
KRYSTYNA BELENDIUK has been Senior Vice President for Business Development,
a Director and Secretary since April 1991 and served as Treasurer from April
1991 to May 1994. Prior to joining the Company, Dr. Belendiuk served as
Executive Director, Corporate Planning and Control, from October 1990 to April
1991, and as Director, Corporate Planning and Analysis from June 1988 to
September 1990, at CIBA-Geigy Corp. From 1984 to May 1988, she served as
Director and then Executive Director of Portfolio Management
43
with the Pharmaceuticals Division of CIBA-Geigy Corp. Prior to joining
CIBA-Geigy Corp., Dr. Belendiuk served as a marketing manager for Sandoz
Pharmaceuticals Corp. In addition to a doctorate in Biopsychology, she holds an
M.B.A. in Finance and Marketing, both from the University of Chicago.
JAMES D. RUSSO has been Senior Vice President, Chief Financial Officer and
Treasurer since May, 1994. Prior to joining the Company, Mr. Russo served as
Senior Vice President, Chief Financial Officer and Treasurer of Versar, Inc. an
environmental consulting firm from 1992 to 1994. Mr. Russo was a Senior Vice
President and Chief Financial Officer of ICF International, Inc., an
international environmental engineering firm and health care consulting firm
("ICF") from 1986 to 1992. From 1986 to 1988 he also served as Treasurer of ICF.
From 1977 to 1986, Mr. Russo was Vice President of Finance, Treasurer and served
on the Board of Directors of PRC Engineering, Inc., a subsidiary of Planning
Research Corporation, where he managed the international financial operations of
the consulting engineering firm. Mr. Russo is a Certified Public Accountant.
EDWARD M. RUDNIC has been Senior Vice President, Development and Technical
Operations, since February 1996. From April 1991 to February 1996, he was Vice
President for Pharmaceutical Research and Development. Dr. Rudnic has over
fifteen years of industry experience in the design, formulation and
commercialization of advanced drug delivery systems. From October 1990 to April
1991, Dr. Rudnic was an independent consultant. From 1987 to October 1990, Dr.
Rudnic served as Director of Formulation Development with Schering-Plough Corp.,
and from 1985 until 1987, as a Manager of Pharmaceutical Process Development.
From 1982 until 1985, Dr. Rudnic was a Research Investigator at E. R. Squibb and
Sons, developing oral controlled-release dosage forms and novel drug delivery
concepts. Dr. Rudnic has a B.S. in Pharmacy, an M.S. in Pharmaceutics and a
doctorate in Pharmaceutical Sciences from the University of Rhode Island. Dr.
Rudnic is a registered pharmacist.
JAMES H. CAVANAUGH has served as a Director of the Company since its
inception. Since 1989, Dr. Cavanaugh has been President of HealthCare Investment
Corporation LLC ("HIC") and is currently a general partner of each of HealthCare
Partners I, L.P. ("HCP I"), HealthCare Partners II, L.P. ("HCP II"), HealthCare
Partners III, L.P. ("HCP III") and HealthCare Partners IV, L.P. ("HCP IV"), the
general partners of HealthCare Ventures I, L.P. ("HCV I"), HealthCare Ventures
II, L.P. ("HCV II"), HealthCare Ventures III, L.P. ("HCV III") and HealthCare
Ventures IV, L.P. ("HCV IV"), respectively. HCV II, HCV III and HCV IV are
principal stockholders of the Company. Prior thereto, Dr. Cavanaugh served as
President of SmithKline & French Laboratories -- U.S., Inc. from March 1985 to
February 1989 and as President of SmithKline Clinical Laboratories from 1981 to
1985. In addition to serving on the Boards of Directors of several health care
and biotechnology companies, including MedImmune, Inc., Magainin
Pharmaceuticals, Inc., Human Genome Sciences, Inc. and Procept, Inc. Dr.
Cavanaugh currently serves on the Executive Committee of the Board of Trustees
of the National Committee for Quality Health Care (Chairman, 1988), the National
Committee of the American Refugee Committee, the Board of Councilors of the
School of Pharmacy of the University of Southern California and as Trustee
Emeritus of the California College of Medicine. Dr. Cavanaugh received his Ph.D.
from the University of Iowa.
MAX LINK has served as a Director of the Company since January 1995. In
addition, Dr. Link has held a number of executive positions with pharmaceutical
and healthcare companies. Most recently, he served as Chief Executive Officer of
Corange Limited, from May 1993 until June 1994. Prior to joining Corange,
Limited, Dr. Link served in a number of positions with Sandoz Pharma Ltd.,
including Chief Executive Officer, from 1990 until April 1992, and Chairman,
from April 1992 until May 1993. Dr. Link currently serves on the board of
directors of Alexion Pharmaceuticals, Inc., Human Genome Sciences, Inc.,
Procept, Inc. and Protein Design Labs, Inc. Dr. Link received his Ph.D. in
Economics from the University of St. Gallen.
LAWRENCE C. HOFF became a Director of the Company in February 1996. In 1990,
Mr. Hoff retired as President and Chief Operating Officer of the Upjohn Company
("Upjohn"). Mr. Hoff joined Upjohn in 1950 as a pharmaceutical sales
representative. He was appointed Vice President for Domestic Pharmaceutical
Marketing in 1969. In 1973, Mr. Hoff was elected to the Board of Directors of
Upjohn on which he served as a director until the Upjohn Company merged with
Pharmacia in 1995. In 1974, he became Vice President
44
and General Manager of Domestic Pharmaceutical Operations. From 1974 to 1984,
Mr. Hoff served as Executive Vice President at Upjohn. Mr. Hoff was elected to
the Board of Directors of the Pharmaceutical Manufacturers Association ("PMA")
in 1984. He was elected Chairman-elect of the PMA in 1986 and Chairman in 1987.
Mr. Hoff currently serves as a director of Curative Technologies, Inc.,
MedImmune, Inc., Alpha Beta Technologies and Pathogenesis, Inc. Mr. Hoff
graduated from Stanford University and has received honorary degrees from
Massachusetts College of Pharmacy and Allied Health Sciences and from Kalamazoo
College.
The Board of Directors established the Audit Committee in October 1995. The
Audit Committee is authorized to review with the Company's independent
accountants, the annual financial statements of the Company prior to
publication; to review the work of, and approve non-audit services performed by,
such independent accountants; and to make annual recommendations to the Board
for the appointment of independent public accountants for the ensuing year. The
Audit Committee also reviews the effectiveness of the financial and accounting
functions, organization, operations and management of the Company.
The Board of Directors established the Compensation Committee in May 1991.
The Compensation Committee is authorized to review and recommend to the Board of
Directors the compensation and benefits of all officers and directors of the
Company and to review general policy matters relating to compensation and
benefits of employees of the Company. The Compensation Committee also
administers the issuance of stock options to the Company's officers, employees
and consultants pursuant to the Company's 1991 Stock Option Plan.
Directors, with the exception of Dr. Link and Mr. Hoff, receive no cash
compensation for their services as directors but are reimbursed for expenses
actually incurred in connection with attending meetings of the Board of
Directors. Dr. Link receives $20,000 per annum and has been granted options to
purchase 7,822 shares of Common Stock at an exercise price of $4.50 per share
and 2,224 shares of Common Stock at an exercise price of the greater of $4.50
per share or 85% of the initial public offering price per share in this
offering. Mr. Hoff receives $15,000 per annum, plus expenses, and has been
granted options to purchase 6,850 shares of Common Stock at an exercise price of
the greater of $4.50 per share or 85% of the initial public offering price per
share in this offering. In addition, directors who are not employees of the
Company are entitled to receive automatic stock option grants. See "-- Stock
Options."
The Company's Restated Certificate of Incorporation includes certain
provisions permitted pursuant to Delaware law whereby officers and directors of
the Company are to be indemnified by the Company against certain liabilities.
The Company's Restated Certificate of Incorporation also limits, to the fullest
extent permitted by Delaware law, a director's liability for monetary damages
for breach of fiduciary duty, including gross negligence, except liability for
(i) breach of the director's duty of loyalty, (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of the law,
(iii) the unlawful payment of a dividend or unlawful stock purchase or
redemption and (iv) any transaction from which the director derives an improper
personal benefit. Delaware law does not eliminate a director's duty of care and
this provision has no effect on the availability of equitable remedies such as
an injunction or rescission based upon a director's breach of the duty of care.
In addition, the Company has obtained an insurance policy providing coverage for
certain liabilities of its officers and directors.
SCIENTIFIC ADVISORY BOARD
The Company's Scientific Advisory Board currently consists of four
individuals who have extensive experience in the fields of pharmacology,
chemistry, neurosciences, enzymology and molecular genetics. At the Company's
request, the scientific advisors review and evaluate the Company's research
programs and advise the Company about technical matters in the scientific fields
in which the Company is involved. The Company's Scientific Advisory Board
generally meets as a group at least three times a year to review and discuss the
Company's progress in research and development. In addition, certain members of
the Scientific Advisory Board meet informally in smaller groups or individually
with Company scientists on a more frequent basis.
45
The following table sets forth the name and current position of each
scientific advisor:
NAME POSITION
- ---------------------------- -----------------------------------------------------------------------
Floyd Bloom, M.D. Chairman of the Scientific Advisory Board. Chairman, Department of
Neuropharmacology, The Scripps Research Institute
Roscoe Brady, M.D. Chief, Developmental and Metabolic Neurology Branch, National
Institutes of Health
John J. Burns, Ph.D. Adjunct Member, Roche Institute of Molecular Biology and Adjunct
Professor, The Rockefeller University
Paul Greengard, Ph.D. Vincent Astor Professor, Laboratory of Molecular and Cellular
NeuroScience, The Rockefeller University
The Company has entered into consulting agreements with each member of the
Scientific Advisory Board. The Consulting Agreements are for varying terms and
provide for each of the members to serve on the Scientific Advisory Board of the
Company and/or to render advice to the Company in the area of the Company's
business and such member's expertise for specified annual compensation for their
services. The Company's scientific advisors are employed by other entities and
some have consulting agreements with entities other than the Company, some of
which may in the future compete with the Company. The scientific advisors are
expected to devote only a small portion of their time to the Company and are not
expected to participate actively in the day-to-day operations of the Company.
Certain of the institutions with which the scientific advisors are affiliated
may adopt new regulations or policies that limit the ability of the scientific
advisors to consult with the Company.
It is possible that any inventions or processes discovered by the scientific
advisors will remain the property of such persons or of such persons' employers.
In addition, the institutions with which the scientific advisors are affiliated
may make available the research services of their personnel, including the
scientific advisors, to competitors of the Company pursuant to sponsored
research agreements.
46
EXECUTIVE COMPENSATION
The following summary compensation table sets forth the aggregate
compensation paid or accrued by the Company to the Chief Executive Officer and
to the four most highly compensated executive officers other than the Chief
Executive Officer whose annual compensation exceeded $100,000 for the fiscal
year ended December 31, 1995 (collectively, the "named executive officers") for
services rendered during the fiscal years ended December 31, 1995, 1994 and
1993:
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION NUMBER OF
------------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) COMPENSATION OPTIONS
- ---------------------------------------------------- --------- ---------- ----------- ------------- -------------
James D. Isbister (2)............................... 1995 $ 225,239 $ 75,000 $ 3,516(3) 82,472
Chairman of the Board 1994 214,513 75,000 3,373(3) 0
President and Chief 1993 204,298 50,000 1,174(3) 85,696
Executive Officer
Dr. George W. Belendiuk (4)......................... 1995 $ 176,248 $ 41,964 $ 40,403(5) 37,201
Senior Vice President -- 1994 167,885 31,972 33,805(5) 4,167
Research & Development 1993 159,862 30,450 0 43,334
Dr. Krystyna Belendiuk.............................. 1995 $ 149,826 $ 28,538 0 37,201
Senior Vice President -- 1994 142,691 27,179 0 4,167
Business Development 1993 135,896 18,598 0 43,334
Dr. Edward M. Rudnic................................ 1995 $ 131,846 $ 25,114 0 23,021
Senior Vice President -- 1994 125,568 23,918 0 2,500
Pharmaceutical Operations 1993 119,589 16,366 0 19,000
James D. Russo...................................... 1995 $ 138,961 $ 30,000 0 18,113
Senior Vice President -- 1994 79,219 0 0 16,667
Chief Financial Officer (5) 1993 0 0 0 0
- --------------
(1) Bonus in this chart represents the amount actually paid to the employee in
the year indicated, but earned in the preceding year.
(2) Effective July 1, 1996, Mr. Isbister resigned as President of the Company
with the appointment of Robert S. Cohen as President, but continues to serve
as Chairman of the Board and Chief Executive Officer.
(3) Compensation adjustment related to value of automobile provided to employee.
(4) Dr. George Belendiuk died on April 20, 1996.
(5) Relocation expense reimbursement.
(6) Mr. Russo's employment with the Company commenced in May 1994.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of Drs.
Krystyna Belendiuk and Edward Rudnic and Mr. James Russo, each of which is
effective July 1, 1996, which provide for current annual base salaries of
$157,317, $153,000 and $153,000, respectively. The agreements renew for
successive one year periods unless terminated earlier by either party on 180
days' written notice. In the event any of the officers' employment agreements
are terminated without cause, such officer will be entitled to receive the
unpaid portion of the base salary payable through the date of termination of the
agreement, plus a payment equal to the lesser of (i) one year's base salary or
(ii) nine months' base salary or the base salary for the remaining term,
whichever is greater, payable in equal monthly installments for the applicable
period. The
47
agreements also provide for the vesting and acceleration of the exercisability
of unvested stock options if the employee is terminated or his or her duties are
substantially reduced after certain corporate transactions involving a change in
control of the Company.
In May 1996, the Company paid $92,530 to the estate of Dr. George Belendiuk
pursuant to the terms of his employment agreement and awarded Dr. Belendiuk a
cash bonus of $20,000 upon acceptance by the FDA of the Company's NDA relating
to Carbatrol. Further, the Company modified the terms of all stock options
granted to Dr. Belendiuk to provide that stock options which were exercisable as
of May 14, 1996 or which will become exercisable on or before April 20, 1997
shall remain exercisable by his estate until twelve months from the closing of
this offering.
The Company has entered into a one-year employment agreement with James D.
Isbister effective December 12, 1995 providing for a base annual salary of
$236,500. The agreement contains severance provisions similar to those contained
in the Company's employment agreements with Drs. Krystyna Belendiuk and Edward
Rudnic and Mr. James Russo and further provides that Mr. Isbister will have the
right to terminate the agreement and for immediate vesting and acceleration of
the exercisability of unvested stock options in the event of death or
disability. Mr. Isbister plans to retire as Chief Executive Officer of the
Company no later than January 1, 1997. It is expected that Robert S. Cohen, the
Company's President and Chief Operating Officer effective July 1, 1996, will
succeed Mr. Isbister as Chief Executive Officer. The Company has entered into an
Agreement with Mr. Isbister under which he will continue to serve as Chairman of
the Company's Board of Directors through December 31, 1998 if he resigns as
Chief Executive Officer on or before December 31, 1998. Under that Agreement,
Mr. Isbister will receive $65,000 annually and certain other employment
benefits.
The Company entered into a three-year employment agreement with Robert S.
Cohen effective July 1, 1996 providing for Mr. Cohen to serve as President and
Chief Operating Officer for a base annual salary of $200,000. Mr. Cohen shall
also be eligible to receive an annual bonus of up to 33 1/3% of his base salary.
The agreement further provides for Mr. Cohen to be reimbursed for relocation
expenses not to exceed $100,000 in the aggregate. The agreement automatically
renews for successive one year periods unless terminated earlier by either party
on 180 days' prior written notice commencing 180 days prior to the third
anniversary of the effective date of the agreement. In the event the agreement
is terminated by the Company without cause, Mr. Cohen will be entitled to
receive the unpaid portion of his base salary payable through the date of
termination of the agreement plus a payment equal to the lesser of (i) one
year's base salary payable in 12 equal monthly installments or (ii) the base
salary for the then remaining term of the agreement, payable in the same
installments as the base salary under the agreement. The agreement also provides
for the vesting and acceleration of the exercisability of unvested stock options
if Mr. Cohen is terminated or his duties are substantially reduced after certain
corporate transactions involving a change in control of the Company. Mr. Cohen
was also granted options to purchase 225,000 shares of Common Stock. See
"--Stock Options."
