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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-28150
NEUROCRINE BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)
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Delaware 33-0525145
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
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10555 Science Center Drive, San Diego, CA 92121
(Address of principal executive office) (Zip Code)
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Registrant's telephone number, including area code: (858) 658-7600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 23, 2001 totaled approximately $344,192,047
million based on the closing stock price as reported by the Nasdaq National
Market. As of March 23, 2001, there were 25,428,731 shares of the Registrant's
Common Stock, $.001 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of Form 10-K is incorporated
by reference from the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 24, 2001 (the "Proxy Statement"), which will be
filed with the Securities and Exchange Commission within 120 days after the
close of the Registrant's fiscal year ended December 31, 2000.
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TABLE OF CONTENTS
Page
PART I
Item 1. Business ................................................ 3
Item 2. Properties .............................................. 31
Item 3. Legal Proceedings ....................................... 31
Item 4. Submission of Matters to a Vote of Security Holders ..... 31
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters ...................... 31
Item 6. Selected Financial Data ................................. 32
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........ 33
Item 7A. Quantitative and Qualitative Disclosures on Market Risk . 38
Item 8. Financial Statements and Supplementary Data ............. 38
Item 9. Changes in Disagreements with Accountants on
Accounting and Financial Disclosure .................. 38
PART III
Item 10. Directors and Executive Officers of the Registrant ...... 39
Item 11. Executive Compensation .................................. 39
Item 12. Security Ownership of Certain Beneficial Owners
and Management ....................................... 39
Item 13. Certain Relationships and Related Transactions .......... 39
PART IV
Item 14. Exhibits, Financial Statements and Schedules
and Reports on Form 8-K .............................. 39
PART I
Forward-Looking Statements
This Annual Report on Form 10-K and the information incorporated by
reference contain forward-looking statements that involve a number of risks and
uncertainties. Although our forward-looking statements reflect the good faith
judgment of our management, these statements can only be based on facts and
factors currently known by us. Consequently, forward-looking statements are
inherently subject to risks and uncertainties, and actual results and outcomes
may differ materially from results and outcomes discussed in the forward-looking
statements.
Forward-looking statements can be identified by the use of
forward-looking words such as "believes," "expects," "hopes," "may," "will,"
"plan," "intends," "estimates," "could," "should," "would," "continue," "seeks,"
"pro forma" or "anticipates," or other similar words (including their use in the
negative), or by discussions of future matters such as the development of new
products, technology enhancements, possible changes in legislation and other
statements that are not historical. These statements include but are not limited
to statements under the captions "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" as
well as other sections in this report. A number of factors could cause results
to differ materially from those anticipated by the forward-looking statements,
including those discussed under "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." You should be aware
that the occurrence of any of the events discussed under "Risk Factors" and
elsewhere in this prospectus could substantially harm our business, results of
operations and financial condition and that if any of these events occurs, the
trading price of our common stock could decline and you could lose all or a part
of the value of your shares of our common stock.
The cautionary statements made in this report are intended to be
applicable to all related forward-looking statements wherever they may appear in
this report. We urge you not to place undue reliance on these forward- looking
statements, which speak only as of the date of this report.
ITEM 1. BUSINESS
Overview
Neurocrine Biosciences, Inc. is a product-based biopharmaceutical
company focused on neurologic and endocrine diseases and disorders. Our product
candidates address some of the largest pharmaceutical markets in the world
including insomnia, anxiety, depression, cancer and diabetes. We currently have
15 programs in various stages of research and development. Of these 15 programs,
five programs are in clinical development and three programs are in advanced
preclinical development which we expect to progress into human clinical trials
in the near future. We believe the other seven research projects will help
supply clinical development candidates in the future. While we independently
develop the majority of our product candidates, we utilize collaborators in four
of our 15 programs, including Janssen Pharmaceutica, a subsidiary of Johnson &
Johnson, Wyeth-Ayerst Laboratories, a division of American Home Products, Taisho
Pharmaceutical and Eli Lilly. Under these collaborations, we receive funds for
product development, in addition to receiving milestone payments and royalties
on worldwide product sales.
Our Business Strategy
Our goal is to become the leading therapeutic product-based
biopharmaceutical company focused on neurologic and endocrine diseases and
disorders. There are six key elements to our business strategy:
Build a Large and Diversified Product Portfolio to Mitigate Overall
Clinical and Technical Risk. We believe that by building a large and diverse
product pipeline, we can mitigate some of the risks associated with drug
development. We currently have 15 programs in various stages of research and
development with five projects in clinical development, three programs in
advanced preclinical development which we expect to progress into the clinic in
the near future, and seven research projects to supply clinical compounds for
the future. We take a portfolio approach to managing our pipeline that balances
the size of the market opportunities with clear and defined clinical and
regulatory paths to approval. We do this to ensure that we focus our internal
development resources on innovative therapies with high probabilities of
technical and commercial success.
Identify Novel Drug Targets for the Development of Innovative
Therapies to Address Large Unmet Market Opportunities. We utilize a
multidisciplinary research approach to identify and validate novel drug targets
for internal development or collaboration. For example, corticotropin-releasing
factor, which is believed to be the central mediator of the body's stress
response, may represent the first new breakthrough for anxiety and depression in
over 20 years. Gonadotropin-releasing factor antagonists, compounds designed to
reduce the secretions of sex steroids, may represent the first novel orally
available means of treatment of prostate cancer and endometriosis. Melanocortin
and hypocretin modulators are compounds, which affect proteins in the brain
believed to be involved in many activities of the body. We believe these
compounds build upon our franchise and expertise in obesity and sleep disorders.
The creativity and productivity of our discovery research group will continue to
be a critical component for our continued success. Our team of approximately 150
biologists and chemists has a goal of delivering three innovative clinical
compounds over the next five years to fuel our research and development
pipeline.
Establish Corporate Collaborations with Global Pharmaceutical Companies
to Assist in the Development of Our Products and Mitigate Financial Risk While
Retaining Significant Commercial Upside. We leverage the development, regulatory
and commercialization expertise of our corporate collaborators to accelerate the
development of our potential products while typically retaining commercial or
co-promotional rights in North America. We intend to further leverage our
resources by continuing to enter into strategic alliances to enhance our
internal development and commercialization capabilities. Our current strategic
alliances include:
o Janssen, to focus on corticotropin-releasing factor receptor
antagonists to treat anxiety and depression;
o Wyeth-Ayerst, to research, develop and commercialize compounds to treat
neurodegenerative and psychiatric diseases;
o Taisho, to develop our compound to treat Type 1 Diabetes in which the
body does not produce enough insulin; and
o Eli Lilly, to collaborate in the discovery, development and
commercialization of treatments of central nervous system disorders,
including obesity.
Acquire Rights to Complementary Drug Candidates. We plan to continue to
selectively acquire rights to products in various stages of development to take
advantage of our drug development capabilities. In May 1998, we licensed from
the National Institutes of Health an interleukin 4 fusion toxin that is
currently in clinical trials for recurrent malignant glioma. In May 1998, we
acquired Northwest NeuroLogic, Inc. and thereby considerably expanded our
research pipeline. Through this acquisition, we acquired the technology and
intellectual property rights surrounding excitatory amino acid transporters, a
portion of which is now in collaboration with Wyeth-Ayerst. We also acquired
from Northwest NeuroLogic melanocortin technology and other intellectual
property that we are developing. In June 1998, we licensed exclusive worldwide
commercial rights for NBI-34060, our compound for the treatment of insomnia,
from DOV Pharmaceuticals and have since moved this compound into advanced
clinical development.
Supplement Our Internal Research Capabilities by Collaborating with
Leading Platform Technology Companies. We believe we can complement our
multidisciplinary research process by selectively accessing new technologies
from platform technology companies. Through creative collaborations with
technology leaders, we believe we can accelerate and expand our internal
discovery efforts. We have entered into a number of alliances with other
platform technology companies to enhance our drug discovery and development
capabilities. These alliances include:
o our alliance with Rigel, Inc. to use Rigel's intellectual property and
expertise to discover novel protein targets involved in neural cell and
antibody activation;
o our alliance with Arena Pharmaceuticals involving the application of
Arena's constitutive activation technology to a family of receptors;
o our alliance with Array Biopharma, Inc. to design and synthesize a
focused library of small molecules; and
o our alliance with Caliper Technologies Corp. to utilize Caliper's
proprietary microfluidics technology to screen against our targets.
Outsource Capital Intensive and Non-Strategic Activities. We intend
to focus our resources on research and development activities by outsourcing our
requirements for clinical drug supply and certain preclinical studies and
clinical monitoring activities. We believe the availability of skilled contract
manufacturers and contractors will allow us to cost-effectively meet these needs
and thereby allow us to concentrate our full attention and resources on our core
discovery and development programs to generate additional product opportunities.
Our Product Pipeline
The following table summarizes our most advanced product candidates
currently in preclinical or clinical development and those currently in
research, and is followed by detailed descriptions of each program:
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Program Compound Targeted Indication Status Commercial Rights
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PRODUCTS UNDER DEVELOPMENT:
GABA-A Agonist NBI-34060 Insomnia Phase II Neurocrine
CRF R1 Antagonist NBI-37582 Anxiety, Depression Preclinical Janssen/ Neurocrine
CRF R1 Antagonist NBI-34041 Anxiety, Depression Phase I Neurocrine
IL-4 Fusion Toxin NBI-3001 Malignant Glioma Phase II Neurocrine
IL-4 Fusion Toxin NBI-3001 Additional Cancers Preclinical Neurocrine
(kidney, lung)
Altered Peptide Ligand NBI-5788 Multiple Sclerosis Phase II Neurocrine
Altered Peptide Ligand NBI-6024 Type 1 Diabetes Phase I/II Taisho/Neurocrine
GnRH Antagonist Endometriosis, Preclinical Neurocrine
Prostate Cancer
RESEARCH:
Excitatory Amino Acid Transporters Neurodegenerative Research Wyeth-Ayerst/
Diseases Neurocrine
CRF R1 Antagonist Gastrointestinal Research Neurocrine
Disorders
CRF R2 Antagonist Eating Disorders Research Neurocrine
Urocortin/CRF R2 Agonist Obesity Research Eli Lilly
Melanocortin Receptor Agonist Obesity Research Neurocrine
Melanin Concentrating Hormone Obesity Research Neurocrine
Antagonist
Hypocretin Agonist/Antagonist Sleep Disorders Research Neurocrine
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<FN>
"Phase II" indicates that we, or our collaborators, are conducting clinical
trials on groups of patients afflicted with a specific disease in order to
determine preliminary efficacy, optimal dosages and expanded evidence of safety.
"Phase I" indicates that we, or our collaborators, are conducting
clinical trials to determine early safety profile, maximally tolerated dose and
pharmacological properties of the product in human volunteers.