Each of the named executive officers and Mr. Cohen have entered into
confidentiality, patent assignment and non-compete agreements with the Company.
STOCK OPTIONS
In July 1991, the Board of Directors of the Company adopted the 1991 Stock
Option Plan (the "Stock Option Plan"). Under the Stock Option Plan, as amended,
1,900,000 shares of Common Stock were reserved for issuance to officers,
employees, directors, consultants and advisors of the Company (subject to anti-
dilution and other adjustments). As of July 1, 1996, 625,151 shares were
available for future grant and options to acquire 1,202,608 shares remain
outstanding under the Stock Option Plan, exercisable at prices ranging from
$0.06 to $4.50, except that certain options to purchase shares are exercisable
at the greater of $4.50 or 85% of the initial public offering price per share in
this offering. The Stock Option Plan provides for the grant of incentive stock
options intended to qualify as such under Section 422 of the Internal Revenue
Code of 1986, as amended, and nonstatutory stock options which do not so
qualify.
The Stock Option Plan is administered by the Compensation Committee (the
"Committee") of the Board of Directors, which consists of Drs. Cavanaugh and
Link. Effective upon consummation of the
48
offering, option grants to "officers" and "directors," as such terms are defined
for the purposes of Rule 16b-3 ("Rule 16b-3") promulgated under the Securities
Exchange Act of 1934 (the "Exchange Act"), shall be administered by a committee
which consists of "disinterested" directors as defined in Rule 16b-3, but only
if at least two directors meet the criteria of "disinterested" directors as
defined in Rule 16b-3. The maximum number of shares for which options may be
granted to any participant under the Stock Option Plan during any fiscal year is
250,000 shares. Subject to the limitations set forth in the Stock Option Plan,
the Committee has the authority to determine to whom options will be granted,
the term during which options granted under the Stock Option Plan may be
exercised, the exercise price of options and the rate at which options may be
exercised and may vest. Nonstatutory stock options may be granted to officers,
employees, consultants and advisors of the Company. Incentive stock options may
be granted only to employees or officers of the Company. The maximum term of
each incentive stock option granted under the Stock Option Plan is ten years.
The exercise price of shares of Common Stock subject to options qualifying as
incentive stock options may not be less than the fair market value of the Common
Stock on the date of the grant. The exercise price of incentive options granted
under the Stock Option Plan to any participant who owns stock possessing more
than 10% of the total combined voting power of all classes of outstanding stock
of the Company must be at least equal to 110% of the fair market value on the
date of grant. Any incentive stock options granted to such participants must
also expire within five years from the date of grant. Under the Stock Option
Plan, the exercise price of both incentive stock options and nonstatutory stock
options is payable in cash or, at the discretion of the Committee, in Common
Stock or a combination of cash and Common Stock.
The Board may at any time modify and amend the Stock Option Plan in any
respect, PROVIDED that the approval of at least a majority of the outstanding
shares of stock of the Company entitled to vote is required for any amendment
which (i) changes the class of persons eligible for the grant of options, (ii)
increases the maximum number of shares subject to options granted under the
Stock Option Plan or (iii) materially increases the benefits accruing to
participants under the Stock Option Plan, within the meaning of Rule 16b-3 of
the Exchange Act. Except with respect to options then outstanding, the Stock
Option Plan expires on (i) the tenth anniversary of the date on which the Stock
Option Plan is adopted by the Board, (ii) the tenth anniversary of the date on
which the Stock Option Plan is approved by the stockholders of the Company, or
(iii) the date as of which the Board, in its sole discretion, determines that
the Stock Option Plan should terminate, whichever is the first to occur. Any
options outstanding as of the expiration date of the Stock Option Plan will
remain in effect until they have been exercised or have terminated or expired by
their respective terms.
The Committee, in its discretion, may in connection with the grant of any
option under the Stock Option Plan, grant to the optionee a stock appreciation
right (an "SAR"). Such SAR shall be granted by the Committee simultaneously with
the grant of the related option. An exercise of an SAR shall result in the
cancellation of the option as to the shares of Common Stock with respect to
which the optionee exercises such SAR. As soon as practicable following the
exercise of an SAR, the Company shall pay to the optionee in cash an amount
equal to the excess of the Fair Market Value (determined in accordance with the
provisions of the Stock Option Plan on the date of exercise) of the shares of
Common Stock with respect to which the option is canceled over the option price
of such shares. An SAR shall be exercisable to the same extent and under the
same conditions as, and shall terminate upon the termination of, the underlying
option. An SAR, however, shall be exercisable only at such time as the Fair
Market Value (determined in accordance with the provisions of the Stock Option
Plan) of the shares of Common Stock on the date of exercise exceeds the Fair
Market Value of the shares on the date of grant. No SAR shall be exercisable for
cash during the first year after the Company becomes subject to Rule 16b-3 of
the Exchange Act. Neither options nor SARS are assignable or otherwise
transferable by the optionee except by will or the laws of descent and
distribution.
The Company may accelerate the exercisability of the options, subject to
limitation to the extent necessary to prevent the options from being treated as
a parachute payment within the meaning of Section 280G of the Code. The
unexercised portion of the options automatically terminates upon the first to
occur of (a) the expiration of the option term; (b) the expiration of 12 months
from the date of termination of the optionee's employment due to death or
permanent disability; (c) immediately upon the termination of the
49
optionee's employment for cause; and (d) the expiration of three months from the
date of termination of the optionee's employment by the Company for any reason
other than (b) or (c) above; PROVIDED that if the optionee dies during such
three-month period, the time of expiration of the options is extended for 12
months thereafter and PROVIDED, FURTHER that if the optionee is rehired during
the three-month period, such termination shall be deemed not to have occurred.
The provisions of the Stock Option Plan provide for the automatic grant of
non-qualified stock options to purchase shares of Common Stock ("Director
Options") to directors of the Company who are not employees or principal
stockholders of the Company ("Eligible Directors"). Eligible Directors of the
Company elected after consummation of this offering will be granted a Director
Option to purchase 5,333 shares of Common Stock on the date such person is first
elected or appointed a director (an "Initial Director Option"). Further,
commencing on the day immediately following the date of the annual meeting of
stockholders during the Company's fiscal year ending December 31, 1996, each
Eligible Director, other than directors who received an Initial Director Option
since the last annual meeting, will be granted a Director Option to purchase
1,333 shares of Common Stock on the day immediately following the date of each
annual meeting of stockholders, as long as such director is as member of the
Board of Directors. The exercise price for each share subject to a Director
Option shall be equal to the fair market value of the Common Stock on the date
of grant. Director Options are exercisable in five equal annual installments,
commencing on the date of grant or 90 days after the termination of the
directors' service on the Board of Directors.
The following table sets forth certain information with respect to
individual grants of stock options made during the fiscal year ended December
31, 1995 to each of the named executive officers:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME GRANTED FISCAL YEAR PER SHARE (1) DATE 5% 10%
- --------------------------------- ------------- ---------------- ------------- ----------- ---------- ----------
James D. Isbister................ 16,667 6.5% $ 4.50 1/17/05(2) $ 47,167 $ 119,531
5,000 1.9 4.50 3/7/05(3) 14,150 35,859
54,138 21.1 4.50 5/22/05(4) 153,212 388,269
6,667 2.6 4.50 12/6/05(3) 18,867 47,812
George W. Belendiuk.............. 5,000 1.9% $ 4.50 3/7/05(3) $ 14,150 $ 35,859
25,534 10.0 4.50 5/22/05(4) 72,258 183,116
6,667 2.6 4.50 12/6/05(3) 18,867 47,812
Krystyna Belendiuk............... 5,000 1.9% $ 4.50 3/7/05(3) $ 14,150 $ 35,859
25,534 10.0 4.50 5/22/05(4) 72,258 183,116
6,667 2.6 4.50 12/6/05(3) 18,867 47,812
Edward M. Rudnic................. 5,000 1.9% $ 4.50 3/7/05(3) $ 14,150 $ 35,859
11,354 4.4 4.50 5/22/05(4) 32,130 81,424
6,667 2.6 4.50 12/6/05(3) 18,867 47,812
James D. Russo................... 5,000 1.9% $ 4.50 3/7/05(3) $ 14,150 $ 35,859
6,446 2.5 4.50 5/22/05(4) 18,242 46,230
6,667 2.6 4.50 12/6/05(3) 18,867 47,812
- --------------
(1) The Board of Directors determined that the fair market value of the
Company's Common Stock was $4.50 on the date of grant.
(2) These options are immediately exercisable.
(3) The options become exercisable as to twenty percent (20%) of the shares on
each of the first, second, third, fourth and fifth anniversaries of the date
of grant.
(4) These options are exercisable commencing May 1996 in annual installments
over either two or four years.
50
On March 6, 1996, each of Messrs. Isbister and Russo and Drs. G. Belendiuk,
K. Belendiuk and Rudnic were granted options to purchase 69,029, 9,888, 34,084,
33,032 and 15,974 shares of Common Stock, respectively, at an exercise price of
the greater of $4.50 or 85% of the initial public offering price per share in
this offering and exercisable in three equal annual installments commencing
March 1997. On May 14, 1996, Mr. Isbister and Dr. Rudnic were granted options to
purchase 13,333 and 6,667 shares of Common Stock, respectively, at an exercise
price of the greater of $4.50 or 85% of the initial public offering price per
share in this offering and exercisable in five equal annual installments
commencing May 1997. On July 1, 1996, Messrs. Isbister and Russo and Dr. Rudnic
were granted options to purchase 40,000, 40,000 and 65,000 shares of Common
Stock, respectively, at an exercise price of the greater of $4.50 or 85% of the
initial public offering price in this offering and exercisable in five equal
installments commencing June 1997. In connection with his appointment as
President and Chief Operating Officer, Robert S. Cohen was granted options to
purchase 225,000 shares of Common Stock at an exercise price of the greater of
$4.50 or 85% of the initial public offering price per share in this offering and
exercisable in five equal annual installments commencing July 1, 1996.
The following table sets forth certain information with respect to each
exercise of stock options during the fiscal year ended December 31, 1995 by each
of the named executive officers and the number and value of unexercised options
held by such named executive officers as of December 31, 1995:
AGGREGATED OPTION/SAR EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS/SAR AT DECEMBER IN-THE-MONEY OPTIONS/SARS
SHARES 31, 1995 AT DECEMBER 31, 1995 (1)
ACQUIRED ON ----------------------- --------------------------
NAME EXERCISE VALUE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- ------------- ---------------- ----------------------- ----------- -------------
James D. Isbister........... 11,593 $ 51,473 67,612/117,223 $ 27,000 $ 0
George W. Belendiuk......... 5,000 $ 22,200 23,166/71,537 $ 8,100 $ 12,800
Krystyna Belendiuk.......... 20,000 $ 88,800 23,166/74,870 $ 8,100 $ 27,600
Edward M. Rudnic............ 5,000 $ 22,200 11,767/39,422 $ 10,640 $ 9,560
James D. Russo.............. 0 $ 0 3,333/31,447 $ 0 $ 0
- --------------
(1) Based on the fair market value of the Company's Common Stock on December 31,
1995 of $4.50 per share, as determined by the Company's Board of Directors.
PENSION PLAN
The Company maintains no defined benefit pension plan but does maintain a
defined contribution pension plan. Effective July 1990, the Company adopted its
defined contribution pension plan (the "Pension Plan") intended to be qualified
under sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as
amended (the "Code"). All full-time employees of the Company are generally
eligible to participate in the Pension Plan, provided they have at least three
months service with the Company, on the first day of the January or July
following their date of hire. Participants may elect to defer a percentage of
their compensation on a pre-tax basis as a contribution to the Pension Plan,
subject to maximum annual contribution limits under the Code. Highly compensated
employees are subject to additional limitations on pre-tax contributions under
the Code. The Company may make contributions to the Pension Plan, although it
has not done so to date. The Company pays all costs associated with
administering the Pension Plan, which to date have not been material.
CERTAIN TRANSACTIONS
RELATED PARTIES
HCV II, HCV III and HCV IV are controlling stockholders of the Company. HCP
II, HCP III and HCP IV are limited partnerships which serve as the general
partner of each of HCV II, HCV III and
51
HCV IV, respectively. Dr. Cavanaugh, a director of the Company, is a general
partner of HCP II, HCP III and HCP IV. See "Principal Stockholders." HIC is the
management company for each of HCV I, HCV II, HCV III and HCV IV. Dr. Cavanaugh
is an officer of HIC.
FINANCINGS
In January 1991, the Company entered into a convertible preferred stock and
warrant purchase agreement whereby the Company sold an aggregate of 2,000,000
shares of Preferred Stock to HCV II for aggregate gross proceeds of $2,000,000
and sold to HCV II, for a price of $.001 each, warrants to purchase 3,000,000
shares of Preferred Stock (the "Preferred Stock Warrants") at an exercise price
of $1.00 per share. In September 1991, HCV II transferred certain of the
Preferred Stock Warrants to certain investors and, upon exercise of 1,700,000 of
the Preferred Stock Warrants, the Company sold an additional 1,700,000 shares of
Preferred Stock, of which 1,200,000 were sold to HCV II and 500,000 were sold to
Everest Trust, for aggregate gross proceeds of $1,700,000, pursuant to the
exercise of a portion of the Preferred Stock Warrants. All Preferred Stock
Warrants held by HCV II and other investors were exercisable through January 30,
1994 at an exercise price of $1.00 per share and have expired. In April and May
1992, the Company sold an aggregate of 1,300,000 and 697,337 shares,
respectively, of Preferred Stock at a purchase price of $1.00 per share to a
group of stockholders including HCV II (876,300 and 413,379 shares,
respectively) and Everest Trust (323,700 and 173,637 shares respectively). In
June 1993, the Company entered into a convertible preferred stock purchase
agreement (the "Preferred Stock Agreement"), pursuant to which it sold an
aggregate of 5,025,000 shares of Preferred Stock at a purchase price of $1.00
per share, to a group of stockholders (the "Preferred Holders") including HCV
III, HCV IV, The State Treasurer of the State of Michigan ("The State of
Michigan"), The Aetna Casualty and Surety Company ("Aetna") and Everest Trust.
The Preferred Stock Agreement provided for the purchase of up to an additional
3,975,000 shares of Preferred Stock in three stages upon the same terms and
conditions prior to December 31, 1994, upon notification by the Company that its
cash and cash equivalents have decreased to less than $500,000. In September
1993, November 1993 and February 1994, an additional 1,325,001, 1,325,000 and
1,324,999 shares of Preferred Stock, respectively, were purchased by certain of
the Preferred Holders, including HCV III, HCV IV and The State of Michigan. In
March 1994, Everest Trust transferred 393,054 shares of Preferred Stock to
Hudson Trust.
The Company was initially funded by loans from HCV II aggregating $768,000,
bearing interest at the rate of 10% per annum on the unpaid principal, which
were repaid, together with accrued interest, out of the proceeds of the sale of
the Preferred Stock in January 1991. In August 1991, the Company borrowed
$150,000 from HCV II pursuant to a promissory note bearing interest at the rate
of 10% per annum on the unpaid principal, which note, together with accrued
interest, was repaid out of the proceeds of the exercise of the Preferred Stock
Warrants in September 1991. In August 1992, the Company borrowed an aggregate of
$1,500,000 for working capital pursuant to a credit agreement between the
Company and certain stockholders, including HCV II (the "August Credit
Agreement"). In December 1992, the Company entered into a $1,000,000 credit
agreement for working capital with a group of stockholders including HCV II (the
"December Credit Agreement"). In each of December 1992 and February 1993, the
Company borrowed $500,000 under the December Credit Agreement. Borrowings under
the August Credit Agreement and the December Credit Agreement bore interest at
the prime rate of interest plus 1% on the unpaid principal. In connection with
the August Credit Agreement and the December Credit Agreement, the Company
issued warrants to purchase an aggregate of 111,111 shares of Common Stock at an
exercise price of $.06 per share (the "Common Stock Warrants"), 107,960 of which
were issued to HCV II and the remainder of which were issued to other investors.
At the dates the Common Stock Warrants were issued, the Company's Board of
Directors had valued the Company's Common Stock at $2.88 per share. In December
1992, HCV II, Everest Trust and certain stockholders purchased 139,518, 22,422
and 4,729 shares of Common Stock, respectively. Pursuant to a credit agreement
in April 1993 (the "April Credit Agreement"), the Company borrowed an aggregate
of approximately $515,000 from a group of stockholders including HCV II. In
connection with the April Credit Agreement, the Company issued Preferred Stock
Warrants to purchase up to 41,667 shares of Preferred Stock at an exercise price
of $1.00 per share to HCV II and 1,686 Common Stock warrants to certain
shareholders of which 802 remain outstanding and 884 were converted. In May
1993, the Company
52
borrowed $100,000, $150,200 and $49,800 from HCV II, HCV III and HCV IV,
respectively, pursuant to promissory notes bearing interest at the prime rate of
interest plus 1% on the unpaid principal. All of the foregoing notes and
borrowings were repaid in June 1993, together with accrued interest of $36,452,
out of the proceeds received by the Company from the sale of the Preferred
Stock.
In June 1993, the Company entered into a Third Amended and Restated
Stockholders Agreement with all holders of its Preferred Stock (the
"Stockholders Agreement") which grants certain demand and piggy-back
registration rights with respect to shares of Common Stock issuable upon
conversion of all outstanding shares of Preferred Stock. See "Description of
Capital Stock -- Registration Rights." The Stockholders Agreement also grants to
the holders of the Preferred Stock certain other rights with respect to voting,
pre-emptive rights with respect to the acquisition and sale of shares by the
Company and certain matters affecting corporate governance. The Stockholders
Agreement will be amended prior to the completion of this offering to eliminate
these rights (other than registration rights).
In May 1994, the Company entered into the 1994 Credit Agreement (the "1994
Credit Agreement") with certain stockholders, including HCV III, HCV IV, Aetna,
The State of Michigan, and Everest Trust (the "1994 Lenders") pursuant to which
the 1994 Lenders agreed to loan the Company up to $4,395,000 through May 1995.
Through May 1995, the Company borrowed $2,000,000 under this agreement and
issued $2,000,000 principal amount of promissory notes bearing interest at the
rate of 7 1/4% per annum (the "1994 Notes") convertible into Preferred Stock to
the 1994 Lenders. Also, in connection with the execution of the 1994 Credit
Agreement, the Company issued warrants to purchase up to an aggregate of 33,337
shares of Common Stock to the Lenders at an exercise price of $10.80 per share.
See "Description of Capital Stock."
In May 1995, the Company entered into a Conversion and Subscription
Agreement (the "Conversion Agreement"), as amended in October 1995, at the same
time it entered into the 1995 Credit Agreement with the 1994 Lenders. Pursuant
to the Conversion Agreement, the outstanding principal amount of $2,000,000 of
the 1994 Notes converted into Preferred Stock at a conversion price of $1.25 per
share, resulting in the issuance of 1,599,997 Preferred Stock Adjustment Shares
(the "Adjustment Shares") of the Company to the 1994 Lenders. In February 1996,
the conversion price of the 1994 Notes was further adjusted to $0.75 per share,
resulting in the issuance of an additional 1,066,663 shares of Preferred Stock
to the 1994 Lenders. As a result of this adjustment, there was a mandatory
adjustment to the conversion ratio of all Preferred Stock to one share of Common
Stock for each four and one-half shares of Preferred Stock (after giving effect
to a one-for-six reverse stock split of the Common Stock).
The 1995 Credit Agreement permitted the Company to borrow up to $8,000,000
through January 15, 1997 from certain stockholders and officers, including HCV
III, HCV IV, The State of Michigan, Everest Trust, James D. Russo, James D.
Isbister and George W. Belendiuk (the "1995 Lenders"). The Company borrowed an
aggregate of $8,000,000 under the 1995 Credit Agreement and issued an aggregate
of $8,000,000 in principal amount of notes (the "Convertible Notes"). The
Convertible Notes, which bore interest at the rate of 9% per annum, were
converted into 8,000,000 shares of Preferred Stock in March 1996. The 1995
Credit Agreement also provided for the issuance by the Company to the 1995
Lenders of 1,200,000 Preferred Stock Warrants at an exercise price of $0.96 per
share.
In October 1995, in connection with a commitment by HCV III and HCV IV to
loan up to $3,000,000 to the Company under certain circumstances, the Company
agreed to issue to such holders warrants to purchase an aggregate of 50,000
shares of Common Stock for a 10-year term at an exercise price equal to the
initial public offering price of the Common Stock.
In March 1996, the Company entered into two credit agreements with certain
stockholders (collectively the "1996 Credit Agreement"), including HCV II, HCV
III, HCV IV, Everest Trust, James D. Russo and Max Link (the "1996 Lenders")
pursuant to which the 1996 Lenders have agreed to loan the Company up to
$7,300,000 through the consummation of this offering at an interest rate of
8 1/2%. The terms of the two credit agreements are identical except that the
first agreement, which provides for borrowing of up to $4,300,000, must be fully
drawn before any borrowings may be made under the second agreement. The loans
are due May 31, 1997, and are convertible in the event of a merger or
acquisition of the Company into Preferred Stock at $1.25 per share, or in the
event of an initial public offering, at one-half of the initial public offering
price per share. In connection with the 1996 Credit Agreement, the Company
issued 730,000 warrants to purchase shares of Preferred Stock to the 1996
Lenders at an exercise price of $0.75 per share and is committed to issue up to
365,000 additional warrants based upon actual funding of loans at the rate of
one
53
warrant for each $20.00 of actual borrowing. On each of March 8, 1996, April 25,
1996 and June 11, 1996, the Company borrowed $1,000,000, for an aggregate of
$3,000,000, under the 1996 Credit Agreement and issued an aggregate of 150,000
warrants to purchase Preferred Stock to the 1996 Lenders under the 1996 Credit
Agreement. All of the foregoing warrants expire in March 2006.
54
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the capital stock of the Company as of July 1, 1996 by (i) each
person known to the Company to be the beneficial owner of more than 5% of the
capital stock of the Company (ii) all Directors, (iii) each of the named
executive officers and (iv) all Directors and executive officers as a group,
prior to this offering and as adjusted to give effect to the sale of the
2,200,000 shares offered hereby.
PERCENTAGE OF
OUTSTANDING SHARES
NUMBER OF SHARES ------------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER (1) OWNED (2) OFFERING OFFERING
- ------------------------------------------------------------------------- ------------------ ----------- -----------
HealthCare Ventures II, L.P.............................................. 1,431,528(3) 21.6% 16.2%
HealthCare Ventures III, L.P............................................. 2,539,454(3) 37.9% 28.5%
HealthCare Ventures IV, L.P.............................................. 745,754(3) 11.4% 8.5%
State Treasurer of The State of Michigan................................. 962,893(4) 14.7% 11.0%
Rho Management Trust II.................................................. 646,643(5) 9.8% 7.4%
Aetna Life Insurance Company............................................. 330,002(6) 5.1% 3.8%
James H. Cavanaugh, Ph.D................................................. 4,716,736(3)(7) 70.9% 53.3%
Joshua Ruch.............................................................. 646,643(8) 9.8% 7.4%
James D. Isbister........................................................ 167,389(9) 2.5% 1.9%
Krystyna Belendiuk, Ph.D................................................. 143,612(10) 2.2% 1.6%
Edward M. Rudnic, Ph.D................................................... 25,307(11) * *
James D. Russo........................................................... 67,057(12) 1.0% *
Max Link, Ph.D........................................................... 21,418(13) * *
Lawrence C. Hoff......................................................... 0 * *
All Directors and Officers as a group (9 persons)........................ 5,192,047(14) 72.1% 55.2%
- --------------
* Less than 1%.
(1)Except as otherwise indicated, the address of each beneficial owner is c/o
the Company, 1550 East Gude Drive, Rockville, MD 20850.
(2)Except as otherwise indicated, each of the parties listed above has sole
voting and investment power over the shares owned.
(3)The address for HCV II, HCV III, HCV IV and Dr. Cavanaugh is Twin Towers at
Metro Park, 379 Thornall Street, Edison, New Jersey 08837. The shares
beneficially owned by HCV II include 153,189 shares subject to immediately
exercisable warrants. The shares beneficially owned by HCV III include
230,974 shares subject to immediately exercisable warrants. The shares
beneficially owned by HCV IV include 67,856 shares subject to immediately
exercisable warrants.
(4)As Custodian of the Michigan Public School Employees' Retirement System,
State Employees' Retirement System, Michigan State Police Retirement System
and Michigan Judges Retirement System. The address for The State Treasurer
of the State of Michigan is c/o Treasury Department, Venture Capital
Division, 430 West Allegan, Lansing, Michigan 48922. Includes 62,568 shares
subject to immediately exercisable warrants.
(5)Managed by Rho Management Company, Inc. with offices at 767 Fifth Avenue,
New York, New York 10153. The shares beneficially owned by the Trust include
104,258 shares subject to immediately exercisable warrants. Does not include
shares owned by HCV IV. Rho Management Trust II (formerly known as Everest
Trust) is a principal limited partner of HCV IV and Rho Management Company,
Inc. may be deemed to be the beneficial owner of shares owned by Everest
Trust.
(6)The address for Aetna Life Insurance Company is IG7F, 151 Farmington Avenue,
Hartford, Connecticut 06103. Includes 12,342 shares subject to immediately
exercisable warrants.
(7)Dr. Cavanaugh, a director of the Company, is one of the General Partners of
HCP II, HCP III and HCP IV, the General Partners of HCV II, HCV III and HCV
IV, respectively, and, accordingly, may be deemed to be the beneficial owner
of shares owned by HCV II, HCV III and HCV IV.
55
(8)Mr. Ruch is the President, Chief Executive Officer and controlling
shareholder of Rho Management Company, Inc., the investment adviser to Rho
Management Trust II, and accordingly may be deemed to be the beneficial
owner of shares owned by Rho Management Trust II.
(9)Includes 2,507 shares subject to immediately exercisable warrants, and
90,197 shares issuable upon exercise of options to purchase Common Stock
within the next 60 days; also includes beneficial ownership of 3,148 shares
of Common Stock owned by K.D. Hammond, 3,148 shares of Common Stock owned by
J.M. Hammond and 3,148 shares of Common Stock owned by A.C. Kalavritinos,
his grandchildren and 2,223 owned by W.J. Kalavritinos, his daughter.
(10)Includes 42,196 shares issuable upon exercise of options to purchase Common
Stock within 60 days. Includes beneficial ownership of 16,712 shares of
Common Stock, 2,507 shares subject to immediately exercisable warrants and
38,863 shares of Common Stock issuable upon exercise of options exercisable
within 60 days in the Estate of George W. Belendiuk; also includes
beneficial ownership of 12,592 shares of Common Stock owned by A.P.
Belendiuk and 12,592 shares of Common Stock owned by K.A. Belendiuk, her
children.
(11)Includes 20,307 shares of Common Stock issuable upon exercise of options
exercisable within 60 days.
(12)Includes 13,334 shares subject to immediately exercisable warrants, and
9,278 shares issuable upon exercise of options to purchase Common Stock
exercisable within 60 days.
(13)Includes 2,997 shares subject to immediately exercisable warrants, and 744
shares issuable upon exercise of options to purchase Common Stock
exercisable within 60 days.
(14)Includes 473,364 shares subject to immediately exercisable warrants and
252,112 shares subject to options exercisable within 60 days.
DESCRIPTION OF CAPITAL STOCK
Upon consummation of this offering, the authorized capital stock of the
Company will consist of 25,000,000 shares of Common Stock, par value $0.01 per
share, and 5,000,000 shares of Preferred Stock, par value $0.01 per share.
COMMON STOCK
Upon consummation of this offering, there will be 8,672,332 shares of Common
Stock outstanding. Holders of Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of the stockholders.
Subject to preferences that may be applicable to any then outstanding Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
then outstanding Preferred Stock. Holders of Common Stock have no preemptive
rights and no right to convert their Common Stock into any other securities.
PREFERRED STOCK
All outstanding shares of Preferred Stock will automatically convert into
shares of Common Stock upon consummation of this offering on the basis of one
share of Common Stock for each four and one-half shares of Preferred Stock. Such
shares will be retired and will not be available for reissuance. See Notes 5 and
11 of Notes to Financial Statements for a description of the currently
outstanding Preferred Stock and "Capitalization." Accordingly, following the
completion of this offering, no shares of Preferred Stock will be outstanding
and all Preferred Stock Warrants will be converted into warrants to purchase
Common Stock.
The Company's amended Certificate of Incorporation authorizes the issuance
of an additional 5,000,000 shares of preferred stock. The Board of Directors,
within the limitations and restrictions contained in the Certificate of
Incorporation and without further action by the Company's stockholders, will
have the authority to issue up to 5,000,000 additional shares of preferred stock
in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences and the number of shares
constituting any series or the designation of such series. The issuance of
preferred stock could adversely affect the voting power of holders of Common
Stock and could have the effect of delaying, deferring or preventing a change in
control of the Company. The Company has no present plan to issue any shares of
preferred stock.
56
WARRANTS
Upon consummation of this offering, the Company will have outstanding
warrants to purchase an aggregate of 110,260 shares of Common Stock at $0.06 per
share, which warrants are exercisable through June 30, 2003 and March 15, 2003,
warrants to purchase up to an aggregate of 33,337 shares of Common Stock which
are exercisable through May 3, 2004 at $10.80 per share, warrants to purchase up
to 9,260 shares of Common Stock through April 6, 2003 at $4.50 per share,
warrants to purchase 266,670 shares of Common Stock which are exercisable
through May 22, 2005 at $4.32 per share, warrants to purchase 195,556 shares of
Common Stock which are exercisable through March 8, 2006 at $3.375 per share and
warrants to purchase 50,000 shares of Common Stock at an exercise price equal to
the initial public offering price per share which are exercisable through March
8, 2006. See "Certain Transactions."
REGISTRATION RIGHTS
Upon the closing of the offering, the holders of shares of 6,260,569 Common
Stock and warrants to purchase 665,084 shares of Common Stock will be entitled
to demand and "piggyback" registration rights with respect to such shares. Under
the Stockholders Agreement between the Company and these holders, the holders
may request that the Company file a registration statement under the Securities
Act, and, subject to certain conditions, the Company generally will be required
to use its best efforts to effect any such registration. The Company is not
generally required to effect more than two such registrations, although under
certain circumstances the holders will have the right to request additional
registrations. In addition, if the Company proposes to register any of its
securities, either for its own account or for the account of other stockholders,
the Company is required, with certain exceptions, to notify the holders
described above and, subject to certain limitations, to include in such
registration all of the shares of Common Stock requested to be included by such
holders. Each of the holders described above has waived its right to include
shares held thereby in the offering made hereby. The Company is generally
obligated to bear the expenses, other than underwriting discounts and sales
commissions, of all of these registrations.
Any exercise of such registration rights may hinder efforts by the Company
to arrange future financings of the Company and may have an adverse effect on
the market price of the Company's Common Stock.