"Preclinical" indicates that a drug candidate is being selected, or has
been selected, and is undergoing toxicology studies and manufacturing to allow
for Phase I clinical trials.
"Development" indicates that lead compounds have been discovered that meet
certain laboratory and preclinical criteria. These compounds may undergo
structural modification and more extensive evaluation prior to selection for
preclinical development.
"Research" indicates identification and evaluation of compounds in
laboratory and preclinical models.
</FN>
Products Under Development
GABA-A Agonist
Insomnia is a prevalent neurological disorder in the United States,
with up to 58% of the adult population reporting one or more symptoms of
insomnia a few nights per week or more, according to the National Sleep
Foundation. Despite this widespread prevalence, insomnia remains a disorder with
high unmet medical needs, including the ability to maintain sleep throughout the
night without next-day residual effects. Researchers have found that insomnia
can be treated by drugs that interact with the site of action of a natural brain
chemical involved in promoting and maintaining sleep. This chemical is called
gamma amino-butyric acid, or GABA, and the site of action is called the GABA-A
receptor.
During the 1980s, a class of drugs that targets the GABA-A receptor,
known as benzodiazepines, was used as sedatives to treat insomnia. The most
well-known of the benzodiazepines is Valium(R). This class of drugs produced
several undesirable side effects, including negative interactions with other
central nervous system depressants, such as alcohol, the development of
tolerance upon repeat dosing, insomnia following discontinuation of dosing,
hangover effects the next day, and impairment of coordination and memory. Memory
impairment, which can include amnesia for events occurring prior to and after
drug administration, is of particular concern in the elderly whose cognitive
function may already be impaired by the aging process. During the late 1980s, a
class of drugs targeting a specific site on the GABA-A receptor, known as
non-benzodiazepines, was developed. The non-benzodiazepines reduce the side
effects associated with benzodiazepines. The most popular of the
non-benzodiazepines are marketed as Ambien(R) and Sonata(R). Ambien(R) is the
current leader with worldwide sales in 2000 of approximately $840 million.
Our drug candidate for the treatment of insomnia, NBI-34060, a
non-benzodiazepine, acts on a specific site on the GABA-A receptor. It is
through this mechanism that the currently marketed non-benzodiazepine
therapeutics also produces their sleep-promoting effects. However, NBI-34060 is
more potent than the currently marketed non-benzodiazepines, including Ambien(R)
and Sonata(R), and is more selective than the benzodiazepines for the specific
subtype of receptors within the brain believed to be responsible for promoting
sleep. We believe that this improved profile and more selective drug targeting
will reduce the side effects characteristic of the currently marketed products.
We also believe that receptor binding studies and preclinical studies on
NBI-34060 indicate that it is a highly potent GABA-A receptor activator, or
agonist, that acts very specifically on the receptor subtype we are targeting.
NBI-34060 also appears to be devoid of next day hangover effects and we expect
it to have a considerably reduced amnesic potential. The elderly population,
which represents a large portion of the insomnia market, would benefit
especially from a novel therapeutic with an improved safety profile, rapidity of
onset and decrease in memory impairment.
Researchers designed the first Phase I clinical trial on NBI-34060 to
determine the safety and tolerance of NBI-34060 and provide a preliminary
evaluation of the sedative potential in 42 normal volunteers as reflected in
self-ratings of drowsiness, disruption of memory and impairment of coordination.
In this trial, subjects tolerated NBI-34060 well, and reported no serious or
unexpected adverse side effects. The subjects consistently reported drowsiness,
indicating strong potential for the sedative properties of the compound.
Subsequently, in the first quarter of 1999, we completed a second Phase I
clinical trial in 30 healthy volunteers to further explore the safety and
kinetic profile of NBI-34060. As demonstrated in the first Phase I trial,
NBI-34060 demonstrated a very good safety profile.
In 1999, we completed a Phase II placebo-controlled multi-center
clinical trial evaluating the efficacy of NBI-34060 in 228 subjects with
transient insomnia. Transient insomnia means occasional sleeplessness caused by
environmental factors, such as jetlag. The trial was conducted in a sleep
laboratory employing objective assessments of sleep onset and safety. The
results indicated that NBI-34060 is safe and effective in helping subjects with
transient insomnia achieve rapid sleep without the next day residual effects
associated with most currently marketed sedatives. The results showed that the
primary clinical endpoint and the required regulatory endpoint for approval,
time to sleep onset, was reached at a statistically significant level. In this
trial, those subjects receiving NBI-34060 took a mean time of 16 minutes to
progress to sleep onset versus a mean time of 34 minutes in the placebo group.
These results were statistically significant at p < 0.001. This means that
applying widely used statistical methods, the chance that these results could
have occurred by accident was less than one in 1,000. In addition, the data
indicated that a majority of subjects in the treated group fell asleep within
9.5 minutes as indicated by the median time to sleep onset as compared to 23
minutes in the placebo group.
Results of a Phase II clinical trial comparing NBI-34060, Ambien(R) and
zopiclone relative to placebo during middle of the night dosing, demonstrated
that NBI-34060 does not lead to next-day hangover effects, while both Ambien(R)
and zopiclone exhibited statistically significant measures of next-day adverse
side effects of residual sedation. In two clinical trials evaluating the effects
of NBI-34060 on the largest target populations for insomnia (the elderly and
females), results demonstrated that NBI-34060 showed no significant
pharmacokinetic differences in age or gender. In a randomized, double-blind,
placebo-controlled clinical study with multiple doses of NBI-34060 conducted in
young adults and elderly subjects, results demonstrate that NBI-34060 works as a
sedative-hypnotic with no major differences in the pharmacokinetics for maximum
plasma levels or total drug exposure between young adults and elderly subjects.
Also, there were no changes between these patient populations in the
accumulation of NBI-34060 after four consecutive nightly doses. Safety
evaluation and subjective measures of next-day residual effect confirmed that
the drug was well-tolerated in both groups with the expected sedation during the
night, and with no hangover or residual carry over next-day effect.
Based on the results from our Phase II trials, we have moved to expand
clinical development of NBI-34060. In 2000 we initiated nine clinical trials
involving 503 subjects to evaluate various formulations and patient subgroups.
Among other research goals, we intend to determine whether NBI-34060 is
effective in treating chronic insomnia, which is sleeplessness not caused by
environmental factors. We are developing a formulation of NBI-34060 to treat
chronic insomnia. We are also designing a large-scale pivotal Phase III program,
from which we expect to determine the approvability of the drug candidate.
Currently, we expect to begin this pivotal trial in the second half of 2001.
Another important feature of NBI-34060 is its relatively short
half-life, or duration of action of the compound, in the body. The levels of
NBI-34060 in the blood stream reach the highest point 30 minutes after the
subject takes the tablet. The NBI-34060 is then rapidly removed from the blood
stream so it cannot be detected four hours later. This rapid peak of drug
results in rapid sleep onset followed by rapid removal of the drug from the
body, reducing the risk of next-day effects of the drug. We believe that this
short duration of action will allow for bedtime dosing for people who have
trouble falling asleep and dosing in the middle of the night for people who have
trouble staying asleep without causing the side effects and next day hangover
that occurs with the longer acting drugs like Ambien(R) and the benzodiazepines.
We also believe that this short duration of action will allow us to formulate
the drug in a modified release form that will effectively provide two doses of
drug, a bedtime dose and a middle of the night dose, which will both rapidly
induce sleep and maintain sleep through the night. If successful, this would
represent the first non-benzodiazepine approved by the FDA for maintaining,
rather than simply inducing, sleep.
We face the risk that the side effects and efficacy profile of
NBI-34060 seen in our Phase I and II trials may not be confirmed in additional
clinical trials or that the results of future trials may not warrant further
trials.
Corticotropin-Releasing Factor
According to the Surgeon General's 1999 Report on Mental Health, 6.5%
of the U.S. adult population experiences a major depressive episode each year
and 16.4% of the U.S. adult population has an anxiety disorder. Existing
anti-depressant and anti-anxiety therapeutics sold approximately $11.1 billion
worldwide in 1999, with sales anticipated in excess of $12.6 billion in 2000
according to market analyst reports from Datamonitor. However, there remain
significant unmet medical needs. The leading drug class, known as the selective
serotonin re-uptake inhibitors, is not effective in one-third of patients. These
drugs frequently require as long as three weeks to take effect, and have
significant adverse side effects such as sexual dysfunction. Therefore, a rapid
acting anti-depressant with fewer side effects would represent a major advance
in the treatment of depression. Corticotropin-releasing factor antagonists may
provide such an advance in anti-depressant therapy through a specific mechanism
for combating the hormonal abnormalities associated with depression.
Researchers have identified what they believe to be the central
mediator of the body's stress responses or stress-induced disorders. This
mediator is a brain chemical known as corticotropin-releasing factor.
Corticotropin-releasing factor is overproduced in clinically depressed patients
and individuals with anxiety disorders. Current research indicates that
clinically depressed patients and patients with anxiety experience dysfunction
of the hypothalamic- pituitary-adrenal axis, which is the system that manages
the body's overall response to stress. When the body detects a threat to
physical or psychological well-being, the region of the brain called the
hypothalamus amplifies production of corticotropin-releasing factor, which
induces the physical effects that are associated with stress and which can lead
to depression or anxiety.
The novelty and specificity of the corticotropin-releasing factor
mechanism of action and the prospect of improving upon selective serotonin
re-uptake inhibitor therapy is a topic of interest throughout the psychiatric
community and pharmaceutical industry, representing a market opportunity both to
better serve patients and expand overall treatment for this life threatening
disease.
We have a strategic position in the corticotropin-releasing factor, or
CRF, field through our intellectual property portfolio and relationship with
experts in the neuropsychiatric field. Wylie Vale, Ph.D., our co-founder and
Chief Scientific Advisor, is considered to be a leader in this field of
research. We have further characterized the CRF receptor system and have
identified additional members of the CRF receptor family. We have received
patents on two receptor subtypes called CRF R1 and CRF R2, and we have pending
patent applications on small molecule organic compounds modulating the CRF
receptors.
Depression. Depression is one of a group of neuropsychiatric disorders
that is characterized by extreme feelings of elation and despair, loss of body
weight, decreased aggressiveness and sexual behavior, and loss of sleep.
Researchers believe that depression results from a combination of environmental
factors, including stress, as well as an individual's biochemical vulnerability,
which is genetically predetermined. Researchers believe that the biochemical
basis of depression involves elevated secretion of CRF and abnormally low levels
of other neurotransmitters in the brain such as serotonin. The most frequently
prescribed antidepressant therapies are selective serotonin reuptake inhibitors
such as Prozac(R), Zoloft(R), Paxil(R) and Celexa(R) which act to increase the
levels of serotonin and several other chemicals in the brain. However, because
these drugs affect a wide range of neurotransmitters, they have been associated
with a number of adverse side effects. While newer, more selective drugs offer
some safety improvement, side effects remain problematic. In addition, one of
the biggest limitations of most existing anti-depressant therapies is their slow
onset of action.