TRANSFER AGENT
American Stock Transfer & Trust Company serves as Transfer Agent for the
shares of Common Stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Section 203 of the Delaware General Corporation Law (the "DGCL") prohibits
certain transactions between a Delaware corporation and an "interested
shareholder," which is defined as a person who, together with any affiliates
and/or associates of such person, beneficially owns, directly or indirectly, 15
percent or more of the outstanding voting shares of a Delaware corporation. This
provision prohibits certain business combinations (defined broadly to include
mergers, consolidations, sales or other dispositions of assets having an
aggregate value of 10 percent or more of the consolidated assets of the
corporation, and certain transactions that would increase the interested
shareholder's proportionate share ownership in the corporation) between an
interested shareholder and a corporation for a period of three years after the
date the interested shareholder acquired its stock, unless: (i) the business
combination is approved by the corporation's board of directors prior to the
date the interested shareholder acquired shares; (ii) the interested shareholder
acquired at least 85 percent of the voting stock of the corporation in the
transaction in which it became an interested shareholder or (iii) the business
combination is approved by a majority of the board of directors and by the
affirmative vote of two-thirds of the outstanding voting stock owned by
disinterested shareholders at an annual or special meeting. A Delaware
corporation, pursuant to a provision in its certificate of incorporation or
by-laws, may elect not to be governed by Section 203 of the DGCL. The Company
will not make such an election and, as a result, the Company will be subject to
the provisions of Section 203 of the DGCL upon consummation of the offering.
At this time, the Company will not seek to "elect out" of the statute and,
therefore, upon consummation of this offering and the registration of its shares
of Common Stock under the Securities Exchange Act of 1934, the restrictions
imposed by Section 203 of the DGCL will apply to the Company.
57
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering the Company will have 8,672,332 shares of
Common Stock outstanding, assuming that the Underwriters' over-allotment option
and other outstanding options and warrants are not exercised. Of these shares,
the 2,200,000 shares offered hereby will be freely transferable without
restriction or further registration under the Securities Act, except that any
shares owned by affiliates of the Company will be subject to the limitations of
Rule 144 under the Securities Act. All remaining shares will be "restricted
securities" and may not be sold publicly unless they are registered under the
Securities Act or are sold pursuant to Rule 144 or other exemption from
registration. Of the shares of Common Stock outstanding, 3,507,582 of such
shares will be eligible for sale in the public market in reliance upon Rule 144
commencing 90 days after the date of this Prospectus. The Company's directors
and executive officers and certain stockholders, beneficially owning an
aggregate of 7,569,968 shares of Common Stock (including 3,752,114 shares
eligible for sale commencing 90 days after the date of this Prospectus), have
agreed with the Underwriters not to sell or otherwise dispose of any shares of
Common Stock or other capital stock of the Company, with certain limited
exceptions, without the prior written consent of Lehman Brothers Inc. on behalf
of the Representatives for a period of 180 days after the date of this
Prospectus. See "Underwriting."
In general under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated), including persons who may be deemed to be "affiliates"
of the Company as that term is defined under the Securities Act, is entitled to
sell within any three-month period a number of restricted shares that does not
exceed the greater of (i) 1% of the then outstanding shares of Common Stock
(approximately 86,700 shares immediately after this offering, assuming no
exercise of the Underwriters' over-allotment option), or (ii) the average weekly
trading volume in the Common Stock during the four calendar weeks preceding such
sale; provided that at least two years have elapsed since the later of the date
such securities were acquired from the Company or from an affiliate of the
Company. Sales under Rule 144 are also subject to certain requirements as to the
manner of sale, notice and the availability of current public information about
the Company. However, a person who is not an affiliate and has beneficially
owned such shares for at least three years is entitled to sell such shares
without regard to the volume or other resale requirements; provided that at
least three years have elapsed since the later of the date the shares were
acquired from the Company or from an affiliate of the Company.
Rule 701 under the Securities Act provides an exemption from the
registration requirements of the Act for offers and sales of securities issued
pursuant to certain compensatory benefit plans, such as the Company's Stock
Option Plan, of a company not subject to the reporting requirements of Section
13 or 15(d) of the Exchange Act. Securities issued pursuant to Rule 701 are
defined as restricted securities for purposes of Rule 144. However, 90 days
after the issuer becomes subject to the reporting provisions of the Exchange
Act, the Rule 144 resale restrictions, except for the broker's transaction
requirement, are inapplicable for non-affiliates. Affiliates are subject to all
Rule 144 restrictions after this 90-day period, except for the holding period.
If all the requirements of Rule 701 are met, an aggregate of 1,274,849 shares
issuable or issued on exercise of stock options which are outstanding may be
sold pursuant to such rule, although approximately 1,059,019 of these shares are
subject to the lock-up agreements described above.
The holders of 7,015,616 shares of Common Stock, including warrants to
purchase Common Stock and Preferred Stock have certain demand and "piggyback"
registration rights. These holders have waived their registration rights with
respect to this offering and have agreed not to exercise such rights during the
period commencing 180 days from the date hereof without the consent of Lehman
Brothers Inc. See "Description of Capital Stock -- Registration Rights."
Prior to this offering, there has been no public market for the Common
Stock, and there is no assurance that an active market will develop or be
sustained after this offering. No predictions can be made of the effect, if any,
that sales of Common Stock or the availability of Common Stock for sale will
have on the market price of such securities prevailing from time to time.
Nevertheless, sales of substantial amounts of Common Stock in the public market
could adversely affect prevailing market prices.
58
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement, the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part, the Underwriters named below,
for whom Lehman Brothers Inc. and Volpe, Welty & Company are acting as
representatives (the "Representatives"), have severally agreed to purchase from
the Company, and the Company has agreed to sell to each Underwriter, the
aggregate number of shares of Common Stock set forth opposite the name of each
such Underwriter below:
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
Lehman Brothers Inc..............................................................
Volpe, Welty & Company...........................................................
----------
Total........................................................................ 2,200,000
----------
----------
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page hereof, and to certain dealers at
such initial public offering price less a selling concession not in excess of
$ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other Underwriters or to
certain other brokers or dealers. After the initial offering to the public, the
offering price and other selling terms may be changed by the Representatives.
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by counsel and
to certain other conditions, including the condition that no stop order
suspending the effectiveness of the Registration Statement is in effect and no
proceedings for such purpose are pending or threatened by the Securities and
Exchange Commission (the "Commission") and that there has been no material
adverse change or any development involving a prospective material adverse
change in the condition of the Company from that set forth in the Registration
Statement otherwise than as set forth or contemplated in this Prospectus, and
that certain certificates, opinions and letters have been received from the
Company and its counsel and independent auditors. The Underwriters are obligated
to take and pay for all of the above shares of Common Stock if any such shares
are taken.
The Company and the Underwriters have agreed in the Underwriting Agreement
to indemnify each other against certain liabilities, including liabilities under
the Securities Act.
The Company has granted to the Underwriters an option to purchase up to an
additional 330,000 shares of Common Stock, exercisable solely to cover
over-allotments, at the initial public offering price, less the underwriting
discounts and commissions shown on the cover page of this Prospectus. Such
option may be exercised at any time until 30 days after the date of the
Underwriting Agreement. To the extent that the option is exercised, each
Underwriter will be committed to purchase a number of the additional shares of
Common Stock proportionate to such Underwriter's initial commitment as indicated
in the preceding table.
The Representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales to accounts over which they exercise
discretionary authority.
Stockholders of the Company, including the directors and executive officers,
beneficially owning an aggregate of 7,569,968 shares of Common Stock (including
shares that will be issued upon conversion of the Preferred Stock and
Convertible Notes and shares that may be issued upon the exercise of outstanding
59
options and warrants) have agreed not to, directly or indirectly, offer, sell or
otherwise dispose of shares of Common Stock or other capital stock of the
Company, or any securities convertible into, or exchangeable for or any rights
to acquire, Common Stock or other capital stock of the Company, with certain
limited exceptions, for a period of 180 days after the date of this offering
without the prior written consent of Lehman Brothers Inc. on behalf of the
Representatives. Except for the Common Stock to be sold in the offering, the
Company has agreed not to offer, sell, contract to sell or otherwise issue any
shares of Common Stock (other than the shares being offered hereby and shares to
be issued upon conversion of the Preferred Stock and Convertible Notes) or other
capital stock or any securities convertible into or exchangeable for, or any
rights to acquire, Common Stock or other capital stock, with certain limited
exceptions, prior to the expiration of 180 days from the date of this Prospectus
without the prior written consent of Lehman Brothers Inc. on behalf of the
Representatives.
Athena has been granted the right to purchase 220,000 shares of Common Stock
in this offering.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price will be negotiated between the Company
and the Representatives. Among the factors to be considered in determining the
initial public offering price of the Common Stock, in addition to the prevailing
market conditions, will be the Company's historical performance, capital
structure, estimates of the business potential and earnings prospects of the
Company, an assessment of the Company's management and consideration of the
above factors in relation to market values of the companies in related
businesses.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Bachner, Tally, Polevoy & Misher LLP, New York, New York and for the
Underwriters by Shearman & Sterling, New York, New York. The statements in this
Prospectus under the captions "Risk Factors -- Uncertain Ability to Protect
Proprietary Technology" and "Business -- Patents, Licenses and Proprietary
Rights" and other references herein to patent and licensing matters will be
passed upon by Carella, Byrne, Bain, Gilfillan, Cecchi, Stewart & Olstein,
Roseland, New Jersey, patent counsel to the Company. A member of Carella, Byrne,
Bain, Gilfillan, Cecchi, Stewart & Olstein holds a limited partnership interest
in each of HCV I, HCV II and HCV III. The statements in this Prospectus under
the captions "Risk Factors -- No Assurance of FDA Approval; Government
Regulation," "Risk Factors -- Possible Delay in Bringing to Market Reformulated
Drug Products" and "Business -- Government Regulation" and other references
herein to FDA regulatory matters will be passed upon by Olsson, Frank and Weeda,
P.C., regulatory counsel to the Company.
EXPERTS
The balance sheets as of December 31, 1994 and 1995 and the statements of
operations, stockholders' deficit and cash flows for each of the three years in
the period ended December 31, 1995, and for the period February 16, 1990
(inception) to December 31, 1995 included in this Prospectus have been included
herein in reliance upon the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form S-1 under the
Securities Act with the Commission in Washington, D.C. with respect to the
shares of Common Stock offered hereby. This Prospectus, which is part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock offered hereby,
reference is hereby made to the Registration Statement and such exhibits and
schedules, which may be inspected without charge at the office of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549. Reports and other information
filed by the Company with the Commission can be inspected and copied at the
public reference facilities maintained by the Commission at the following
addresses: New York Regional Office, Seven World Trade Center, New York, New
York
60
10048; and Chicago Regional Office, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661-2511. Copies of such material can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements audited by its independent certified
public accountants and with quarterly reports for the first three quarters of
each fiscal year containing unaudited interim financial information.
61
GLOSSARY
AGONIST: A chemical substance or drug that is capable of combining with a
receptor on a cell and initiating a reaction or activity similar to that of
another chemical substance or drug.
ANDA: Abbreviated New Drug Application. An application submitted by generic
firms to gain marketing approval for a version of a marketed drug based on
bioequivalence studies.
ANTAGONIST: A chemical substance or drug that acts within the body to reduce
the physiological activity of another chemical substance.
ANTICONVULSANT: An agent preventing or arresting convulsions or seizures,
including seizures resulting from epilepsy.
APNEA: Transient cessation of respiration, whether normal or abnormal, as
caused by certain drugs.
BENZODIAZEPINE: Any of a group of aromatic lipophilic amines, such as diazepam
and chlordiazepoxide, used as tranquilizers.
BIOAVAILABILITY: An absolute term that indicates measurement of both the rate
and total amount (extent) of drug that reaches the general circulation from an
administered dosage form.
BIOEQUIVALENCE: A relative term that compares the bioavailability of one drug
product with another or with a set of standards.
BIOLOGIC: Any virus, therapeutic serum, toxin, antitoxin, vaccine, blood, blood
component or derivative, allergenic product or analogous product or arsphenamine
or its derivatives (or any other trivalent organic arsenic compound),
applicable to the prevention, treatment, or cure of disease, or injuries in
man.
BUCCAL: Pertaining to the cheek, or to the cavity between the upper gum and
lip.
DOPAMINE: A monoamine that is a decarboxylated form of dopa and occurs,
especially as a neurotransmitter, in the brain and as an intermediate in the
biosynthesis of epinephrine.
DOPAMINERGIC: Relating to, participating in, or activated by the
neurotransmitter activity of dopamine or related substances.
DOSAGE FORM: The administered version of a drug product, such as a tablet,
capsule, syrup, etc.
EMESIS: Vomiting.
EXCIPIENTS: Inactive ingredients that facilitate the preparation of a dosage
form.
FLUX ENHANCER: A chemical that improves the transport of a drug across a
biological barrier, such as skin.
HYDROPHOBIC: A substance that does not dissolve in or mix well with water, or a
substance that repels water in the extreme.
HYDROPHILIC: A substance that dissolves readily in, or mixes easily with water.
IDDM: Insulin-dependent diabetes mellitus.
IND: Investigational New Drug Exemption. The application to the FDA requesting
the shipment in interstate commerce of an experimental new drug for human
experimentation. The IND typically contains pre-clinical and some limited
clinical data and information and the protocol or plan for the human
clinical trial. The FDA has 30 days from receipt to review and approve or
deny the IND. An IND becomes effective 30 days after receipt by the FDA
unless the FDA notifes the sponsor not to proceed with human clinical
testing.
INJECTABLE: Denoting a fluid to be introduced into one of the cavities beneath
the skin, or into a blood vessel.
G-1
MAO-B: Monoamine Oxidase, Type B. An enzyme that metabolizes a number of
chemicals including dopamine.
MICROEMULSION: A formulation consisting of a surfactant (and sometimes a
cosurfactant), an oily phase and an aqueous phase.
MIVACURIUM: A basic compound that acts similarly to curare and is used
intravenously, chiefly in the form of a hydrated chloride, as a muscle relaxant
in surgery.
NDA: New Drug Application. The application submitted and reviewed by the FDA,
of the data on the safety and efficacy of a chemical entity. Approval of an NDA
allows marketing of the product.
NIDDM: Non-insulin dependent diabetes mellitus.
PARENTERAL: Referring to the introduction of substances into an organism by
means other than through the gastrointestinal tract (e.g., intravenous,
intramuscular, subcutaneous).
PEPTIDE: A small protein consisting of fifty amino acids or less.
PERMEABLE: The ability of a substance to cross a barrier, such as a drug
crossing a biological membrane.
PLA: Product License Application. The equivalent of a "New Drug Application"
("NDA") for biologics.
PLASMA FRACTIONS: Components of plasma separated on the basis of differences in
physical or chemical properties.
SBIR GRANT: Small Business Innovation Research Grant. A mechanism to obtain
research grants from the federal government for small business.
SUCCINYLCHOLINE: A compound similar to curare that is administered
intravenously as a muscle relaxant during surgery.
TITRATION: The method or process used by physicians, of gradually adjusting the
dosage of a drug administered to achieve the desired clinical result while
seeking to minimize adverse side effects.
TRANSDERMAL: Transcutaneous, passing, entering or made by, penetration through
the skin.
TRANSMUCOSAL: Penetration through the mucous membranes of the mouth or buccal
cavity.
G-2
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX TO FINANCIAL STATEMENTS
PAGE
-------------
Report of Independent Accountants.................................................................. F-2
Balance Sheets..................................................................................... F-3
Statements of Operations........................................................................... F-4
Statements of Stockholders' Deficit................................................................ F-5
Statements of Cash Flows........................................................................... F-6
Notes to Financial Statements...................................................................... F-7 to F-16
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Pharmavene, Inc.