In our CRF R1 antagonist program, our corporate collaborator, Janssen
Pharmaceutica, selected a CRF R1 receptor antagonist drug candidate, NBI-30775,
for preclinical studies in 1996. Janssen initiated and completed a number of
Phase I clinical trials on the compound in late 1998 and initiated a Phase IIa
open label trial in 1999. Results from this trial indicated that NBI-30775 was
safe and well-tolerated and demonstrated anti-depressant activity as measured by
a widely-accepted depression scale known as the Hamilton Depression Scores. In
this trial, Janssen administered NBI-30775 to 20 patients with major depressive
disorders. Results from the trial, as reported in the Journal of Psychiatric
Research, showed that treatment response, as defined by more than a 50%
reduction in Hamilton Depression Scores, occurred in 50% of the patients in the
low dose group and 80% of the patients in the higher dose group. We were
strongly encouraged by these results, which we believe support the hypothesized
mechanism of action. While this trial found NBI-30775 to be safe, reversible
increases in liver enzymes occurred in two volunteers in an expanded safety
study. As a result, Janssen announced its decision to discontinue development of
NBI-30775. However, because of the positive efficacy results for NBI-30775,
Janssen decided to proceed with a back-up compound identified from its research
relationship with us. In 2000, Janssen selected a back-up candidate to develop,
NBI-37582. This candidate is currently in late preclinical testing.
In addition to our CRF R1 program with Janssen, we are conducting an
independent CRF R1 antagonist program focused on a series of our proprietary
chemical compounds. We have selected several lead candidates for this program
and entered into Phase I clinical trials in December 2000. This Phase I,
randomized, double-blind, placebo-controlled, single-dose trial was conducted in
48 normal healthy volunteers and was designed to evaluate the safety,
tolerability, pharmacokinetics, and pharmacodynamics, including endocrine
profiles, over a range of six escalating doses. Initial pharmacokinetic
evaluation indicates rapid absorption and good dose-proportionality and plasma
half lives supportive of a once-a-day dosing schedule. No safety issues were
noted which would preclude advancement into the next phase of clinical
evaluation. A two week multiple dose, dose-escalating Phase I placebo controlled
clinical trial will be initiated to further evaluate the safety and endocrine
profiles of this compound to prepare for Phase II efficacy evaluation. We
anticipate initiating Phase II clinical trials in the second half of 2001.
We face the risk that CRF R1 antagonist compounds may not be effective
and safe therapeutics for the treatment of depression or any other conditions.
In addition, Janssen or we may decide not to initiate Phase I clinical testing
or progress to later clinical trials in a timely manner, if at all.
Anxiety. Anxiety is among the most commonly observed group of central
nervous system disorders, which includes phobias or irrational fears, panic
attacks, obsessive-compulsive disorders and other fear and tension syndromes.
The Surgeon General's 1999 Report on Mental Health estimates that anxiety
disorders affect 16.4% of the U.S. adult population. Of the pharmaceutical
agents that other companies currently market for the treatment of anxiety
disorders, benzodiazepines, such as Valium(R) and Xanax(R), are the most
frequently prescribed. Several side effects, however, limit the utility of these
anti-anxiety drugs. Most problematic among these are drowsiness, the inability
to stand up, amnesia, drug dependency and withdrawal reactions following the
termination of therapy. Despite these adverse effects, total sales of
benzodiazepines were approximately $800 million in 1999. In view of significant
evidence implicating CRF in anxiety-related disorders, we are developing small
molecule CRF R1 receptor antagonists as anti-anxiety agents that block the
effects of overproduction of CRF. We believe that these compounds utilize a
novel mechanism of action that may offer the advantage of being more selective,
thereby providing increased efficacy with reduced side effects as compared to
benzodiazepines.
With our corporate collaborator, Janssen, and in our independent CRF R1
antagonist program, we are developing small molecule therapeutics to block the
effects of overproduction of CRF in anxiety. As a co-examined variable in the
Janssen open label Phase IIa clinical trial for depression described above,
Janssen analyzed the anti-anxiety effects of the CRF R1 receptor antagonist
NBI-30775 using the Hamilton Anxiety Scores. Janssen observed a reduction in
Hamilton Anxiety Scores from baseline in both treatment groups at all times
after dosing. In addition, in preclinical studies used to evaluate anti-anxiety
drugs, our scientists have demonstrated with statistical significance that
clinical compound candidates from our independent CRF R1 antagonist program are
effective following oral administration. We did not observe any evidence of
clinically relevant side effects. These results are encouraging because they
suggest that compounds blocking the CRF R1 receptor may be effective in treating
anxiety-related disorders. Despite these early results, Janssen or we may decide
not to initiate clinical testing of CRF R1 antagonist compounds for anxiety.
Even if those trials are conducted, the data may not support continuation of the
program and additional clinical trials.
IL-4 Fusion Toxin
Interleukin 4, or IL-4, is a natural chemical, which modulates cell
growth. Proteins that bind to IL-4, known as IL-4 receptors, are highly
concentrated on the cells of malignant brain tumors as well as many other
cancers, including some types of kidney and lung cancers. Targeted toxins are a
novel form of anti-cancer therapy under investigation in a variety of clinical
settings. Targeted toxin therapeutics carry a bacterial toxin to a target site
on the cancer cells and subsequently kills the cancer cell. Many scientists
believe that targeted toxins have several potential advantages over conventional
chemotherapy in that they are more selective and effective in the treatment of
chemotherapy-resistant cancer cells.
In 1998, we exclusively licensed from the National Institutes of Health
a targeted toxin compound, IL-4 fusion toxin, which we call NBI-3001. A
collaboration between the FDA and the National Cancer Institute designed the
IL-4 fusion toxin. It is a combination protein in which IL-4 is attached to
Pseudomonas exotoxin, a bacterial toxin that can kill cells. The IL-4 portion of
the fusion toxin preferentially binds to human cancer cells because the cancer
cells express elevated levels of receptors for IL-4 on their surface, while IL-4
receptor expression is absent or undetectable in normal tissue. Once the IL-4
portion of the IL-4 fusion toxin targets the toxin to the cancer cells, the
toxin portion of the molecule preferentially kills the cancer cells.
Malignant Glioma. Malignant brain tumors are a significant cause of
cancer death. The most common form of malignant brain cancer is malignant
glioma. These tumors arise within the brain and generally remain confined to the
brain. According to the American Cancer Society, despite surgical, radiation and
chemotherapy treatments, the median survival rate for malignant glioma is only
in the range of 9 to 12 months. The clinical course of malignant glioma is
characterized by relentless loss of vital neurological functions and death
within approximately 12 months.
In 1999 we initiated a Phase I/II trial of NBI-3001 in patients with
malignant glioma in which the primary endpoints were safety and tumor
regression. We completed this trial in June 2000. We enrolled a total of 31
patients with recurrent gliomas, which were unresponsive to surgery and
radiotherapy in the trial. Our researchers treated patients with intratumoral
infusions of NBI-3001 for up to four days. This trial found NBI-3001 to be safe
and to have an acceptable degree of tolerability in this patient population.
While approximately one-third of the patients exhibited side effects during or
immediately following therapy, these effects were consistent with marked tumor
cell death and the subsequent inflammatory response to this tumor cell death.
The researchers did not observe any significant peripheral drug-related
toxicities. The researchers reported that, of the 27 patients who completed
therapy:
o seven patients, or 26%, experienced complete remissions, defined as no
evidence of viable tumor;
o 10 patients, or 37%, experienced a partial response, defined as greater
than 50% reduction in tumor mass; and
o 10 patients, or 37%, continued to suffer from stable or progressive
disease.
In addition, the six-month median survival data showed trends toward
efficacy. We initiated an additional confirmatory Phase II trial to further
establish dosing regiment, safety and efficacy in the fourth quarter of 2000. We
also plan to initiate a Phase III trial in the second half of 2001.
In October 1999, the FDA granted us fast track designation for NBI-3001.
Fast track designation allows us to accelerate our clinical program for NBI-3001
and expedite receipt of regulatory approvals. In April 2000, we were awarded
orphan drug designation for NBI-3001 for astrocytic glioma. Under FDA rules,
drug developers may obtain orphan drug designation for drugs that treat a
disease or condition that affects fewer than 200,000 people in the United States
per year. Orphan drug designation provides us with seven years of marketing
exclusivity following approval, tax incentives and access to grant funding. We
face the risk that we will not successfully complete clinical testing or
progress to later clinical trials in a timely manner, or at all.
Additional Cancers. In conjunction with our clinical trials of IL-4 fusion
toxin in malignant glioma, we entered into a collaborative research and
development agreement with the FDA to investigate the safety and efficacy of
IL-4 fusion toxin in laboratory models of different cancers and by different
routes of administration. Research teams from the FDA and NIH have published
results with IL-4 fusion toxin demonstrating a high level of binding and
destruction of specific types of cancers. We are conducting preclinical research
to support the application of NBI-3001 to peripheral solid tumors and have shown
that IL-4 fusion toxin can be safely administered intravenously in preclinical
models. We plan to initiate a Phase I clinical trial in the second quarter of
2001 to first investigate the safety and efficacy of NBI-3001 against kidney and
non-small-cell lung cancers. We face the risks that the effectiveness of
NBI-3001 seen in our laboratory models, or the safety profile of NBI-3001 seen
in our preclinical models, may not be confirmed in clinical trials or that the
results of future clinical trials may not warrant further development in any of
these settings or that the trial results may not support initiating clinical
trials in cancers other than malignant glioma.
Altered Peptide Ligands
The American Autoimmune Related Diseases Association estimates that
over 50 million people in the United States suffer from autoimmune diseases such
as multiple sclerosis, rheumatoid arthritis, Type 1 diabetes, systemic lupus
erythematosus and thyroiditis. Scientists believe that the body's immune system
causes these diseases. The immune system protects an individual from disease
agents, such as viruses, by recognizing and destroying those foreign substances
using specialized blood cells, called lymphocytes. Occasionally, however,
certain lymphocytes arise that inappropriately recognize the body's own tissues
as an invader and begin to attack normal healthy tissue, resulting in an
autoimmune disease like Type 1 diabetes. While the mechanism through which the
lymphocyte initiates the autoimmune disease is still unknown, the development of
drugs that specifically suppress the action of self-reactive lymphocytes or
restore the function of regulatory cells may prove advantageous for the
prevention, cure or treatment of an autoimmune disease.
One type of lymphocyte involved in the immune response to self or
foreign substances is the T cell. T cells detect antigens, which are foreign
substances, such as viruses, bacterias or other proteins the T cell recognizes
as foreign. T cells recognize these antigens and destroy them. Experiments
conducted by our scientists determined that specific amino acid residues within
a peptide sequence of an antigen are required for T cell recognition and
subsequent cellular activation. Scientists can specifically alter the structure
of such a peptide fragment so that it will not properly activate the T cell.