We have audited the accompanying balance sheets of Pharmavene, Inc. (A
Development Stage Enterprise) as of December 31, 1994 and 1995, and the related
statements of operations, stockholders' deficit, and cash flows for each of the
three years in the period ended December 31, 1995, and for the period February
16, 1990 (date of inception) to December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1994 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995, and for the period
February 16, 1990 (date of inception) to December 31, 1995 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Rockville, Maryland
January 24, 1996
(except as to the information presented in Note 11,
for which the date is March 14, 1996)
F-2
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
ASSETS
DECEMBER 31,
----------------------------
1994 1995
------------- ------------- MARCH 31, PRO FORMA
1996 MARCH 31,
------------- 1996
(UNAUDITED) -------------
(UNAUDITED)
Current assets:
Cash and cash equivalents................................. $ 1,045,248 $ 408,166 $ 586,368 $ 2,589,794
Grant and other receivables............................... 19,557 721 734 734
Prepaid expenses.......................................... 54,594 171,266 863,256 152,656
------------- ------------- ------------- -------------
Total current assets.................................... 1,119,399 580,153 1,450,358 2,743,184
Property and equipment, net................................. 564,748 1,563,215 1,582,112 1,582,112
Other assets................................................ 53,004 469,158 769,964 576,164
------------- ------------- ------------- -------------
Total assets.......................................... $ 1,737,151 $ 2,612,526 $ 3,802,434 $ 4,901,460
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses..................... $ 1,114,474 $ 964,089 $ 1,215,832 $ 1,215,832
Accrued compensation...................................... 265,230 210,520 76,500 76,500
Obligation under capital leases........................... 209,710 360,277 383,441 383,441
Convertible notes payable to investors.................... 2,000,000 -- -- --
------------- ------------- ------------- -------------
Total current liabilities............................... 3,589,414 1,534,886 1,675,773 1,675,773
------------- ------------- ------------- -------------
Convertible notes payable to investors...................... -- 7,000,000 938,400 --
Obligation under capital leases, less current portion....... 166,579 748,443 783,960 783,960
------------- ------------- ------------- -------------
Total long-term liabilities............................. 166,579 7,748,443 1,722,360 783,960
------------- ------------- ------------- -------------
Commitments and contingencies
Mandatorily Redeemable Series A Convertible Preferred Stock,
$.01 par value; designated 14,739,004, 17,489,001 and
27,385,664 (Unaudited) shares at December 31, 1994 and 1995
and March 31, 1996; issued and outstanding 14,697,337,
16,297,334 and 25,363,997 (Unaudited) shares at December
31, 1994 and 1995 and March 31, 1996, (liquidation
preference of $21,000,000 and $30,600,000 (Unaudited) at
December 31, 1995 and March 31, 1996; redemption value of
original purchase price plus any declared but unpaid
dividends)................................................. 14,697,337 16,697,333 24,697,332 --
------------- ------------- ------------- -------------
Stockholders' (deficit) equity:
Preferred stock, $.01 par value; authorized 30,100,000
shares of which 14,739,004 17,489,001 and 27,385,664
(Unaudited) shares at December 31, 1994 and 1995 and
March 31, 1996, respectively, have been designated as
Series A Convertible Preferred Stock..................... -- -- -- --
Common stock, $0.01 par value; authorized 25,000,000
shares; issued and outstanding, 241,741, 288,980 and
289,514 (Unaudited) shares at December 31, 1994 and 1995
and March 31, 1996, respectively and 6,472,332 shares pro
forma at March 31, 1996 (Unaudited)...................... 2,418 2,890 2,895 64,724
Paid-in capital........................................... 811,096 837,885 5,200,280 35,071,209
Deficit accumulated during the development stage.......... (17,529,693) (24,208,911) (29,496,206) (32,694,206)
------------- ------------- ------------- -------------
Total stockholders' (deficit) equity.................... (16,716,179) (23,368,136) (24,293,031) 2,441,727
------------- ------------- ------------- -------------
Total liabilities and stockholders' (deficit)
equity............................................... $ 1,737,151 $ 2,612,526 $ 3,802,434 $ 4,901,460
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
The accompanying notes are an integral part of these financial statements.
F-3
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
CUMULATIVE FOR
THE PERIOD
FOR THE PERIOD FEBRUARY 16,
FEBRUARY 16, 1990 FOR THE 1990
FOR THE YEARS ENDED (DATE OF THREE MONTHS ENDED (DATE OF
DECEMBER 31, INCEPTION) MARCH 31, INCEPTION)
---------------------------------- TO DECEMBER 31, ---------------------- TO MARCH 31,
1993 1994 1995 1995 1995 1996 1996
---------- ---------- ---------- ----------------- ---------- ---------- ----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenues:
Licensing revenue........ $ -- $2,000,000 $ -- $ 2,000,000 $ -- $ -- $ 2,000,000
Research and development
revenue................. -- -- 111,384 111,384 95,284 18,907 130,291
Research and development
grants.................. 268,891 193,860 -- 512,751 -- -- 512,751
Interest income.......... 19,596 45,983 34,410 190,611 4,502 9,638 200,249
---------- ---------- ---------- ----------------- ---------- ---------- ----------------
Total revenues......... 288,487 2,239,843 145,794 2,814,746 99,786 28,545 2,843,291
---------- ---------- ---------- ----------------- ---------- ---------- ----------------
Expenses:
Research and
development............. 3,932,133 4,935,641 4,986,538 19,131,095 1,230,045 1,266,187 20,397,282
General and
administrative.......... 1,413,258 1,317,280 1,392,409 6,298,930 368,829 477,908 6,776,838
Interest expense......... 425,867 131,904 446,065 1,593,632 58,047 3,571,745 5,165,377
---------- ---------- ---------- ----------------- ---------- ---------- ----------------
Total expenses......... 5,771,258 6,384,825 6,825,012 27,023,657 1,656,921 5,315,840 32,339,497
---------- ---------- ---------- ----------------- ---------- ---------- ----------------
Net loss................... $(5,482,771) $(4,144,982) $(6,679,218) $ (24,208,911) $(1,557,135) $(5,287,295) $(29,496,206)
---------- ---------- ---------- ----------------- ---------- ---------- ----------------
---------- ---------- ---------- ----------------- ---------- ---------- ----------------
Net loss per common and
common share equivalent... $ (1.59) $ (1.20) $ (1.91) $ (7.19) $ (0.45) $ (1.51) $ (8.76)
---------- ---------- ---------- ----------------- ---------- ---------- ----------------
---------- ---------- ---------- ----------------- ---------- ---------- ----------------
Weighted average common
shares and common share
equivalents outstanding... 3,455,473 3,457,896 3,495,333 3,365,949 3,466,028 3,507,700 3,365,962
---------- ---------- ---------- ----------------- ---------- ---------- ----------------
---------- ---------- ---------- ----------------- ---------- ---------- ----------------
The accompanying notes are an integral part of these financial statements.
F-4
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' DEFICIT
DEFICIT
ACCUMULATED
COMMON STOCK DURING THE
---------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
--------- ----------- ---------- ------------ -----------
Net loss for the period February 16, 1990 (date of
inception) to December 31, 1990..................... -- $ -- $ -- $ (657,757) $ (657,757)
--------- ----------- ---------- ------------ -----------
Balance, December 31, 1990........................... -- -- -- (657,757) (657,757)
Initial sale of common stock, $0.06 per share........ 48,990 490 2,449 -- 2,939
Common stock options exercised....................... 11,595 116 580 -- 696
Sale of Series A Preferred warrants.................. -- -- 3,000 -- 3,000
Net loss............................................. -- -- -- (2,141,789) (2,141,789)
--------- ----------- ---------- ------------ -----------
Balance, December 31, 1991........................... 60,585 606 6,029 (2,799,546) (2,792,911)
Common stock options exercised, $0.06-$2.88 per
share............................................... 8,799 88 440 -- 528
Interest ascribed to common stock warrants in
connection with debt financing...................... -- -- 500,569 -- 500,569
Exercise of common stock warrants issued in
connection with debt financing, $0.06 per share..... 166,670 1,667 8,333 -- 10,000
Net loss............................................. -- -- -- (5,102,394) (5,102,394)
--------- ----------- ---------- ------------ -----------
Balance, December 31, 1992........................... 236,054 2,361 515,371 (7,901,940) (7,384,208)
Common stock options exercised, $0.06-$5.70 per
share............................................... 1,778 18 479 -- 497
Interest ascribed to common stock warrants in
connection with debt financing...................... -- -- 292,268 -- 292,268
Net loss............................................. -- -- -- (5,482,771) (5,482,771)
--------- ----------- ---------- ------------ -----------
Balance, December 31, 1993........................... 237,832 2,379 808,118 (13,384,711) (12,574,214)
Common stock options exercised, $0.06-$5.70 per
share............................................... 1,371 14 2,851 -- 2,865
Exercise of common stock warrants issued in
connection with debt financing, $0.06 per share..... 2,538 25 127 -- 152
Net loss............................................. -- -- -- (4,144,982) (4,144,982)
--------- ----------- ---------- ------------ -----------
Balance, December 31, 1994........................... 241,741 2,418 811,096 (17,529,693) (16,716,179)
Common stock options exercised, $0.06-$4.50 per
share............................................... 47,239 472 26,789 -- 27,261
Net loss............................................. -- -- -- (6,679,218) (6,679,218)
--------- ----------- ---------- ------------ -----------
Balance, December 31, 1995........................... 288,980 2,890 837,885 (24,208,911) (23,368,136)
Common stock options exercised, $4.50 per share
(Unaudited)......................................... 534 5 2,395 -- 2,400
Interest ascribed to common stock in connection with
debt conversion (Unaudited)......................... -- -- 3,325,000 -- 3,325,000
Interest ascribed to common stock warrants issued in
connection with debt financing, $0.75 per share
(Unaudited)......................................... -- -- 969,000 -- 969,000
Interest ascribed to common stock warrants issued in
connection with draw of $1 million of debt
financing, $0.75 per share (Unaudited).............. -- -- 66,000 -- 66,000
Net loss (Unaudited)................................. -- -- -- (5,287,295) (5,287,295)
--------- ----------- ---------- ------------ -----------
Balance, March 31, 1996 (Unaudited).................. 289,514 2,895 5,200,280 (29,496,206) (24,293,031)
Pro forma conversion of Mandatorily Redeemable Series
A Convertible Preferred Stock (Note 12)
(Unaudited)......................................... 5,636,452 56,365 24,640,968 -- 24,697,333
Pro forma conversion of convertible notes payable
drawn under the March 1996 credit agreement (Note
12) (Unaudited)..................................... 545,455 5,455 2,994,545 -- 3,000,000
Pro forma interest ascribed to common stock in
connection with debt conversion (Unaudited)......... -- -- 2,100,000 (2,100,000) --
Pro forma interest ascribed to common stock warrants
issued in connection with draw of $2 million of debt
financing, $0.75 per share (Unaudited).............. -- -- 132,000 (132,000) --
Pro forma common stock options exercised, $0.60-$4.50
per share (Note 12) (Unaudited)..................... 911 9 3,416 -- 3,425
Pro forma net loss, balance of interest ascribed to
common stock $904,400 and $61,600 amortized over the
term of the agreement (Unaudited)................... -- -- -- (966,000) (966,000)
--------- ----------- ---------- ------------ -----------
Pro forma Balance, March 31, 1996 (Note 12)
(Unaudited)......................................... 6,472,332 $ 64,724 $35,071,209 ($32,694,206) $ 2,441,727
--------- ----------- ---------- ------------ -----------
--------- ----------- ---------- ------------ -----------
The accompanying notes are an integral part of these financial statements.
F-5
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
CUMULATIVE
FOR THE FOR THE
PERIOD PERIOD
FEBRUARY 16, FEBRUARY 16,
1990 (DATE 1990 (DATE
FOR THE OF FOR THE THREE MONTHS OF
YEARS ENDED DECEMBER 31, INCEPTION) ENDED MARCH 31, INCEPTION)
---------------------------------- TO DECEMBER ---------------------- TO MARCH 31,
1993 1994 1995 31, 1995 1995 1996 1996
---------- ---------- ---------- ------------ ---------- ---------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Cash flows from operating
activities:
Net loss......................... $(5,482,771) $(4,144,982) $(6,679,218) ($24,208,911) $(1,557,135) $(5,287,295) ($29,496,206)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and
amortization.................. 211,329 282,220 416,190 1,075,635 78,841 135,980 1,211,615
Interest expense ascribed to
common stock warrants......... 292,268 -- -- 792,837 -- 3,394,000 4,186,837
Gain on sale of assets......... -- -- (85,081) (85,081) -- -- (85,081)
Increase (decrease) in cash due
to changes in assets and
liabilities:
Grant and other
receivables................. (111,582) 92,384 18,836 (721) 10,226 (13) (734)
Prepaid expenses............. 5,009 (5,316) (116,672) (171,266) (36,323) (691,990) (863,256)
Other assets................. (4,331) 649 (416,154) (469,158) (5,644) (300,806) (769,964)
Accounts payable and accrued
expenses.................... 173,868 493,289 (378,885) 735,589 (319,393) 226,243 961,832
Accrued compensation......... 93,952 55,230 (54,710) 210,520 (140,592) (134,020) 76,500
---------- ---------- ---------- ------------ ---------- ---------- ------------
Net cash used in operating
activities.................. (4,822,258) (3,226,526) (7,295,694) (22,120,556) (1,970,020) (2,657,901) (24,778,457)
---------- ---------- ---------- ------------ ---------- ---------- ------------
Cash flows from investing
activities:
Capital expenditures............. (61,762) (44,335) (417,421) (863,163) (21,574) (2,364) (865,527)
Proceeds from sale of
equipment....................... -- -- 139,845 140,807 -- -- 140,807
---------- ---------- ---------- ------------ ---------- ---------- ------------
Net cash used in investing
activities.................. (61,762) (44,335) (277,576) (722,356) (21,574) (2,364) (724,720)
---------- ---------- ---------- ------------ ---------- ---------- ------------
Cash flows from financing
activities:
Proceeds from sale of Series A
Convertible Preferred Stock..... 7,675,001 1,324,999 1,999,996 16,697,333 -- 7,999,999 24,697,332
Proceeds from sale of warrants... -- -- -- 3,000 -- -- 3,000
Proceeds from issuance of common
stock........................... 497 3,017 27,261 44,938 25,925 968,400 1,013,338
Proceeds from promissory notes... 1,315,164 2,000,000 8,900,000 15,133,165 1,215,000 1,938,400 17,071,565
Repayment of promissory notes.... (3,315,165) -- (3,900,000) (8,133,165) -- (8,000,000) (16,133,165)
Initial public offering costs
financed by accounts payable.... -- -- 228,500 228,500 -- 25,500 254,000
Principal payments under capital
lease obligations............... (134,257) (198,450) (319,569) (722,693) (56,025) (93,832) (816,525)
---------- ---------- ---------- ------------ ---------- ---------- ------------
Net cash provided by
financing activities........ 5,541,240 3,129,566 6,936,188 23,251,078 1,184,900 2,838,467 26,089,545
---------- ---------- ---------- ------------ ---------- ---------- ------------
Net increase (decrease) in cash and
cash equivalents.................. 657,220 (141,295) (637,082) 408,166 (806,694) 178,202 586,368
Cash and cash equivalents at the
beginning of the period........... 529,323 1,186,543 1,045,248 -- 1,045,249 408,166 --
---------- ---------- ---------- ------------ ---------- ---------- ------------
Cash and cash equivalents at the
end of the period................. $1,186,543 $1,045,248 $ 408,166 $ 408,166 $ 238,555 $ 586,368 $ 586,368
---------- ---------- ---------- ------------ ---------- ---------- ------------
---------- ---------- ---------- ------------ ---------- ---------- ------------
Supplemental disclosures of cash
flow information:
Cash paid during the period for
interest........................ $ 116,060 $ 131,903 $ 446,065 $ 800,796 $ 58,047 $ 177,745 $ 978,541
---------- ---------- ---------- ------------ ---------- ---------- ------------
---------- ---------- ---------- ------------ ---------- ---------- ------------
Noncash financing activities:
Capital lease obligations
incurred to acquire
equipment..................... $ 208,603 $ 187,746 $1,051,999 $1,831,413 $ 148,450 $ 152,513 $1,983,925
---------- ---------- ---------- ------------ ---------- ---------- ------------
---------- ---------- ---------- ------------ ---------- ---------- ------------
The accompanying notes are an integral part of these financial statements.