This altered peptide ligand can thus prevent the T cell from destroying its
target, or in the case of an autoimmune reaction, prevent the T cell from
destroying the healthy tissue.
Multiple Sclerosis. Multiple sclerosis is a chronic autoimmune disease
characterized by recurrent attacks of neurologic dysfunction due to damage in
the central nervous system. The classic clinical features of multiple sclerosis
include impaired vision and weakness or paralysis of one or more limbs. Patients
develop a slow, steady deterioration of neurologic function over an average
duration of approximately 30 years. According to the National Multiple Sclerosis
Society, there are an estimated 350,000 cases of multiple sclerosis in the
United States and a similar number of patients in Europe with approximately
17,000 new cases diagnosed worldwide each year. Currently available treatments
for multiple sclerosis offer only limited efficacy. Doctors often prescribe
steroids to reduce the severity of acute flare-ups and speed recovery.
Experimental therapy with other immune-suppressive agents has shown limited
success.
Our co-founder, Dr. Lawrence Steinman, identified one of the
dominant destructive T cell types in the brains of patients who had died of
multiple sclerosis. Dr. Steinman further identified one of the dominant antigens
on the normal cell targeted by the autoreactive T cells, a peptide from a brain
protein know as myelin basic protein. We designed a novel altered peptide ligand
based on myelin basic protein that would target the autoreactive T cells that
cause neurological damage in multiple sclerosis. Together with Novartis
Pharmaceuticals Corporation, our former collaborative partner for this program,
we filed an investigational new drug application with the FDA and received
approval in 1996 to commence clinical trials. We subsequently completed Phase I
clinical trials, and initiated two Phase II clinical trials of our altered
peptide ligand for the treatment of multiple sclerosis, NBI-5788, in 1999.
The first Phase II trial was a multi-center, placebo controlled,
randomized parallel group design involving three doses of the altered peptide
ligand in 5, 20, and 50 mg weekly doses for four months in 13 centers in North
America and Europe. In July 1999 while the Phase II trials were underway,
Novartis exercised its right to terminate the collaboration effective January
2000. Subsequently, the Data and Safety Monitoring Board for the trial
recommended, and we agreed, that administration of the trial drug be
discontinued based on reports of adverse allergic reactions. We continued to
evaluate all of the enrolled patients in the study through December 1999 in
accordance with the study protocol. We reacquired all rights to the program from
Novartis on January 7, 2000 and initiated data analysis. The final data analysis
from the multi-center trial showed no increases in either clinical relapses or
in new lesions in all patients, even those with allergic reactions. Of the
patients completing the double-blind phase of the study, the total volume of
enhancing lesions was reduced in the 5 mg dose group compared to the
placebo-control patents (p<0.029 Mann Whitney for two treatments). We could not
conduct this same secondary analysis in the 20 mg or 50 mg groups, since there
were not enough patients with positive scans for us to evaluate their magnetic
resonance imaging changes. Moreover, 57% of the patients in the 5 mg group
experienced reductions in the volume of new enhancing lesions compared to 25% in
the placebo group. Because of these factors, we believe that for this compound,
optimal dosing may be at lower levels, and we are currently planning a Phase IIb
trial to establish the efficacy profile and optimum dosing regiment for
NBI-5788.
The second Phase II trial, which we conducted in collaboration with the
National Institutes of Health, involved an open-label, unblinded, non-placebo
control trial in eight patients, seven of whom received multiple injections of
50 mg weekly while the final subject received 5 mg. In this trial, published in
Nature Medicine, the authors observed a higher incidence of new brain lesions in
two patients who received 50 mg doses and the one patient who received 5 mg
doses. As a result, the trial was stopped. However, the authors did not provide
direct evidence that NBI-5788 triggered the lesions.
Our aim for future trials will be to further establish the benefit of
low-dose altered peptide ligand therapy in patients with multiple sclerosis. We
face the risks that we may not initiate or complete additional clinical trials
or that results of any such studies may not warrant additional clinical
development of potential products.
Type 1 Diabetes. Utilizing our experience in the development of altered
peptide ligands for multiple sclerosis, we have extended this approach to Type 1
or juvenile-onset diabetes, which is a metabolic disease in which the body does
not produce enough insulin. Like multiple sclerosis, in Type 1 diabetes the
immune system erroneously targets healthy tissue, in this case the pancreatic
cells responsible for the production of insulin. Type 1 diabetes is one of the
most prevalent chronic childhood conditions in North America, afflicting
approximately one million patients in 1999. Diabetics often suffer from a number
of complications of the disease including heart disease, circulatory problems,
kidney failure, neurologic disorders and blindness. Current therapy for Type 1
diabetes consists of daily insulin injections to regulate blood glucose levels.
We believe that an altered peptide ligand specific for autoimmune T
cells involved in diabetes may stop the destruction of the insulin-secreting
cells in pre-diabetic patients, thus allowing them to delay or avoid chronic
insulin therapy. Working with leading diabetologists at the Barbara Davis Center
for Childhood Diabetes at the University of Colorado, our scientists have
engineered an altered peptide ligand that affects immune cells targeting the
pancreas. In preclinical studies, this altered peptide ligand, NBI-6024, was
capable of eliciting a protective immune response and reducing the incidence of
diabetes. In addition, experiments using immune cells derived from the blood of
Type 1 diabetes patients indicate that patients' immune cells recognize
NBI-6024. This suggests that NBI-6024 may have the potential to intervene in the
disease process in humans. We have completed 2 Phase I safety and dose
escalating clinical program in diabetic patients. These trials included 50 Type
1 diabetic patients. Data from this trial indicates that NBI-6024 is safe and
well tolerated. We are enrolling patients for an additional Phase I multi-dose
trial and expect to initiate the first Phase II trial in early 2001 to assess
the safety and biological activity of multiple doses of NBI-6024 in adult,
adolescent and pediatric patients with Type 1 diabetes and a Phase II/III trial
in the third quarter of 2001.
In January 2000, we entered into an agreement with Taisho
Pharmaceutical Co., Ltd. providing Taisho with an exclusive option to obtain
European, Asian and North American rights to NBI-6024. In July 2000, Taisho
exercised the option as to European and Asian rights, and we granted Taisho
exclusive rights to NBI-6024 in those regions. Under the collaboration
agreement, we will receive licensing and option fees, payments for certain
development and regulatory milestones, significant reimbursement of worldwide
development expenses and payments based on sales upon commercialization. In
November, 2000 we expanded our collaboration with Taisho, granting Taisho the
exclusive rights to develop and commercialize NBI-6024 in North America and
other countries outside of Europe and Asia. The worldwide collaboration is
valued at up to $100 million, including all potential licensing fees, purchase
fees, milestones and development expenses.
We face the risk that large-scale studies of our drug in Type 1
diabetes patients may show different results than our preclinical studies in
animals and in cells derived from Type 1 diabetes patients or our Phase I
trials.
Gonadotropin-Releasing Hormone Receptor
Gonadotropin-releasing hormone, or GnRH, is a brain peptide that
stimulates the secretion of the pituitary hormones that are responsible for sex
steroid production and normal reproductive function. Researchers have found that
chronic administration of GnRH agonists reversibly shuts down this transmitter
pathway and is clinically useful in treating hormone-dependent diseases such as
prostate cancer and endometriosis. Other companies have developed several
peptide drugs on this principle, such as Lupron(R) and Zoladex(R), and according
to market analyst reports by Euromonitor and Epicom Business Intelligence, these
drugs now have an estimated market size in excess of $2.0 billion annually
worldwide. However, since these drugs are peptides, they must be injected rather
than taken orally. These types of agonists take up to several weeks to exert
their effect, a factor not seen with direct gonadotropin-releasing hormone
antagonists. Until these drugs exert their effects, they have shown a tendency
to exacerbate the condition.
We believe that there is a large market potential for an orally
delivered gonadotropin-releasing hormone antagonist that does not have the
tendency to initially exacerbate the patient's condition. We have screened our
small molecule library and conducted structure activity studies to produce small
molecule orally-active gonadotropin-releasing hormone antagonists. We have
identified several series of small molecule compounds and are conducting
additional studies to select a final clinical candidate. We intend to select a
lead clinical candidate in the first half of 2001 and expect to initiate Phase I
clinical trials in the second half of 2001. We believe that the results of these
Phase I studies will be predictive of efficacy in many potential indications. We
face the risk that our work in this area may not lead to clinical candidates or
that, even if we select a candidate, clinical trials may show it is not safe and
effective.
We plan to focus our clinical efforts on prostate cancer and in the
area of women's health, including endometriosis, uterine fibroids and
infertility. According to a 1993 article in Contemporary OB/GYN, researchers
believe that more than five million women in the U.S. alone are affected by
chronic endometriosis, representing approximately 10% prevalence in reproductive
age women. Of those afflicted, approximately 200,000 patients are treated in a
hospital setting, and an additional 250,000 are treated in an outpatient
setting, according to a 1998 National Patient Profile audit. We believe that the
availability of an oral treatment lacking the side effect profile of the
currently available peptide agonists may be an alternative to surgery and
encourage a higher treatment rate. We also believe our drug will have utility in
the treatment of prostate cancer, which has over 180,000 new cases per year in
the U.S., according to the American Cancer Society.
Research
Excitatory Amino Acid Transporters
Some of the most successful central nervous system drugs, including
selective serotonin reuptake inhibitors such as Prozac(R), selectively target
brain amino acid transporters. Similarly, we are targeting a set of proteins
generally located in the brain which transport brain chemicals in and out of
cells, called excitatory amino acid transporters, to selectively control the
levels of a brain chemical called glutamate in order to produce a therapeutic
benefit in disorders where glutamate levels are abnormal such as head trauma,
schizophrenia, Lou Gehrig's Disease and other neurodegenerative and psychiatric
disorders.
We are collaborating with Wyeth-Ayerst Laboratories, a division of
American Home Products Corporation, to control glutamate transporter function as
a novel strategy for the treatment of neurodegenerative and psychiatric
disorders. Our collaboration includes basic research to understand the function
and regulation of the transporters, along with the identification and
characterization of chemical and biological leads. We face the risks that we may
be unable to demonstrate that these excitatory amino acid transporters are
therapeutic targets or that we may fail to identify any product candidates for
preclinical or subsequent clinical development.
In 2000 we expanded our excitatory amino acid transporter research and
initiated a research program focused on retinal cell death associated with
damage from low blood flow. The National Institutes of Health awarded us a
research grant to fund our work to identify novel compounds for the alleviation
of neuronal cell death in response to a wide range of conditions including
diabetic induced nerve damage, glaucoma and other circulatory conditions of the
eye. This work is independent of our collaboration with Wyeth-Ayerst.
CRF R1 Peripheral Uses
Recent reports have suggested that corticotropin-releasing factor, or
CRF, plays a role in the control or modulation of the gastrointestinal system.
Studies have demonstrated that central administration of CRF acts in the brain
to inhibit emptying of the stomach while stimulating bowel activity, and suggest
that overproduction of CRF in the brain may be a main contributor to
stress-related gastrointestinal disorders.
Irritable bowel syndrome is a gastrointestinal inflammatory disease
that affects up to 15% of American adults, mostly women, according to the
International Foundation for Gastrointestinal Disorders. Irritable bowel
syndrome can be a lifelong, intermittent disease, involving chronic or recurrent
abdominal pain and frequent diarrhea or constipation, or both. Some patients
with irritable bowel syndrome report the onset of symptoms of the disease
following a major life stress event, such as death in the family, which suggests
that the causes of irritable bowel syndrome may be related to stress. In
addition, most irritable bowel syndrome sufferers also experience anxiety and
depression. Since researchers believe that CRF is the primary mediator of
stress, they have suggested that CRF R1 antagonists may provide a treatment for
irritable bowel syndrome. We are evaluating our proprietary CRF R1 antagonists
for treatment of irritable bowel syndrome. We face the risks that preclinical
studies may not warrant initiating clinical testing of these candidates or that
any initial clinical data may not support continuation of the program and
additional clinical trials.
CRF R2 Antagonists
Our scientists were the first to isolate a second CRF receptor, called
CRF R2. We believe the distribution of CRF R2 in the brain suggests that CRF R2
could play a role in some forms of anxiety and some eating disorders. Our
researchers have demonstrated that administration of a CRF R2 antagonist reduces
measures of anxiety in studies of obsessive compulsive disorder and conditioned
fear. We are also evaluating our proprietary CRF R2 antagonist for treatment of
a variety of eating disorders. We have screened our small molecule library and
conducted exploratory chemistry to identify a new series of compounds to undergo
further study. We face the risks that our work in this area will not lead to
clinical candidates or that clinical trials will not find our candidates to be
safe and effective.
CRF R2 Agonists/Urocortin Agonist
CRF R2 agonists may represent a therapeutic strategy to elevate CRF and
a related neuropeptide called urocortin. Preliminary data indicate that CRF and
urocortin may act as central regulators of both appetite and metabolism. We have
evaluated CRF R2 agonists in various models of obesity and have observed reduced
food intake and weight loss. In 1996, we initiated a three-year research
collaboration with Eli Lilly to screen and optimize CRF R2 agonists. In October
1999, the funded research portion of the program was completed as scheduled and
Eli Lilly retained control of the program and exclusive rights to the compounds.
We face the risks that Eli Lilly may not initiate further research and that, if
they do, the research may not identify suitable candidate compounds for
development in a timely manner, or at all.
Melanocortin Receptor Agonists/Antagonists
Melanocortin receptors are proteins on the surface of cells, which help
regulate some body functions such as eating and skin color. To date, researchers
have identified a family of five melanocortin receptor subtypes. Recently,
researchers discovered that one of the melanocortin receptor subtypes, subtype
4, plays an important role in the mechanism regulating appetite, body weight and
insulin secretion. The subtype 4 receptor is activated by melanocyte stimulating
hormone. When melanocyte stimulating hormone is injected, it reduces food intake
and body weight. Responses have included the apparent increase in basal
metabolic rate and lowering of serum insulin levels. We believe that an orally
active subtype 4 agonist may produce the same effects and, thus, may provide a
novel approach to the treatment of obesity or diabetes. We hope to identify an
orally active subtype 4 agonist compound. However, we may fail to do so and we
face the risk that our melanocortin research will not lead to product
candidates.
Melanin Concentrating Hormone Antagonists
Recent studies suggest that melanin concentrating hormone plays a role
in regulating eating behavior. Based on these findings, we believe that blocking
the effect of melanin concentrating hormone with a small molecule antagonist may
represent a novel approach to the treatment of obesity. Thus, we have identified
the melanin concentrating hormone receptor as a compelling drug target that may
be complementary to other obesity/anorexia drug targets in our drug discovery
pipeline. We face the risk that our research in this area will not lead to
product candidates.
Hypocretin
Hypocretins are peptides that researchers have linked to a variety of
activities, including the control of eating, cardiovascular regulation and water
intake. Recent publications have also reported that hypocretins appear to have a
critical role as regulators of sleep. Some studies point to a lack of hypocretin
as being instrumental in the development of narcolepsy and suggest that a small
molecule agonist may be able to offset the lack of hypocretin and provide
therapy for narcolepsy. It is possible that the hypocretin system also
contributes to the regulation of other sleeping disorders such as insomnia,
particularly since administration of excess hypocretin into animals promotes
wakefulness. We have screened our small molecule library to identify agonists
and antagonists for the hypocretin receptors and are in the process of
optimizing the compounds that resulted from these screens. We will be using
these compounds to further characterize the hypocretin system. We face the risk
that our research in this area will not lead to product candidates.
Our Discovery Technology
We utilize a proprietary approach to small molecule drug design that we
refer to as multi-channel technology.
Our Multi-Channel Discovery. The advent of molecular biology,
culminating recently in the cloning of the human genome, has opened up a vast
array of receptors as potential targets for drug discovery. Over the past ten
years numerous new technologies have been developed to try to speed the
identification of small molecule drugs. These technologies have mainly relied on
the creation of large chemical libraries utilizing combinatorial chemistry,
automated synthesis of compounds and ultra-high throughput screening machines to
test hundreds of thousands of compounds against a particular receptor. While we
utilize all of these technologies, we have taken the science to the next step,
one we call Multi-Channel Discovery or MCD.
MCD is driven by the power of traditional medicinal chemistry
accelerated by a suite of computational methodologies that guide the synthesis
of highly active small molecules. At the core of MCD is our development of a
virtual library (NBI-VL) containing over 108 molecules. Utilizing this
`universe' of compounds our chemists sequentially apply computer generated
molecular screens to filter compounds that will bind to the desired receptor.
The unique feature of MCD is that chemists are no longer constrained by the
physical properties of a particular compound but rather are free to work with
thousands of shapes and charges to design compounds that will fit onto the
receptor target.
The power of MCD however, lies not in its application to a single
receptor as a drug target but in the database of compounds that are
characterized and isolated for the next target from the same class of receptors.
Our current focus is on the most attractive receptor class in the pharmaceutical
industry, G-protein-coupled receptors (GPCR's). MCD is not a static process, but
one that becomes more powerful, more predictive, and more efficient with each
subsequent use. It is an artificial intelligence system applied to drug design.
In connection with our multi-channel technology, we utilize other
advanced technologies to enhance our drug discovery capabilities and to
accelerate the drug development process. These technologies include:
High-Throughput Screening. We have assembled a chemical library of
diverse, low molecular weight organic molecules for lead compound identification
and we have implemented robotics screening capabilities linked to our library of
compounds that facilitate the rapid identification of new drug candidates for
multiple drug targets. In addition, we have designed a 10,000 compound library
focused on some of our molecular targets. We believe that our utilization of
high-throughput screening and medicinal and peptide chemistry will enable us to
rapidly identify and optimize lead molecules.
Molecular Biology. Our scientists utilize novel techniques to examine
gene expression in a variety of cellular systems. We have developed a
sophisticated technique to evaluate the type and quantity of genes in various
cellular systems prior to the isolation of genes. We have also developed unique
expression vectors and cell lines that allow for the highly efficient protein
expression of specific genes.
Our drug discovery program creates a significant amount of genetic
sequence information. We have developed a bioinformatics system, which we
believe will allow us to identify novel genes involved in neurodegeneration. We
collect data with automated instruments and we store and analyze the data using
customized computational tools.
Gene Sequencing. We apply integrated automated DNA sequencing and gene
identification technology in our drug discovery program, enabling us to perform
extended gene analysis in a rapid, high-throughput format with independent
linkage into a sequence identification database. We have optimized gene
sequencing instrumentation for differential display, a technique that may
facilitate the rapid identification of novel genes.
Our Strategic Alliances
One of our business strategies is to utilize strategic alliances to
enhance our development and commercialization capabilities. To date, we have
formed the following alliances:
Janssen Pharmaceutica, N.V. In January 1995, we entered into the first
of two research and development agreements with Janssen Pharmaceutica, N.V., an
indirect wholly-owned subsidiary of Johnson & Johnson, to collaborate in the
discovery, development and commercialization of small molecule CRF R1
antagonists for the treatment of anxiety, depression and substance abuse. These
collaborations utilize our expertise in cloning and characterizing CRF R1
subtypes, CRF pharmacology and medicinal chemistry. Under the January 1995
agreement, Janssen funded three years of research at Neurocrine and received
exclusive licenses to all CRF R1 antagonist compounds developed during the term
of the funded research or during the year thereafter. The term of the licenses
are for the term of the patents licensed under the agreement. Pursuant to this
agreement, we have received $2.0 million in up-front license payments and are
eligible to receive royalties on product sales for the term of the patents
covering the compounds subject to reduction for payments to third parties. We
may also receive royalties for products not covered by issued patents and agreed
minimum annual royalties. In addition, we have the option of co-promoting the
first marketed product from the collaboration in North America for five years.
The 1995 agreement will terminate upon the expiration of the patents covering
the collaboration products but may also be terminated for failure by either
party to meet its obligations, bankruptcy, or in some circumstances, upon
assignment of the agreement by Janssen or us. In 1996 Janssen selected a
clinical candidate from the compounds discovered in connection with the first
Janssen agreement and commenced clinical trials in Europe. The collaborative
research portion of the first Janssen agreement was completed as scheduled in
1997. In September 1999, together with Janssen, we entered into an amended
agreement to expand the collaborative research and development efforts to
identify additional small molecule CRF antagonists for the treatment of
psychiatric disorders. In connection with the amended Janssen agreement, we
received an initial payment and will receive two years of additional research
funding for our scientists working in collaboration with Janssen. All
collaboration products identified under the 1999 agreement are subject to the
same terms and conditions as the products arising under the 1995 agreement.
Under the Janssen agreements, we are entitled to receive up to $39.2
million for sponsored research, milestones and license fees, plus additional
amounts for potential royalties and reimbursement of outside costs. The amount
we are entitled to receive includes $14.7 million for sponsored research and
$2.0 million in license fees, plus up to $22.5 million in milestone payments for
the indications of anxiety, depression and substance abuse, in each case upon
achievement of development and regulatory goals. As of December 31, 2000, we
have received a total of $20.6 million, including $14.3 million in sponsored
research, $3.5 million in milestones, $2.0 million in license fees and $755,000
for reimbursement of outside costs. Janssen is responsible for funding all
clinical development and marketing activities, including reimbursement to us for
our promotional efforts, if any. In connection with the 1995 agreement, Johnson
& Johnson Development Corporation purchased $5.0 million of our common stock.