F-6
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND FINANCING
ORGANIZATION
Pharmavene, Inc. (the "Company") is a Delaware corporation which was
originally incorporated on December 22, 1989 as Substance Abuse Sciences, Inc.
On February 16, 1990, the Company amended its Certificate of Incorporation to
change its name to Pharmavene, Inc. The Company develops pharmaceutical products
utilizing advanced drug delivery systems.
The Company is considered to be a development stage enterprise as it has not
derived significant revenues from its planned principal operations.
FINANCING REQUIREMENTS
In the course of its development activities, the Company has sustained
continuing operating losses and expects such losses to continue for the
foreseeable future. As of December 31, 1995, the Company is in a net working
capital deficit position. The Company's future capital requirements will depend
on many factors, including the progress of the Company's collaborative and
independent research and development programs, payments received under
collaborative agreements with other companies, if any, the results and costs of
preclinical and clinical testing for the Company's products, the costs
associated with and the timing of regulatory approvals, technological advances,
the status of competitive products and the commercial success of the Company's
products. The Company plans to continue to finance operations with a combination
of stock sales, borrowings, payments from future strategic partnerships and, in
the longer term, revenues from product sales and licensing and royalty
arrangements (see Notes 11 and 12). There can be no assurance that additional
funds will be available on a timely basis, on favorable terms or at all or that
such funds, if raised, would be sufficient to permit the Company to continue to
conduct its operations or that the Company's planned products will be
commercially successful.
SPLIT OF COMMON STOCK
In March 1996, the Board of Directors authorized: (i) a one-for-six reverse
split of the outstanding shares of the Company's common stock, and (ii) a change
in the number of authorized shares of common and preferred stock to 25,000,000
and 30,100,000, respectively. All references to common stock, options, warrants,
per share data and the conversion rates of Series A Convertible Preferred Stock
and Convertible Notes have been restated to give effect to the reverse split.
REGISTRATION STATEMENT
In October 1995, the Board of Directors authorized the filing of a
registration statement (the "Registration Statement") with the Securities and
Exchange Commission for the initial public offering (the "Offering") of shares
of the Company's common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The Company is complying with Statement of Financial Accounting Standards
No. 7, which prescribes reporting requirements for development stage
enterprises.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-7
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION AND AMORTIZATION
Equipment is recorded at cost. Depreciation of laboratory and computer
equipment is computed on the straight-line method based upon estimated useful
lives ranging from three to seven years. Equipment held under capital leases is
amortized using the straight-line method over the terms of the leases or their
estimated useful lives, whichever is shorter. Amortization of leasehold
improvements is computed on the straight-line method based on the shorter of the
estimated useful life of the improvement or the remaining term of the lease.
HISTORICAL NET LOSS PER SHARE
Historical net loss per common share is based on the weighted average number
of common shares outstanding during the periods presented. Pursuant to
Securities and Exchange Commission Staff Acounting Bulletin No. 83, all common
shares, Convertible Preferred Stock and Convertible Notes Payable issued and
stock options and warrants granted by the Company during the 12 months prior to
the date of the Registration Statement have been included in the calculation of
weighted average common shares and common share equivalents outstanding as if
they were outstanding for all periods presented. Convertible Preferred Stock and
Convertible Notes Payable issued and stock options and warrants granted by the
Company prior to the aforementioned 12-month period have not been included in
the calculation because such items were antidilutive.
REVENUE RECOGNITION
The Company has entered into a license agreement with Rhone-Poulenc Rorer,
Inc., as described in Note 3 below. Revenue from the license agreement is
recognized in accordance with the terms of the agreement. Non-refundable,
non-creditable fees or milestone payments are recognized when they are earned in
accordance with the performance requirements and contractual terms. Research and
development grant revenues are recognized over the period of performance under
the terms of the related agreements.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less at the date of acquisition to be cash
equivalents. The Company's policy regarding investments, pending their use, is
to ensure safety, liquidity and capital preservation while obtaining a
reasonable rate of return.
CONCENTRATION OF CREDIT RISK
The Company has invested its excess cash in a money market account and
certificates of deposit with two commercial banks. The Company has not
experienced any losses on its investments.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future
years for 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.
Income tax expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
PATENT COSTS
As a result of research and development efforts conducted by the Company, it
has received and applied for, and is in the process of applying for, a number of
patents to protect proprietary inventions. Costs incurred in connection with
patent applications have been expensed as incurred and are reflected as general
and administrative expenses.
F-8
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
The Company must adopt Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, commencing in fiscal year 1996. Management believes adoption of
this standard will not have a material impact on the Company's financial
statements.
The Company does not intend to adopt the provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,
as they pertain to financial statement recognition of compensation expense
attributable to option grants.
3. LICENSE AGREEMENT
In August 1994, the Company entered into a license agreement with
Rhone-Poulenc Rorer, Inc. ("RPR") under which the Company granted to RPR the
exclusive worldwide right to develop, manufacture and market products containing
the Company's proprietary Butyrylcholinesterase (BChE) technology, resulting
from know-how and patent rights owned by the Company.
Under the agreement, RPR paid the Company a non-refundable, non-creditable
license fee of $2,000,000 in August 1994, and is obligated to make milestone
payments and royalty payments on product sales over the longer of the life of an
issued patent or 15 years. Additionally, during the period of technology
transfer, RPR will reimburse the Company for certain costs incurred by the
Company in the furtherance of the development of the BChE technology and
preparation of filings with U.S. and foreign government regulatory agencies.
During 1995 the Company was reimbursed $111,384 by RPR under the agreement,
which amount is recorded as research and development revenue.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1994 and 1995 consists of the
following:
1994 1995
------------ ------------
Laboratory and office equipment............................................. $ 875,402 $ 1,770,836
Leasehold improvements...................................................... 160,442 369,565
Computer equipment.......................................................... 188,350 328,702
------------ ------------
Total cost.............................................................. 1,224,194 2,469,103
Less accumulated depreciation and amortization.............................. (659,446) (905,888)
------------ ------------
$ 564,748 $ 1,563,215
------------ ------------
------------ ------------
5. CAPITAL STRUCTURE
MANDATORILY REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK
Under the Convertible Preferred Stock and Warrant Purchase Agreement dated
as of January 31, 1991 (the "Purchase Agreement"), the Company was capitalized
in the amount of $2,000,000 through the sale of 2,000,000 shares of Series A
Convertible Preferred Stock to an investor (the "Investor"). In connection with
the Purchase Agreement, the Company also sold to the Investor warrants to
purchase up to 3,000,000 additional shares of Series A Convertible Preferred
Stock at $1.00 per share, subject to adjustment.
On September 18, 1991, the Investor transferred to two additional investors
(collectively the "Investors") warrants to purchase 550,000 shares of Series A
Convertible Preferred Stock. Contemporaneously with this transfer, the Investors
exercised warrants to purchase 1,700,000 shares of Series A Convertible
Preferred Stock. Warrants to purchase the remaining 1,300,000 shares of Series A
Convertible Preferred Stock lapsed in January 1994.
F-9
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CAPITAL STRUCTURE (CONTINUED)
On April 8, 1992 and May 14, 1992, the Company sold 1,300,000 shares and
697,337 shares, respectively, of Series A Convertible Preferred Stock to certain
investors for $1.00 per share.
On June 1, 1993, the Company entered into the Convertible Preferred Stock
Purchase Agreement (the "June 1, 1993 Preferred Agreement") whereby the Company
sold to the Investors and certain other investors (collectively the "Preferred
Investors") 5,025,000 shares of Series A Convertible Preferred Stock for $1.00
per share. Of the proceeds, $3,351,616 was used to repay principal and accrued
interest thereon in connection with the credit agreements discussed in Note 7.
On September 10, 1993, November 24, 1993 and February 24, 1994, the Company sold
1,325,001, 1,325,000 and 1,324,999 shares, respectively, of the Series A
Convertible Preferred Stock for $1.00 per share to the Preferred Investors
pursuant to the terms of the Preferred Agreement.
Shares of the Series A Convertible Preferred Stock are convertible at the
option of the holder at any time into shares of common stock of the Company at a
conversion rate, subject to certain antidilutive adjustments, of four and
one-half shares of Series A Convertible Preferred Stock for one share of common
stock at December 31, 1995. The Series A Convertible Preferred Stock is
redeemable at the option of the holder at a redemption value of the original
purchase price plus any declared but unpaid dividends. No dividends have been
declared. In addition, the Series A Convertible Preferred Stock has a
liquidation preference equal to its original purchase price plus 10% per annum
for each share from its original issue date, plus any declared but unpaid
dividends.
Holders of Series A Convertible Preferred Stock (the "Preferred
Stockholders") vote together with the common stockholders on most matters. The
approval of a super majority of the Preferred Stockholders is required for
certain significant transactions. The Preferred Stockholders fully participate
in any dividends declared and have the exclusive right to elect all but one
member of the Company's Board of Directors. In addition, the Preferred
Stockholders have the right of first refusal in the event of sale of any equity
securities of the Company, except for certain excluded security transactions.
If the Company offers any of its securities to the public, the Preferred
Stockholders have the option to have their common stock received upon conversion
of their Series A Convertible Preferred Stock included in the offering. In
addition, the Preferred Stockholders have the right to demand that the Company
register the common stock received upon conversion of the Series A Convertible
Preferred Stock.
WARRANTS
In connection with a certain credit agreement executed in 1992 (see Note 7),
the Company issued to the lenders warrants to purchase a total of 277,778 shares
of common stock, exercisable at $.06 per share. Warrants to purchase a total of
168,320 shares have been exercised, and the remaining 109,458 warrants at
December 31, 1995 are exercisable through March 15, 2003.
In connection with a certain 1993 credit agreement (see Note 7), and as
amended and restated by the Preferred Agreement, the Company issued warrants to
one of the lenders to purchase 41,667 shares of Series A Convertible Preferred
Stock at $1.00 per share, all of which are outstanding and exercisable. Certain
of the lenders also received warrants to purchase 1,685 shares of the Company's
common stock at $.06 per share. Warrants to purchase 880 shares of common stock
were exercised and the remaining 805 warrants are outstanding. All outstanding
warrants issued in connection with the 1993 credit agreements are exercisable
through June 30, 2003.
At the dates the 1992 and 1993 warrants were issued, the Company's Board of
Directors had valued the Company's common stock at $2.88 and $5.70 per share,
respectively. Because the common stock warrants
F-10
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CAPITAL STRUCTURE (CONTINUED)
were issued at an exercise price below their estimated fair market value, the
Company recognized non-cash charges of $500,569 and $292,268 as interest expense
and a corresponding increase to additional paid-in capital during 1992 and 1993,
respectively.
In connection with the May 3, 1994 credit agreement (see Note 7), the
Company issued to the lenders warrants to purchase 33,334 shares of the
Company's common stock, exercisable at $10.80 per share. The warrants contain
certain antidilutive provisions that adjust their exercise price should the
Company subsequently issue common shares or equivalents at a price per share
below $10.80. Warrants covered by this agreement expire May 3, 2004.
In connection with the May 22, 1995 Credit Agreement (see Note 7), the
Company issued to the lenders warrants to purchase 1,150,000 shares of the
Company's Series A Convertible Preferred Stock, exercisable at $0.96 per share.
Warrants covered by this agreement expire in May 2005.
In connection with the October 1995 financial commitment (see Note 7), the
Company agreed to issue warrants to purchase 50,000 shares of its common stock
exercisable at the initial public offering price per share. In the event an
initial public offering is not completed by April 30, 1996, the warrant price is
to be set at the fair value as determined by the Board of Directors. These
warrants are exercisable immediately and expire in October 2005.
The Company has reserved a sufficient number of shares of its common stock
to effect conversion of its convertible securities and the exercise of its
options and warrants outstanding and available for issuance.
6. COMMON STOCK OPTIONS
In 1991, the Board of Directors adopted the 1991 Stock Option Plan (the
"Plan"), which, as amended, provides for the granting of options to purchase up
to 1,400,000 shares of the Company's common stock to employees and consultants.
Common stock option activity under this plan is as follows:
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
---------- ----------------
Balance, December 31, 1992..................................... 108,451 $ .06 - $ 2.88
Granted...................................................... 253,909 $ 5.70
Exercised.................................................... (1,778) $ .06 - $ .60
Canceled..................................................... (4,000) $ .06 - $ 5.70
----------
Balance, December 31, 1993..................................... 356,582 $ .06 - $ 5.70
Granted...................................................... 53,333 $ 4.50 - $10.80
Exercised.................................................... (1,371) $ .30 - $ 5.70
Canceled..................................................... (38,555) $ .06 - $10.80
----------
Balance, December 31, 1994..................................... 369,989 $ .06 - $ 4.50
Granted...................................................... 256,522 $ 4.50
Exercised.................................................... (47,239) $ .06 - $ 4.50
Cancelled.................................................... (201) $ 4.50
----------
Balance, December 31, 1995..................................... 579,071 $ .06 - $ 4.50
----------
----------
Common stock options normally vest over a two, four and five year period. At
December 31, 1995, 151,419 stock options were exercisable and 750,133 stock
options were available for grant. The stock option price is periodically set by
the Compensation Committee of the Board of Directors based upon an evaluation of
the fair market value of the Company's common stock. The Company has issued its
stock options at an exercise price commensurate with the fair market value of
the Company's common stock on the date of
F-11
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COMMON STOCK OPTIONS (CONTINUED)
grant; accordingly, no compensation costs have been charged to the Statements of
Operations for these stock option grants. The Compensation Committee may, in
connection with the grant of any option under the Plan, grant to the optionee a
stock appreciation right. No such rights have been granted.
Common stock options covering 260,251 shares granted at $5.70 per share in
1993, and at $10.80 per share in 1994 were repriced at $4.50 per share by the
Board of Directors, based upon the evaluation of the market value of the
Company's common stock as of October 18, 1994.
7. CREDIT AGREEMENTS
1992 AND 1993 AGREEMENTS
The Company entered into credit agreements in 1992 and 1993 with certain of
the investors to finance short-term working capital requirements. All amounts
borrowed under the credit agreements, totaling $3,315,165, inclusive of
interest, were repaid from proceeds of the June 1, 1993 Preferred Agreement.
MAY 1994 AGREEMENT
The Company entered into a credit agreement dated May 3, 1994 with certain
of its investors which provided that the Company could borrow, under certain
conditions, up to $4,395,000 at an interest rate of 7 1/4%. The amount borrowed
under the credit agreement was due the earlier of one year from the date of the
first draw, or upon closing if the Company raises $10,000,000 or more through an
equity offering or is sold or merges. In connection with the execution of the
credit agreement, the Company agreed to issue warrants to purchase shares of
common stock at $10.80 per share, exercisable at one share of common stock for
every $60 of actual borrowings. The Company borrowed $1,000,000 on each of May
23, 1994 and August 4, 1994 under the terms of the credit agreement and in
connection therewith 33,334 common stock warrants were issued and are fully
exercisable at December 31, 1995. The warrants expire May 3, 2004. In May 1995,
investors under the May 3, 1994 Credit Agreement converted loans of $2,000,000
into Series A Preferred Stock at $1.25 per share, adjustable to $0.75 per share
in the event the Company does not complete a corporate equity financing or
licensing transaction of $15,000,000 or more or a merger or acquisition of the
Company before December 31, 1995, or an initial public offering of its
securities by February 28, 1996.
MAY 1995 AGREEMENT
The Company entered into a credit agreement dated May 22, 1995 with certain
of its investors which provides that the Company may borrow, under certain
conditions, up to $8,000,000 at an interest rate of 9%. The loan is due January
15, 1997, and is convertible in the event of a merger or acquisition of the
Company into Series A Preferred Stock at $1.25 per share, or in the event of an
initial public offering, into shares of the Company's common stock at the rate
of one-half of the price per share in an initial public offering. In connection
with the execution of the credit agreement and the funding of $7,000,000 loans
thereunder, as of December 31, 1995, the Company has issued 1,150,000 warrants
to the investors to purchase shares of Series A Preferred Stock, at an exercise
price of $0.96 per share, and is committed to issue 50,000 additional warrants
based upon actual funding of loans at the rate of one warrant for each $20.00 of
actual borrowing. The warrants expire in May 2005. See Note 11.