Taisho Pharmaceutical Co., Ltd. In December 1999, we entered into an
agreement with Taisho Pharmaceutical Co., Ltd. providing to Taisho an exclusive
option to obtain European, Asian and North American development and
commercialization rights for our altered peptide ligand product, NBI-6024, for
Type 1 Diabetes. In exchange for this option, we a received $2.0 million option
fee. In June 2000, Taisho exercised its option as to Europe and Asia, and a
steering committee, comprised of delegates from both companies, was formed to
oversee the development of NBI-6024. Pursuant to that agreement, we will receive
license fees, milestone payments and reimbursement of development expenses. In
addition, if the compound is ultimately commercialized, we will receive payments
on product sales in Europe and Japan for the term of the patents covering
NBI-6024 subject to adjustment for payments to third parties. In November 2000,
we expanded our collaboration with Taisho, granting Taisho the exclusive rights
to develop and commercialize NBI-6024 in North America and other countries
outside of Europe and Asia. The worldwide collaboration is valued at up to $100
million, including all potential licensing fees, purchase fees, milestones and
development expenses. As of December 31, 2000, we have received a total of $4.0
million in license fees, $4.0 million in milestone payments, and $829,000 in
reimbursements of development costs. The license fees were deferred and are
being recognized as revenues over the life of the agreement at $319,000 in 2000,
$818,000 in each of the years 2001 through 2004 and $409,000 in 2005.
Wyeth-Ayerst Laboratories. Effective January 1999, we entered into a
Collaboration and License Agreement with Wyeth-Ayerst Laboratories, a division
of American Home Products Corporation, relating to the research, development and
commercialization of compounds that control excitatory amino acid transporters
for the treatment of neurodegenerative and psychiatric diseases. Pursuant to the
agreement, we are entitled to receive up to $80.3 million for sponsored research
and milestones, plus additional amounts for potential royalties. The amount we
are entitled to receive consists of $11.0 million for sponsored research over a
three-year period, plus up to $69.3 million in milestone payments upon
achievement of certain research, development and regulatory events. We have
granted Wyeth-Ayerst exclusive and non-exclusive rights to our excitatory amino
acid transporters technology as well as exclusive rights to any products
developed during the collaboration. These licenses are for the term of the
patents licensed. We will receive royalties on product sales for the terms of
the patents covering the collaboration products, subject to adjustments for
royalties payable to other parties. We will also receive royalties for products
that are not the subject of issued patents. We also have the option to
co-promote collaboration products in Canada and the United States under some
conditions. Wyeth-Ayerst may terminate the agreement if they decide that the
research is not successful, if they decide to stop the program or if we are
acquired by another company. The agreement may also be terminated by either
party for the other party's failure to meet its obligations under the agreement
or bankruptcy. As of December 31, 2000, we have received $6.0 million in
sponsored research payments, $3.0 million for the achievement of four milestones
and $50,000 in license fees, which are being deferred and recognized over the
life of the agreement.
Eli Lilly and Company. In October 1996, we entered into a research and
license agreement with Eli Lilly and Company to collaborate in the discovery,
development and commercialization of CRF binding protein ligand inhibitors for
the treatment of central nervous system disorders including obesity and
dementias, such as Alzheimer's disease, and CRF R2 agonists for central nervous
system diseases and disorders. Under the agreement, we were entitled to receive
three years of funded research payments. In October 1999, the funded portion of
the research program concluded as scheduled and, to our knowledge, Eli Lilly is
not planning any specific future development efforts. Through October 1999, we
received a total of $17.2 million in research and development payments under the
agreement. We have granted Eli Lilly an exclusive worldwide license to
manufacture and market CRF binding protein ligand antagonists and CRF R2 agonist
products. The licenses granted under the agreement are for the term of the
patents licensed and we are entitled to receive a royalty on product sales for
the term of those patents. We have the option to co-promote products for the
treatment of dementia in the United States and to receive a portion of the
profits resulting from sales, subject to our obligation to pay a portion of the
development costs for such product rather than royalties. The agreement may be
terminated for failure by either party to meet its obligations or if blocking
patents prevent the development of products.
Risks Related to Our Strategic Alliances. We face the risks that we or
any of the above collaborators may not be successful in research and drug
discovery, that any preclinical and clinical drug candidates arising from the
collaborations may not generate commercial product candidates that have viable
clinical, regulatory and intellectual property profiles or that any commercial
products arising from any of these collaborations may not enjoy market
acceptance. Therefore, we may never receive additional milestone payments or
royalty income under any of our collaboration agreements.
Intellectual Property
We seek to protect our lead compounds, compound libraries, expressed
proteins, synthetic organic processes, formulations, assays, cloned targets,
screening technology and other technologies by filing, or by causing to be filed
on our behalf, patent applications in the United States and abroad. We have five
issued U.S. patents, approximately 60 pending U.S. patent applications and
another approximately 105 issued and pending foreign patents and applications.
We have licensed, from institutions such as The Salk Institute, Stanford
University, Oregon Health Sciences University, DOV Pharmaceuticals and others,
the rights to an additional 30 issued U.S. patents, 20 pending U.S. patent
applications, and 50 issued and pending foreign filings. Two of our European
patents are subject to opposition proceedings. These proceedings relate to the
CRF R2 patent and our broad patent covering immune therapeutics in diabetes. If
successful, these opposition proceedings could reduce the breadth of some of our
proprietary rights, but we believe they would not materially impede our
commercialization strategy. We face the risk that one or more of the above
patent applications may be denied. We also face the risk that our issued patents
may be challenged or circumvented or may otherwise not provide protection for
any commercially viable products we develop.
The technologies we use in our research, as well as the drug targets we
select, may unintentionally infringe the patents or violate the proprietary
rights of third parties. If this occurs, we may be required to obtain licenses
to patents or proprietary rights of others in order to continue with the
commercialization of our products. We are aware of pending and issued patent
claims to melanin concentrating hormone ligand and receptor, the hypocretin
ligand and receptor and certain uses of melanocortin subtype 4 agonists. We are
conducting research in all of those areas and may ultimately need to license
those patents in order to proceed. In addition, we are aware of two U.S. patents
relating to IL-4 proteins that are controlled by other entities which, if
construed very broadly, and if valid as so construed, could prevent us from
commercializing our IL-4 fusion toxin products in the United States unless we
obtain a license, which may not be available to us on commercially reasonable
terms, or at all. We do not believe that our research and development activities
as currently conducted infringe any valid issued patents.
NBI-34060, our leading gamma amino-butyric acid agonist compound for
the treatment of insomnia, is covered generically in an issued U.S. patent,
which we licensed from DOV Pharmaceuticals. It is not currently covered by any
foreign patents of which we are aware. The term of the U.S. patent is due to
expire in June 2003. We intend to seek additional protection of this compound in
three ways. First, we have filed eight U.S. and foreign patent applications on
NBI-34060, which could extend patent protection to the year 2020. We face the
risk that these patents may not issue, or may subsequently be challenged
successfully. Second, patent term extension under the Hatch/Waxman Patent Term
Extension Act may add patent life in the U.S. beyond the June 2003 expiration,
depending on the length of clinical trials and other factors involved in the
filing of a new drug application. Third, in addition to this potential patent
protection, the United States, the European Union and Japan all provide data
protection for new medicinal compounds. If this protection is available, no
competitor may use the original applicant's data as the basis of a generic
marketing application during the period of data protection. This period of
exclusivity is five years in the United States, six years in Japan and six to 10
years in the European Union, measured from the date of FDA, or corresponding
foreign, approval.
In-Licensed Technology
We have in-licensed the following technologies to complement our
ongoing clinical and research programs. Most of these licenses extend for the
term of the related patent and contain customary royalty, termination and other
provisions.
o In October 2000, we licensed nonexclusive rights to GT1-1 cell line
from The Salk Institute.
o In August 2000, we licensed nonexclusive rights to CRF R1 deficient
mice from the Research Development Foundation.
o In July 2000, we licensed exclusive rights to melanocortin subtype 3
receptor knock-out mice from Oregon Health Sciences University.
o In August 1999, we licensed nonexclusive rights to the human
gonadotropin-releasing hormone receptor from Mount Sinai School of
Medicine.
o In January 1999, we licensed exclusive worldwide rights to patents
relating to excitatory amino acid transporters and melanocortin 1-5
from Oregon Health Sciences University.
o In December 1998, we licensed nonexclusive rights to technology
covering melanocortin subtype 4 receptor from the University of
Michigan.
o In June 1998, we licensed exclusive worldwide rights to our sedative
compound, NBI-34060, from DOV Pharmaceuticals, Inc.
o In May 1998, we licensed exclusive worldwide rights to patents covering
NBI-3001, our IL-4 fusion toxin, from the National Institutes of Health
and inventors Ira Pastan and David Fitzgerald.
o In November 1996, we licensed exclusive worldwide rights to technology
directed to peptide therapeutics for the treatment of autoimmune
disease from Trustees of Dartmouth College.
o In October 1997, we licensed co-exclusive rights to technology relating
to the prevention of diabetes from University Technology Corporation.
o In November 1994, we licensed exclusive worldwide rights to technology
relating to treatment of multiple sclerosis using peptide analogs of
myelin basic protein from Stanford University.
o In November 1993, we licensed exclusive worldwide rights to CRF R1 from
the Salk Institute for Biological Studies.
Manufacturing
We currently rely, and will continue to rely for at least the next few
years, on contract manufacturers to produce sufficient quantities of our product
candidates for use in our preclinical and anticipated clinical trials.
Manufacturers of our NBI-34060 and CRF antagonist compounds clinical trial
material include Albany Molecular Research, Cedarburg Pharmaceuticals,
Organichem Corporation and Pharmaceutics International. Cook Pharmaceuticals,
Covance Biotechnology Services, Polypeptide Laboratories, Primedica and Pyramid
Laboratories manufacture our altered peptide ligands, NBI-6024 and NBI-5788 and
our recombinant protein NBI-3001. We also rely, and intend to continue to rely,
on third parties to provide the components of these product candidates, such as
proteins, peptides, phospholipids, small molecules and bulk chemical materials.
There is currently a limited supply of some of these components.
Furthermore, the contract manufacturers that we have identified to date only
have limited experience at manufacturing, formulating, analyzing and packaging
our product candidates in quantities sufficient for conducting clinical trials
or for commercialization.
If we are unable to establish and maintain relationships with third
parties for manufacturing sufficient quantities of our product candidates and
their components that meet our planned time and cost parameters, it could delay
the development and timing of our clinical trials.
Marketing and Sales
We currently have no sales, marketing or distribution capabilities. In
order to commercialize any of our product candidates, we must either internally
develop sales, marketing and distribution capabilities or make arrangements with
third parties to perform these services. We intend to sell, market and
distribute some products directly and intend to rely on relationships with third
parties to sell, market and distribute other products. Under our collaboration
agreements with Janssen, Wyeth-Ayerst and Eli Lilly, we may have the opportunity
to co-promote our products in the United States. To market any of our products
directly, we must develop a marketing and sales force with technical expertise
and with supporting distribution capabilities, none of which we currently have.
Government Regulation
Regulation by government authorities in the United States and foreign
countries is a significant factor in the development, manufacture and marketing
of our proposed products and in our ongoing research and product development
activities. All of our products will require regulatory approval by government
agencies prior to commercialization. In particular, human therapeutic products
are subject to rigorous preclinical studies and clinical trials and other
approval procedures of the FDA and similar regulatory authorities in foreign
countries. Various federal and state statutes and regulations also govern or
influence testing, manufacturing, safety, labeling, storage and record-keeping
related to such products and their marketing. The process of obtaining these
approvals and the subsequent substantial compliance with appropriate federal and
state statutes and regulations require the expenditure of substantial time and
financial resources.
Preclinical studies are generally conducted in laboratory animals to
evaluate the potential safety and the efficacy of a product. Drug developers
submit the results of preclinical studies to the FDA as a part of an
investigative new drug application, which must be approved before we can begin
clinical trials in humans. Typically, clinical evaluation involves a time
consuming and costly three-phase process.
Phase I Clinical trials are conducted with a small number of
subjects to determine the early safety profile, maximum
tolerated dose and pharmacokinetics of the product in human
volunteers.
Phase II Clinical trials are conducted with groups of patients
afflicted with a specific disease in order to determine
preliminary efficacy, optimal dosages and expanded evidence of
safety.
Phase III Large-scale, multi-center, comparative trials are
conducted with patients afflicted with a target disease in
order to provide enough data to demonstrate with substantial
evidence the efficacy and safety required by the FDA.
The FDA closely monitors the progress of each of the three phases of
clinical trials that are conducted in the United States and may, at its
discretion, reevaluate, alter, suspend or terminate the testing based upon the
data accumulated to that point and the FDA's assessment of the risk/benefit
ratio to the patient. To date we have conducted many of our clinical trials in
Europe and South Africa.
Once Phase III trials are completed, drug developers submit the results
of preclinical studies and clinical trials to the FDA in the form of a new drug
application, or a biologics licensing application for approval to commence
commercial sales. In response, the FDA may grant marketing approval, request
additional information or deny the application if the FDA determines that the
application does not meet regulatory approval criteria. FDA approvals may not be
granted on a timely basis, or at all. Furthermore, the FDA may prevent a drug
developer from marketing a product under a label for its desired indications,
which may impair commercialization of the product. Similar regulatory procedures
must also be complied with in countries outside the United States.
If the FDA approves the new drug application, the drug becomes
available for physicians to prescribe in the United States. After approval, the
drug developer must submit periodic reports to the FDA, including descriptions
of any adverse reactions reported. The FDA may request additional studies, known
as Phase IV, to evaluate long-term effects.
In addition to studies requested by the FDA after approval, a drug
developer may conduct other trials and studies to explore use of the approved
compound for treatment of new indications. The purpose of these trials and
studies and related publications is to broaden the application and use of the
drug and its acceptance in the medical community.
Orphan Drug Designation
The FDA may grant orphan drug designation to drugs intended to treat a
"rare disease or condition," which is generally a disease or condition that
affects fewer than 200,000 individuals in the United States. Orphan drug
designation must be requested before submitting a new drug application. After
the FDA grants orphan drug designation, the generic identity of the therapeutic
agent and its potential orphan use are disclosed publicly by the FDA. Orphan
drug designation does not convey any advantage in, or shorten the duration of,
the regulatory review and approval process. If a product that has orphan drug
designation subsequently receives FDA approval for the indication for which it
has orphan drug designation, the product is entitled to orphan exclusivity,
which means the FDA may not approve any other applications to market the same
drug for the same indication, except in very limited circumstances, for seven
years. Our IL-4 fusion toxin product candidate has received orphan drug
designation from the FDA for astrocytic glioma.
Approvals Outside the United States
We will have to complete an approval process similar to that in the
United States in virtually every foreign target market for our products in order
to commercialize our product candidates in those countries. The approval
procedure and the time required for approval vary from country to country and
may involve additional testing. Foreign approvals may not be granted on a timely
basis, or at all. In addition, regulatory approval of prices is required in most
countries other than the United States. We face the risk that the resulting
prices would be insufficient to generate an acceptable return to us, or our
corporate collaborators.
Fast Track Designation
Congress enacted the Food and Drug Administration Modernization Act of
1997, in part, to ensure the timely availability of safe and effective drugs,
biologics and medical devices by expediting the FDA review process for new
products. The Food and Drug Administration Modernization Act establishes a
statutory program for the approval of so-called fast track products. The new law
defines a fast track product as a new drug or biologic intended for the
treatment of a serious or life-threatening condition that demonstrates the
potential to address unmet medical needs for such a condition. Under the new
fast track program, the sponsor of a new drug or biologic may request the FDA to
designate the drug or biologic as a fast track product at any time during
clinical development of the product. Fast-track designation provides an
expedited review of a product, which accelerates FDA review.
We may seek fast track designation to secure expedited review of
appropriate product candidates. We can never be sure that we will obtain fast
track designation. We cannot predict the ultimate impact, if any, of the new
fast track process on the timing or likelihood of FDA approval of any of our
potential products. We received fast track designation for our IL-4 fusion
toxin.
Competition
The biotechnology and pharmaceutical industries are subject to rapid
and intense technological change. We face, and will continue to face,
competition in the development and marketing of our product candidates from
biotechnology and pharmaceutical companies, research institutions, government
agencies and academic institutions. Competition may also arise from, among other
things:
o other drug development technologies;
o methods of preventing or reducing the incidence of disease, including
vaccines; and
o new small molecule or other classes of therapeutic agents.
Developments by others may render our product candidates or
technologies obsolete or noncompetitive. We are performing research on or
developing products for the treatment of several disorders including anxiety,
depression, insomnia, malignant glioma, other forms of cancer and multiple
sclerosis.
In the area of anxiety disorders, our product candidates will compete
with well-established products such as Valium(R), marketed by Hoffman-La Roche,
Xanax(R), marketed by Pharmacia Upjohn, Buspar(R), marketed by
Bristol-Myers-Squibb, and others.
We are also developing products for depression, which will compete with
well-established products in the antidepressant class, including Prozac(R),
marketed by Eli Lilly, Zoloft(R) marketed by Pfizer, and Paxil(R), marketed by
GlaxoSmith Kline. Certain technologies under development by other pharmaceutical
companies could result in additional commercial treatments for depression and
anxiety. In addition, a number of companies are also conducting research on
molecules to block CRF, which is the same mechanism of action employed by our
compounds.
We are also developing a gamma amino-butyric acid receptor agonist,
NBI-34060, for the treatment of insomnia. Ambien(R) and Sonata(R) are already
marketed for the treatment of insomnia by Pharmacia/Sanofi and American Home
Products, respectively.
Guilford Pharmaceuticals' Gliadel(R), approved for use in a type of
brain cancers known as recurrent glioblastoma multiforme, would potentially
compete with our IL-4 fusion toxin product, NBI-3001, if our product is approved
by the FDA. Temozolomide, marketed by Schering Plough, is approved in Europe
only for recurrent glioblastoma multiforme, where it may also compete with our
IL-4 fusion toxin product.
We are also pursuing development of NBI-3001 for the treatment of
peripheral solid tumors, such as kidney cancer and non-small-cell lung cancer.
Proleukin(R) is marketed by Chiron for the treatment of kidney cancer, and drug
treatments for non-small-cell lung cancer include Platinol(R) and Taxol(R),
which are marketed by Bristol-Myers-Squibb, and Gemzar(R), which is marketed by
Eli Lilly.
Products that may compete with NBI-5788, our altered peptide ligand for
multiple sclerosis, include Betaseron(R) and Avonex(R), similar forms of
beta-interferon marketed by Berlex BioSciences and Biogen, respectively.
Copaxone(R), a peptide polymer marketed by Teva, has also been approved for the
marketing in the United States and certain other countries for the treatment of
multiple sclerosis.
There are a number of competitors to products in our research pipeline.
Lupron Depot(R), marketed by Takeda-Abbott Pharmaceuticals, Zoladex(R), marketed
by AstraZeneca, and Synarel(R), marketed by Pharmacia Upjohn, are
gonadotropin-releasing hormone peptide agonists that have been approved for the
treatment of prostate cancer, endometriosis, infertility, breast cancer and
central precocious puberty. In addition, peptide antagonists, including
Abarelix(R) and Antagon Injection(R), are under development by Amgen and
Organon, respectively, for these indications. These drugs may compete with any
small molecule gonadotropin-releasing hormone antagonists we develop for these
indications.
Anti-obesity therapeutics currently available include Xenical(R) from
Roche Laboratories and Meridia(R) from Knoll Pharmaceuticals. If one or more of
these products or programs are successful, it may reduce or eliminate the market
for our products.
Compared to us, many of our competitors and potential competitors have
substantially greater:
o capital resources;
o research and development resources, including personnel and technology;
o regulatory experience;
o preclinical study and clinical testing experience;
o manufacturing and marketing experience; and
o production facilities.
Any of these competitive factors could harm our business, prospects,
financial condition and results of operations, which could negatively impact our
stock price.
Insurance
The Company maintains product liability insurance for clinical trials.
The Company intends to expand its insurance coverage to include the sale of
commercial products if marketing approval is obtained for products in
development. However, insurance coverage is becoming increasingly expensive, and
no assurance can be given that the Company will be able to maintain insurance
coverage at a reasonable cost or in sufficient amounts to protect the Company
against losses due to liability. There can also be no assurance that the Company
will be able to obtain commercially reasonable product liability insurance for
any products approved for marketing. A successful product liability claim or
series of claims brought against the Company could have a material adverse
effect on its business, financial condition and results of operations.
Employees
As of December 31, 2000, we had 188 employees, consisting of 179
full-time and 9 part-time employees. Of the full-time employees, approximately
63 hold Ph.D., M.D. or equivalent degrees. None of our employees are represented
by a collective bargaining arrangement, and we believe our relationship with our
employees is good. We are highly dependent on the principal members of our
management and scientific staff. If we were to lose the services of any of these
personnel, we might not be able to achieve our development objectives.
Furthermore, recruiting and retaining qualified scientific personnel to perform
research and development work in the future will also be critical to our
success. We face the risk that we may not be able to attract and retain
personnel on acceptable terms given the competition among biotechnology,
pharmaceutical and health care companies, universities and non-profit research
institutions for experienced scientists. In addition, we rely on members of our
Scientific Advisory Board and a significant number of consultants to assist us
in formulating our research and development strategies.