OCTOBER 1995 COMMITMENT
In October 1995, the Company entered into an agreement with two of its
investors to provide up to $3,000,000 on terms to be negotiated. This credit
commitment was replaced by the 1996 Credit Agreement (see Note 11).
Interest expense for the years ended December 31, 1993, 1994 and 1995, and
for the period February 16, 1990 (date of inception) to December 31, 1995, under
all borrowing arrangements was $73,523, $75,353, $353,338 and $540,766,
respectively.
F-12
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The components of the Company's net deferred tax asset and the tax effects
of the primary temporary differences giving rise to the Company's deferred tax
asset are as follows at December 31, 1994 and 1995:
1994 1995
------------- -------------
Net operating loss carryforwards and credits.............. $ 5,387,000 $ 7,578,000
Capitalized start-up costs for tax purposes............... 1,847,000 2,347,000
Other..................................................... 59,000 17,000
------------- -------------
Deferred tax asset........................................ 7,293,000 9,942,000
Valuation allowance....................................... (7,293,000) (9,942,000)
------------- -------------
Net deferred tax asset.................................... $ -- $ --
------------- -------------
------------- -------------
As of December 31, 1995, the Company has the following net operating loss
carryforwards available for federal income tax purposes:
EXPIRATION
- -------------------------------------------------------------------------------
2005........................................................................... $ 313,000
2006........................................................................... 1,259,000
2007........................................................................... 3,818,000
2008........................................................................... 4,403,000
2009........................................................................... 2,834,000
2010........................................................................... 5,375,000
-------------
Total...................................................................... $ 18,002,000
-------------
-------------
As a result of a greater-than-50% ownership change in 1993, utilization of
the net operating loss carryforwards will be limited due to the ownership change
limitations provided by the tax law.
9. PENSION PLAN
The Company offers a defined contribution 401(k) pension plan to all
eligible employees. The plan is administered by trustees. Employee contributions
are voluntary and are determined on an individual basis with a maximum annual
amount equal to the maximum allowable under federal tax regulations. Highly
compensated employees are subject to further limitations and all participants
are always fully vested. There have been no employer contributions under the
plan.
10. COMMITMENTS AND CONTINGENCIES
FACILITY LEASE
The Company previously leased administrative and laboratory space from
MedImmune, Inc., a related party, under a five year sublease arrangement which
was terminated by the Company in 1995. Total lease expense was $156,560,
$174,155, $131,016 and $660,179 for the years ended December 31, 1993, 1994 and
1995 and for the period February 16, 1990 (date of inception) to December 31,
1995, respectively.
In January 1995, the Company entered into a five year lease, commencing in
May 1995 for administrative and laboratory space in Rockville, Maryland. Under
the lease, the Company is required to pay base rent, which increases 3% per
year, and operating expenses.
F-13
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company's future minimum lease payments under facility operating leases
at December 31, 1995 are as follows:
YEAR ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
1996............................................................................ $ 463,000
1997............................................................................ 631,000
1998............................................................................ 650,000
1999............................................................................ 670,000
2000............................................................................ 169,000
------------
Total Minimum Payments...................................................... $ 2,583,000
------------
------------
CAPITAL LEASES
Included as assets in the balance sheets are the following amounts for
capitalized leases as of December 31, 1994 and 1995:
1994 1995
----------- ------------
Laboratory and office equipment.................................... $ 779,414 $ 1,804,730
Less accumulated amortization...................................... (426,333) (709,008)
----------- ------------
$ 353,081 $ 1,095,722
----------- ------------
----------- ------------
Future minimum lease payments required under capitalized leases are as
follows:
YEAR ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
1996............................................................................ $ 449,969
1997............................................................................ 400,472
1998............................................................................ 295,355
1999............................................................................ 207,841
2000............................................................................ 827
------------
Total minimum lease payments.................................................... 1,354,464
Less amounts representing interest at 10% to 18%................................ (245,744)
------------
Present value of net minimum lease payments..................................... $ 1,108,720
------------
------------
11. SUBSEQUENT EVENTS
MAY 1994 AGREEMENT
On February 28, 1996, the $2,000,000 loan under the May 31, 1994 Credit
Agreement (see Note 7), which had previously been converted at $1.25 per share
into shares of Series A Convertible Preferred Stock, was adjusted to convert at
a $0.75 per share conversion price and 1,066,663 additional shares were issued.
As a result of the adjustment in the conversion price, the conversion ratio of
all Series A Convertible Preferred Stock was adjusted from one share of common
stock to four shares of preferred stock to one share of common stock to three
shares of preferred stock.
MAY 1995 AGREEMENT
On January 10, 1996, the Company borrowed $1,000,000 and issued 50,000
warrants to purchase shares of Series A Preferred Stock under the May 1995
Credit Agreement. On March 7, 1996, lenders converted all $8,000,000 covered by
the agreement into Series A Convertible Preferred Stock at a conversion price of
F-14
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. SUBSEQUENT EVENTS (CONTINUED)
$1.00 per share, which was $0.25 per share less than the originally negotiated
conversion price. The decrease in the conversion price was an inducement to the
lenders to exercise their conversion option and, as a result, the Company will
record a non-cash expense of $3,325,000 in the first quarter of 1996.
MARCH 1996 AGREEMENTS
The Company entered into two credit agreements, dated March 7, 1996
(collectively, the "1996 Credit Agreement") with certain of its investors which
provide that the Company may borrow when certain conditions are met up to
$7,300,000 at an interest rate of 8 1/2%. The loans are due May 31, 1997, and
are convertible in the event of a merger or acquisition of the Company into
Series A Convertible Preferred Stock at $1.25 per share, or in the event of an
initial public offering at one-half of the initial public offering price per
share. In connection with the 1996 Credit Agreement, the Company issued 730,000
warrants to the investors at an exercise price of $0.75 per share to purchase
shares of Series A Convertible Preferred Stock and is committed to issue 365,000
additional warrants based upon actual funding of loans at the rate of one
warrant for each $20.00 of actual borrowing. The warrants expire in March 2006.
On March 8, 1996, the Company borrowed $1,000,000 and issued 50,000 warrants
under the 1996 Credit Agreement.
In connection with the 1996 Credit Agreement, the Company ascribed an
estimated fair value of $969,000 to the warrants issued at the time the
agreement was executed, with a like amount recorded as debt issuance costs. In
addition, the proceeds of $1,000,000 from the initial draw under the 1996 Credit
Agreement was allocated between the debt of $934,000 and the estimated fair
value of the warrants of $66,000. The debt will be written up to its face value
of $1,000,000 using the effective interest method over the term of the debt. The
debt issuance costs will be amortized over the life of the agreement. At the
time of the closing of the Offering, the outstanding balance under the 1996
Credit Agreement will be converted into common stock and any remaining debt
discount and debt issuance costs will be expensed.
The $1,000,000 initial draw under the 1996 Credit Agreement is mandatorily
convertible into common stock upon closing of the Offering at a conversion price
of one-half of the Offering price. The Company will record a non-cash expense of
$700,000 upon closing of the offering to reflect this discount.
In connection with the 1996 Credit Agreement, employees of the Company were
issued 194,485 stock options to purchase shares of the Company's common stock at
the greater of $4.50 or 85% of the initial public offering price per share.
SPLIT OF COMMON STOCK
On March 14, 1996, the Board of Directors authorized a one-to-six reverse
split of the outstanding shares of the Company's Common Stock.
12. UNAUDITED INFORMATION
BASIS OF PRESENTATION
The unaudited interim financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. The unaudited interim financial statements
reflect, in the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to fairly present the results of
operations, changes in cash flows and financial positions as of and at the end
of the periods presented. The unaudited interim financial information
F-15
PHARMAVENE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. UNAUDITED INFORMATION (CONTINUED)
should be read in conjunction with the audited financial statements and related
notes thereto, appearing elsewhere herein. The results for the interim periods
presented are not necessarily indicative of results to be expected for the full
year.
MARCH 1996 AGREEMENTS
On April 25, 1996 and June 11, 1996 the Company borrowed a total of
$2,000,000 and issued 100,000 warrants under the 1996 Credit Agreement. The
proceeds from the two draws were allocated between the debt of $1,868,000 and
the estimated fair value of the warrants of $132,000. The debt will be written
up to its face value of $2,000,000 using the effective interest method over the
terms of the debt. The debt issuance costs will be amortized over the life of
the agreement. At the time of the closing of the Offering, the outstanding
balance under the 1996 Credit Agreement will be converted into common stock and
any remaining debt discount and debt issuance costs will be expensed.
The $3,000,000 total draws (including the $1,000,000 initial draw on March
8, 1996, see Note 11) under the 1996 Credit Agreement is mandatorily convertible
into common stock upon closing of the Offering at a conversion price of one-half
of the Offering price. The Company will record a non-cash expense of $2,100,000
upon closing of the offering to reflect this discount.
COMMON STOCK OPTIONS
In June 1996, the 1991 Stock Option Plan was amended to provide for the
granting of options to purchase up to 1,900,000 shares of the Company's common
stock. Stock options activity for the three months ended March 31, 1996 was as
follows:
EXERCISE
PRICE
NUMBER OF SHARES PER SHARE
----------------- -------------
Balance, December 31, 1995................................................ 579,071 $ .06 - $4.50
Granted................................................................. 221,992 $ 4.50
Exercised............................................................... (534) $ 4.50
Cancelled............................................................... --
-----------------
Balance, March 31, 1996................................................... 800,529 $ .06 - $4.50
-----------------
-----------------
Subsequent to March 31, 1996 the Company granted 435,651 options, options
covering 911 shares were exercised at prices ranging from $0.60 to $4.50 per
share and 32,661 options were cancelled. All options granted in 1996 were at
$4.50 or 85% of the Offering price per share if the Company completes the
Offering within six months from the date of grant.
ATHENA AGREEMENT
On July 1, 1996, the Company entered into an exclusive agreement with Athena
Neurosciences, Inc. ("Athena"), a wholly-owned subsidiary of Elan Corporation
plc ("Elan") for the worldwide marketing, sale and distribution of Carbatrol.
Carbatrol will be marketed in the United States by Athena and its affiliates or
sublicensees in the rest of the world. Under the agreement, Athena (i) will make
a $2.0 million payment within ten days of execution of the agreement, (ii) will
fund all future development costs associated with Carbatrol which are approved
by a steering committee, (iii) will make a milestone payment of up to $8.0
million, upon satisfaction of certain conditions, of which $5.0 million is
creditable against future royalty payments which may be earned on product sales,
and (iv) will make future royalty payments to the Company based on net sales of
Carbatrol. Athena has been granted the right to purchase 220,000 shares of
common stock in the Offering.
F-16
- ---------------------------------------------
---------------------------------------------
- ---------------------------------------------
---------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
Page
---
Prospectus Summary....................... 3
Risk Factors............................. 6
Use of Proceeds.......................... 15
Dividend Policy.......................... 15
Capitalization........................... 16
Dilution................................. 17
Selected Financial Data.................. 18
Management's Discussion and Analysis..... 20
Business................................. 24
Management............................... 43
Certain Transactions..................... 51
Principal Stockholders................... 55
Description of Capital Stock............. 56
Shares Eligible for Future Sale.......... 58
Underwriting............................. 59
Legal Matters............................ 60
Experts.................................. 60
Additional Information................... 60
Glossary................................. G-1
Index to Financial Statements............ F-1
---------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,200,000 SHARES
[LOGO]
PHARMAVENE, INC.
COMMON STOCK
-------------------
PROSPECTUS
, 1996
---------------------
LEHMAN BROTHERS
VOLPE, WELTY & COMPANY
- ---------------------------------------------
---------------------------------------------
- ---------------------------------------------
---------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered (other than
underwriting discounts and commissions) are as follows:
AMOUNT
----------
SEC Registration Fee.............................................................. $ 10,469
NASD Filing Fee................................................................... 3,536
Nasdaq Listing Fee................................................................ 35,000
Printing and Engraving Expenses................................................... 250,000
Accounting Fees and Expenses...................................................... 180,000
Legal Fees and Expenses........................................................... 350,000
Blue Sky Fees and Expenses........................................................ 22,000
Transfer Agent's Fees and Expenses................................................ 3,500
Miscellaneous Expenses............................................................ 45,495
----------
Total......................................................................... $ 900,000
----------
----------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation and By-Laws of the Registrant provides that
the Company shall indemnify any person to the full extent permitted by the
Delaware General Corporation Law (the "GCL"). Section 145 of the GCL, relating
to indemnification, is hereby incorporated herein by reference.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to Directors, officers or controlling persons of the Company pursuant
to the Company's By-laws and the Delaware General Corporation Law, the Company
has been informed 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.
The Company's Restated Certificate of Incorporation includes certain
provisions permitted pursuant to Delaware law whereby officers and Directors of
the Company are to be indemnified against certain liabilities. The Company's
Restated Certificate of Incorporation also limits, to the fullest extent
permitted by Delaware law, a director's liability for monetary damages for
breach of fiduciary duty, including gross negligence, except liability for (i)
breach of the director's duty of loyalty, (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of the law,
(iii) the unlawful payment of a dividend or unlawful stock purchase or
redemption and (iv) any transaction from which the director derives an improper
personal benefit. Delaware law does not eliminate a director's duty of care and
this provision has no effect on the availability of equitable remedies such as
injunction or rescission based upon a director's breach of the duty of care. In
addition, the Company has obtained an insurance policy providing coverage for
certain liabilities of its officers and Directors.
In accordance with Section 102(a)(7) of the GCL, the Company's Certificate
of Incorporation eliminates the personal liability of directors to the Company
or its stockholders for monetary damages for breach of fiduciary duty as a
director with certain limited exceptions set forth in Section 102(a)(7).
Reference is made to Section 10 of the Underwriting Agreement (Exhibit 1.1)
which provides for indemnification by the Underwriters of the Company, its
officers and directors.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Company has issued securities to a limited
number of persons, as described below. No underwriter or underwriting discounts
or commissions were involved. There was no public offering in any such
transaction and the Company believes that each transaction was exempt from the
registration requirements of the Securities Act of 1933 (the "Securities Act")
by reason of Sections 3(b) and
II-1
4(2) thereof based on the private nature of the transactions and the
sophistication of the purchasers, all of whom had access to complete information
concerning the Company and acquired the securities for investment and not with a
view to the distribution thereof.
Since its inception to July 1, 1996, the Company has issued 72,241 shares of
Common Stock pursuant to exercise of employee stock options at exercise prices
per share ranging from $.06 to $5.70, and has granted options to purchase
1,357,560 shares of its Common Stock to employees, directors and consultants at
exercise prices ranging from $.06 to $10.80.
In June, September and November 1993, the Company sold an aggregate of
5,025,000, 1,325,001 and 1,325,000 shares of Series A Preferred Stock for a
purchase price of $1.00 per share to a group of investors including HCV III, HCV
IV, The State of Michigan, Aetna and Everest Trust. These shares are convertible
into an aggregate of 1,705,556 shares of Common Stock upon completion of this
offering. In February 1994, the Company sold an aggregate of 1,324,999 shares of
Series A Preferred Stock for a purchase price of $1.00 per share to a group of
investors. These shares are convertible into an aggregate of 294,445 shares of
Common Stock upon completion of this offering.
In April 1993, the Company sold to HCV II for a price of $.01 per share
Preferred Stock Warrants to purchase 41,667 shares of Series A Preferred Stock
at an exercise price of $1.00 per share and 1,686 Common Stock Warrants to
certain shareholders, of which 802 remain outstanding and 884 were exercised.
In August and December 1992, the Company sold to HCV II and others Common
Stock Warrants to purchase an aggregate of 111,111 shares of Common Stock for a
price of $.06 per share. These warrants are exercisable at a price of $.06 per
share. In December 1992, the Company sold 139,518 shares of Common Stock to HCV
II, 22,422 shares of Common Stock to Everest Trust and 4,729 shares of Common
Stock to other investors.
In May 1994, the Company issued an aggregate of $2,000,000 7 1/4%
Convertible Promissory Notes (the "1994 Notes") and warrants to purchase up to
an aggregate of 33,337 shares of Common Stock at an exercise price of $10.80 per
share to a group of stockholders including HCV III, HCV IV, The State of
Michigan, Aetna and Everest Trust (the "1994 Lenders"). In May 1995, the Company
issued 1,599,997 shares of Series A Preferred Stock to the 1994 Lenders pursuant
to an agreement to convert the 1994 Notes (the "Conversion Agreement"). In
February 1996, the Company issued 1,066,663 shares of Series A Preferred Stock
to the 1994 Lenders under the terms of the Conversion Agreement.
The Company issued an aggregate of $8,000,000 principal amount of 9%
promissory notes (the "1995 Notes") to certain stockholders and officers,
including HCV III, HCV IV, The State of Michigan, Everest Trust, James D. Russo,
James D. Isbister and George W. Belendiuk (the "1995 Lenders"). In March 1996,
the 1995 Notes were converted into an aggregate of 8,000,000 shares of Series A
Preferred Stock. The Company also issued warrants to purchase 1,200,000 shares
of Series A Preferred Stock at an exercise price of $.96 per share pursuant to
the 1995 Credit Agreement to the 1995 Lenders. In October 1995, the Company
agreed to issue ten-year warrants to purchase 50,000 shares of Common Stock at
an exercise price equal to the public offering price per share to HCV III and
HCV IV.
In March 1996, the Company entered into two credit agreements (collectively,
the "1996 Credit Agreement") with certain stockholders, including HCV III, HCV
IV and Everest Trust (the "1996 Lenders") and issued an aggregate of $3,000,000
principal amount of 8 1/2% promissory notes (the "1996 Notes") to the 1996
Lenders. In connection with the execution of the 1996 Credit Agreement, the
Company issued an aggregate of 730,000 ten-year warrants to purchase Series A
Preferred Stock to the 1996 Lenders at an exercise price of $.75 per share. In
connection with the issuance of the 1996 Notes, the Company issued an aggregate
of 150,000 ten-year warrants to purchase Series A Preferred Stock at an exercise
price of $.75 per share. The 1996 Notes are convertible into shares of Series A
Preferred Stock at a conversion price equal to one-half the initial public
offering price per share.
The above transactions were private transactions not involving a public
offering and were exempt from the registration provisions of the Securities Act
pursuant to Section 4(2) thereof. The sale of securities was
II-2
without the use of an underwriter, and the certificates evidencing the shares
bear a restrictive legend permitting the transfer thereof only upon registration
of the shares or an exemption under the Securities Act.
ITEM 16. EXHIBITS
1.1. Form of Underwriting Agreement*
3.2 Fourth Restated Certificate of Incorporation*
3.2(a) Amendment to Fourth Restated Certificate of Incorporation*
3.2(b) Second Amendment to Fourth Restated Certificate of Incorporation*
3.2(c) Third Amendment to Fourth Restated Certificate of Incorporation*
3.3. By-laws, as amended*
4.1. Form of Common Stock Certificate*
5.1. Opinion of Bachner, Tally, Polevoy & Misher LLP regarding legality of
securities offered
10.1 Employment Agreement dated April 15, 1993 between the Registrant and
Edward M. Rudnic, Ph.D.*
10.1(a) Employment Agreement dated July 1, 1996 between the Registrant and Edward
M. Rudnic, Ph.D.
10.2 Employment Agreement dated July 1, 1996 between the Registrant and James
D. Russo
10.3 Employment Agreement dated as of January 1, 1993 between the Registrant
and George W. Belendiuk, M.D., Ph.D.*
10.4 Employment Agreement dated as of July 1, 1996 between the Registrant and
Krystyna Belendiuk, Ph.D.
10.5 Restricted Stock Purchase Agreement dated July 11, 1991 between the
Registrant and George W. Belendiuk*
10.6 Employment Agreement between the Registrant and James D. Isbister*
10.6(a) Restricted Stock Purchase Agreement dated July 29, 1991 between the
Registrant and James D. Isbister*
10.6(b) Continuing Services Agreement dated as of July 1, 1996 between the
Registrant and James D. Isbister
10.7 1991 Stock Option Plan, as amended*
10.8 Form of Stock Option Agreement*
10.9 Sublease Agreement dated March 29, 1995 between the Registrant and Corning
Clinical Laboratories, Inc.*
10.10 Sublease Agreement Amendment dated June 2, 1995 between the Registrant and
Corning Clinical Laboratories, Inc.*
10.11 Convertible Preferred Stock Purchase Agreement dated June 1, 1993*
10.12 Third Amended and Restated Stockholders' Agreement dated June 1, 1993, and
amendments.*
10.12(a) Fourth Amendment to the Third Amended and Restated Stockholders'
Agreement*
10.13 Credit Agreement dated as of May 3, 1994 between the Registrant and
certain stockholders, with form of Warrant and Convertible Promissory
Note attached.*
10.14 Form of Warrant to purchase shares of Common Stock dated May 3, 1994
issued to Everest Trust pursuant to Exhibit 10.13.*
II-3
10.15 Conversion and Subscription Agreement dated as of May 22, 1995 between the
Registrant and the signatories of the May 3, 1994 Credit Agreement.*
10.15(a) Form of Amendment No. 1 to Conversion and Subscription Agreement*
10.15(b) Form of Amendment No. 2 to Conversion and Subscription Agreement.
10.16 Credit Agreement dated as of May 22, 1995 between Registrant and certain
stockholders, with form of Convertible Promissory Note and Form of
Warrant to purchase shares of Series A Convertible Preferred Stock
attached.*
10.16(a) Form of Amendment No. 1 to Credit Agreement*
10.17+ License Agreement between the Registrant and Rhone-Poulenc Rorer, Inc.,
dated as of August 25, 1994.*
10.18+ Manufacturing Agreement dated as of September 30, 1993 between the
Registrant and Niro Inc.*
10.19 Form of Consent and Agreement to Amend between the Registrant and certain
stockholders dated as of November 30, 1995.
10.20 Form of warrant to purchase Common Stock issued to HCV III and HCV IV*
10.21 Credit Agreement for up to $4,300,000 dated March 7, 1996 between the
Registrant and certain stockholders, with form of Convertible Promissory
Note attached*
10.22 Credit Agreement for up to $3,000,000 dated March 7, 1996 between the
Registrant and certain stockholders, with form of Convertible Promissory
Note attached*
10.23 Form of warrant to purchase shares of Series A Convertible Preferred Stock
dated March 11, 1996 issued to HCV III pursuant to Exhibit 10.21*
10.24 Conversion and Subscription Agreement dated March 7, 1996 between the
Registrant and Certain Stockholders*
10.25+ Agreement dated as of May 28, 1996 between the Registrant and The P.F.
Laboratories, Inc.
10.26+ License Agreement dated as of July 1, 1996 between the Registrant and
Athena Neurosciences, Inc.
10.27 Employment Agreement dated as of June 25, 1996 between the Registrant and
Robert S. Cohen
11.1 Computation of Historical Loss Per Share
24.1 Consent of Bachner, Tally, Polevoy & Misher LLP (included in its opinion
filed as Exhibit 5.1 hereto)
24.2 Consent of Coopers & Lybrand L.L.P. -- Included on Page II-7
24.3 Consent of Carella, Byrne, Baine, Gilfillan, Cecchi, Stewart & Olstein*
24.4 Consent of Olsson, Frank and Weeda, P.C. -- included on Page II-8
25.1 Power of Attorney*
- --------------
* Previously filed
+ Confidential treatment has been requested.
(b)Financial Statement Schedules
II-4
ITEM 17. UNDERTAKINGS
Undertakings Required by Regulation S-K, Item 512(g).
The undersigned registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Undertaking Required by Regulation S-K, Item 512(h).
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Undertakings required by Regulation S-K, Item 512(i).
The undersigned registrant hereby undertakes that:
(1)For purposes of determining any liability under the Securities Act of
1933, as amended, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in the 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 purposes 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-5
CONSENT OF COUNSEL
The consent of Bachner, Tally, Polevoy & Misher LLP is contained in its
opinion filed as Exhibit 5.1 to the Registration Statement.
II-6
EXHIBIT 24.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to inclusion in this Registration Statement on Form S-1 (File No.
33-98706) of our report dated January 24, 1996 (except as to the information
presented in Note 11, for which the date is March 14, 1996), on our audits of
the financial statements as of December 31, 1993, 1994 and 1995, and for each of
the three years in the period ended December 31, 1995, and for the period
February 16, 1990 (date of inception) to December 31, 1995 of Pharmavene, Inc.
We also consent to the references to our firm under the captions "Experts" and
"Selected Financial Data" in the Prospectus.
COOPERS & LYBRAND L.L.P.
Rockville, Maryland
July 3, 1996
II-7
EXHIBIT 24.4.
CONSENT OF COUNSEL
The undersigned hereby consents to the use of our name, and the statement with
respect to us appearing under the heading "Legal Matters" included in the
Registration Statement. We further consent to the incorporation by reference of
this consent pursuant to Rule 439(b) under the Securities Act of 1933, as
amended (the "Securities Act"), into any subsequent registration statement for
the same offering that may be filed pursuant to Rule 462(b) under the Securities
Act.
OLSSON, FRANK AND WEEDA, P.C.
Washington, D.C.
June 28, 1996
II-8
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 Rockville, State of
Maryland on the 3rd day of July, 1996.
PHARMAVENE, INC.
By: _______/s/_JAMES D. ISBISTER______
James D. Isbister
CHIEF EXECUTIVE OFFICER AND
DIRECTOR
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------------------------- ----------------------------------------- -------------
/s/JAMES D. ISBISTER Chief Executive Officer and Director July 3, 1996
James D. Isbister (principal executive officer)
/s/KRYSTYNA BELENDIUK, PH.D. Senior Vice President -- Business July 3, 1996
Krystyna Belendiuk, Ph.D. Development and Director
Senior Vice President and Chief Financial
/s/JAMES D. RUSSO Officer (principal financial and July 3, 1996
James D. Russo accounting officer)
/s/JAMES H. CAVANAUGH, PH.D. Director July 3, 1996
James H. Cavanaugh, Ph.D.
/s/MAX LINK, PH.D. Director July 3, 1996
Max Link, Ph.D.
/s/LAWRENCE C. HOFF Director July 3, 1996
Lawrence C. Hoff
/s/JAMES D. ISBISTER
*James D. Isbister
(AS ATTORNEY-IN-FACT)
II-9
EXHIBIT INDEX
EXHIBITS
NO. PAGE
- ------------ ---------
1.1. Form of Underwriting Agreement*
3.2 Fourth Restated Certificate of Incorporation*
3.2 (a) Amendment to Fourth Restated Certificate of Incorporation*
3.2 (b) Second Amendment to Fourth Restated Certificate of Incorporation*
3.2 (c) Third Amendment to Fourth Restated Certificate of Incorporation*
3.3. By-laws, as amended*
4.1. Form of Common Stock Certificate*
5.1. Opinion of Bachner, Tally, Polevoy & Misher LLP regarding legality of securities
offered
10.1 Employment Agreement dated April 15, 1993 between the Registrant and Edward M.
Rudnic, Ph.D.*
10.1 (a) Employment Agreement dated July 1, 1996 between the Registrant and Edward M.
Rudnic, Ph.D.
10.2 Employment Agreement dated July 1, 1996 between the Registrant and James D. Russo
10.3 Employment Agreement dated as of January 1, 1993 between the Registrant and George
W. Belendiuk, M.D., Ph.D.*
10.4 Employment Agreement dated as of July 1, 1996 between the Registrant and Krystyna
Belendiuk, Ph.D.
10.5 Restricted Stock Purchase Agreement dated July 11, 1991 between the Registrant and
George W. Belendiuk*
10.6 Employment Agreement between the Registrant and James D. Isbister*
10.6 (a) Restricted Stock Purchase Agreement dated July 29, 1991 between the Registrant and
James D. Isbister*
10.6 (b) Continuing Services Agreement dated as of July 1, 1996 between the Registrant and
James D. Isbister
10.7 1991 Stock Option Plan, as amended*
10.8 Form of Stock Option Agreement*
10.9 Sublease Agreement dated March 29, 1995 between the Registrant and Corning Clinical
Laboratories, Inc.*
10.10 Sublease Agreement Amendment dated June 2, 1995 between the Registrant and Corning
Clinical Laboratories, Inc.*
10.11 Convertible Preferred Stock Purchase Agreement dated June 1, 1993*
10.12 Third Amended and Restated Stockholders' Agreement dated June 1, 1993, and
amendments.*
10.12 (a) Fourth Amendment to the Third Amended and Restated Stockholders' Agreement*
10.13 Credit Agreement dated as of May 3, 1994 between the Registrant and certain
stockholders, with form of Warrant and Convertible Promissory Note attached.*
10.14 Form of Warrant to purchase shares of Common Stock dated May 3, 1994 issued to
Everest Trust pursuant to Exhibit 10.13.*
EXHIBITS
NO. PAGE
- ------------ ---------
10.15 Conversion and Subscription Agreement dated as of May 22, 1995 between the
Registrant and the signatories of the May 3, 1994 Credit Agreement.*
10.15 (a) Form of Amendment No. 1 to Conversion and Subscription Agreement*
10.15 (b) Form of Amendment No. 2 to Conversion and Subscription Agreement.
10.16 Credit Agreement dated as of May 22, 1995 between Registrant and certain
stockholders, with form of Convertible Promissory Note and Form of Warrant to
purchase shares of Series A Convertible Preferred Stock attached.*
10.16 (a) Form of Amendment No. 1 to Credit Agreement*
10.17 + License Agreement between the Registrant and Rhone-Poulenc Rorer, Inc., dated as of
August 25, 1994.*
10.18 + Manufacturing Agreement dated as of September 30, 1993 between the Registrant and
Niro Inc.*
10.19 Form of Consent and Agreement to Amend between the Registrant and certain
stockholders dated as of November 30, 1995.
10.20 Form of warrant to purchase Common Stock issued to HCV III and HCV IV*
10.21 Credit Agreement for up to $4,300,000 dated March 7, 1996 between the Registrant
and certain stockholders, with form of Convertible Promissory Note attached*
10.22 Credit Agreement for up to $3,000,000 dated March 7, 1996 between the Registrant
and certain stockholders, with form of Convertible Promissory Note attached*
10.23 Form of warrant to purchase shares of Series A Convertible Preferred Stock dated
March 11, 1996 issued to HCV III pursuant to Exhibit 10.21*
10.24 Conversion and Subscription Agreement dated March 7, 1996 between the Registrant
and Certain Stockholders*
10.25 + Agreement dated as of May 28, 1996 between the Registrant and The P.F.
Laboratories, Inc.
10.26 + License Agreement dated as of July 1, 1996 between the Registrant and Athena
Neurosciences, Inc.
10.27 Employment Agreement dated as of June 25, 1996 between the Registrant and Robert S.
Cohen
11.1 Computation of Historical Loss Per Share
24.1 Consent of Bachner, Tally, Polevoy & Misher LLP (included in its opinion filed as
Exhibit 5.1 hereto)
24.2 Consent of Coopers & Lybrand L.L.P. -- Included on Page II-7
24.3 Consent of Carella, Byrne, Baine, Gilfillan, Cecchi, Stewart & Olstein*
24.4 Consent of Olsson, Frank and Weeda, P.C. -- included on Page II-8
25.1 Power of Attorney*
- --------------
* Previously filed
+ Confidential treatment has been requested.
(b)Financial Statement Schedules