RISK FACTORS
Risks Related to the Company
We have a history of losses and expect to incur substantial losses and
negative operating cash flows for the foreseeable future, and we may never
achieve or maintain profitability. Since our inception, we have incurred
significant net losses, including net losses of $28.8 million in the period from
January 1, 2000 through December 31, 2000. As a result of ongoing operating
losses, we had an accumulated deficit of $70.5 million as of December 31, 2000.
We are not currently profitable. Even if we succeed in developing and
commercializing one or more of our drugs, we expect to incur substantial losses
for the foreseeable future and may never become profitable. We also expect to
continue to incur significant operating and capital expenditures and anticipate
that our expenses will increase substantially in the foreseeable future as we:
o seek regulatory approvals for our product candidates;
o develop, formulate, manufacture and commercialize our drugs;
o implement additional internal systems and infrastructure; and
o hire additional clinical and scientific personnel.
We also expect to experience negative cash flow for the foreseeable
future as we fund our operating losses and capital expenditures. As a result, we
will need to generate significant revenues to achieve and maintain
profitability. We may not be able to generate these revenues, and we may never
achieve profitability in the future. Our failure to achieve or maintain
profitability could negatively impact the market price of our common stock.
If we cannot raise additional funding, we may be unable to complete
development of our product candidates. We may require additional funding to
continue our research and product development programs, including preclinical
testing and clinical trials of our product candidates, for operating expenses,
and to pursue regulatory approvals for product candidates. We also may require
additional funding to establish manufacturing and marketing capabilities in the
future. We believe that our existing capital resources, together with interest
income and future payments due under our strategic alliances, will be sufficient
to satisfy our current and projected funding requirements for at least the next
12 months. However, these resources might be insufficient to conduct research
and development programs as planned. If we cannot obtain adequate funds, we may
be required to curtail significantly one or more of our research and development
programs or obtain funds through arrangements with corporate collaborators or
others that may require us to relinquish rights to some of our technologies or
product candidates.
Our future capital requirements will depend on many factors, including:
o continued scientific progress in our research and development programs;
o the magnitude of our research and development programs;
o progress with preclinical testing and clinical trials;
o the time and costs involved in obtaining regulatory approvals;
o the costs involved in filing and pursuing patent applications and
enforcing patent claims;
o competing technological and market developments;
o the establishment of additional strategic alliances;
o the cost of manufacturing facilities and of commercialization
activities and arrangements; and
o the cost of product in-licensing and any possible acquisitions.
We intend to seek additional funding through strategic alliances, and
may seek additional funding through public or private sales of our securities,
including equity securities. In addition, we have leased equipment and may
continue to pursue opportunities to obtain additional debt financing in the
future. However, additional equity or debt financing might not be available on
reasonable terms, if at all, and any additional equity financings will be
dilutive to our stockholders.
Because the development of our product candidates is subject to a
substantial degree of technological uncertainty, we may not succeed in
developing any of our product candidates. All of our product candidates are in
research or development and we do not expect any of our product candidates to be
commercially available for the foreseeable future, if at all. Only a small
number of research and development programs ultimately result in commercially
successful drugs. Potential products that appear to be promising at early stages
of development may not reach the market for a number of reasons. These reasons
include the possibilities that the potential products may:
o be found ineffective or cause harmful side effects during preclinical
studies or clinical trials;
o fail to receive necessary regulatory approvals;
o be precluded from commercialization by proprietary rights of third
parties;
o be difficult to manufacture on a large scale; or
o be uneconomical or fail to achieve market acceptance.
If any of these potential problems occurs, we may never successfully market
any products.
We may not receive regulatory approvals for our product candidates.
Regulation by government authorities in the United States and foreign countries
is a significant factor in the development, manufacture and marketing of our
proposed products and in our ongoing research and product development
activities. All of our products are in research and development and we have not
yet requested or received regulatory approval to commercialize any product from
the FDA or any other regulatory body. The process of obtaining these approvals
and the subsequent substantial compliance with appropriate federal and state
statutes and regulations require spending substantial time and financial
resources. If we fail or our collaborators or licensees fail to obtain, or
encounter delays in obtaining or maintaining, regulatory approvals, it could
adversely affect the marketing of any products we develop, our ability to
receive product or royalty revenues and our liquidity and capital resources.
In particular, human therapeutic products are subject to rigorous
preclinical testing and clinical trials and other approval procedures of the FDA
and similar regulatory authorities in foreign countries. Various federal and
state statutes and regulations also govern or influence testing, manufacturing,
safety, labeling, storage and record-keeping related to these products and their
marketing. Any delay in, or suspension of, our clinical trials will delay the
filing of our new drug applications with the FDA and, ultimately, our ability to
commercialize our drugs and generate product revenues.
In connection with our clinical trials, we face the risks that:
o we or the FDA may suspend the trials;
o we may discover that a product candidate may cause harmful side
effects;
o the results may not replicate the results of earlier, smaller trials;
o the results may not be statistically significant;
o patient recruitment may be slower than expected; and
o patients may drop out of the trials.
In addition, we depend on independent clinical investigators to conduct
our clinical trials under their agreements with us. These investigators are not
our employees and we cannot control the amount or timing of resources that they
devote to our programs. If independent investigators fail to devote sufficient
time and resources to our drug development programs, or if their performance is
substandard, it will delay the approval of our FDA applications and our
introductions of new drugs. These investigators may also have relationships with
other commercial entities, some of which may compete with us. If independent
investigators assist our competitors at our expense, it could harm our
competitive position.
Also, late stage clinical trials are often conducted with patients
having the most advanced stages of disease. During the course of treatment,
these patients can die or suffer other adverse medical effects for reasons that
may not be related to the pharmaceutical agent being tested but which can
nevertheless adversely affect clinical trial results.
We depend on continuing our current strategic alliances and developing
additional strategic alliances to develop and commercialize our compounds. We
depend upon our corporate collaborators to provide adequate funding for a number
of our programs. Under these arrangements, our corporate collaborators are
responsible for:
o selecting compounds for subsequent development as drug candidates;
o conducting preclinical studies and clinical trials and obtaining
required regulatory approvals for these drug candidates; and
o manufacturing and commercializing any resulting drugs.
Our strategy for developing and commercializing our products is
dependent upon maintaining our current arrangements and establishing new
arrangements with research collaborators, corporate collaborators and others. We
currently have collaborations with Janssen Pharmaceutica, Wyeth-Ayerst, Taisho
Pharmaceutical and Eli Lilly. Because we rely heavily on our corporate
collaborators, our development of our projects would be substantially delayed if
our collaborators:
o fail to select a compound we have discovered for subsequent development
into marketable products;
o fail to gain the requisite regulatory approvals of these products;
o do not successfully commercialize products that we originate;
o do not conduct their collaborative activities in a timely manner;
o do not devote sufficient time and resources to our partnered programs
or potential products;
o terminate their alliances with us;
o develop, either alone or with others, products that may compete with
our products;
o dispute our respective allocations of rights to any products or
technology developed during our collaborations; or
o merge with a third party that may wish to terminate the collaboration.
These issues and possible disagreements with our corporate
collaborators could lead to delays in the collaborative research, development or
commercialization of many of our product candidates. Furthermore, disagreements
with these parties could require or result in litigation or arbitration, which
would be time-consuming and expensive. If any of these issues arise, it may
delay the filing of our new drug applications and, ultimately, our generation of
product revenues.
We have no manufacturing capabilities. If third-party manufacturers of
our product candidates fail to devote sufficient time and resources to our
concerns, or if their performance is substandard, our clinical trials and
product introductions may be delayed and our costs may rise.
We have in the past utilized, and intend to continue to utilize,
third-party manufacturers to produce the drug compounds we use in our clinical
trials and for the potential commercialization of our future products. We have
no experience in manufacturing products for commercial purposes and do not
currently have any manufacturing facilities. Consequently, we depend on several
contract manufacturers for all production of products for development and
commercial purposes. If we are unable to obtain or retain third-party
manufacturers, we will not be able to commercialize our products. The
manufacture of our products for clinical trials and commercial purposes is
subject to specific FDA regulations. In addition, our third-party manufacturers
may not comply with FDA regulations relating to manufacturing our products for
clinical trials and commercial purposes or other regulatory requirements now or
in the future. Our reliance on contract manufacturers also exposes us to the
following risks:
o Contract manufacturers may encounter difficulties in achieving volume
production, quality control and quality assurance, and also may
experience shortages in qualified personnel. As a result, our contract
manufacturers might not be able to meet our clinical schedules.
o Switching manufacturers may be difficult because the number of
potential manufacturers is limited. It may be difficult or impossible
for us to find a replacement manufacturer quickly on acceptable terms,
or at all.
o Our contract manufacturers may not perform as agreed or may not remain
in the contract manufacturing business for the time required to
successfully produce, store and distribute our products.
o Drug manufacturers are subject to ongoing periodic unannounced
inspection by the FDA, the Drug Enforcement Agency, and corresponding
state agencies to ensure strict compliance with good manufacturing
practices and other government regulations and corresponding foreign
standards. We do not have control over third-party manufacturers'
compliance with these regulations and standards.
Our current dependence upon third parties for the manufacture of our
products may harm our profit margin, if any, on the sale of our future products
and our ability to develop and deliver products on a timely and competitive
basis.
If we are unable to retain and recruit qualified scientists or if any
of our key senior executives discontinue their employment with us, it will delay
our development efforts. We are highly dependent on the principal members of our
management and scientific staff. The loss of any of these people could impede
the achievement of our development objectives. Furthermore, recruiting and
retaining qualified scientific personnel to perform research and development
work in the future will also be critical to our success. We may be unable to
attract and retain personnel on acceptable terms given the competition among
biotechnology, pharmaceutical and health care companies, universities and
non-profit research institutions for experienced scientists. In addition, we
rely on members of our Scientific Advisory Board and a significant number of
consultants to assist us in formulating our research and development strategy.
All of our consultants and members of the Scientific Advisory Board are employed
by employers other than us. They may have commitments to, or advisory or
consulting agreements with, other entities that may limit their availability to
us.
We may be subject to claims that we, or our employees, have wrongfully
used or disclosed alleged trade secrets of their former employers. As is
commonplace in the biotechnology industry, we employ individuals who were
previously employed at other biotechnology or pharmaceutical companies,
including our competitors or potential competitors. Although no claims against
us are currently pending, we may be subject to claims that these employees or we
have inadvertently or otherwise used or disclosed trade secrets or other
proprietary information of their former employers. Litigation may be necessary
to defend against these claims. Even if we are successful in defending against
these claims, litigation could result in substantial costs and be a distraction
to management.
We have no marketing experience, sales force or distribution
capabilities and, if our products are approved, we may not be able to
commercialize them successfully. Although we do not currently have any
marketable products, our ability to produce revenues ultimately depends on our
ability to sell our products if and when they are approved by the FDA. We
currently have no experience in marketing or selling pharmaceutical products and
we do not have a marketing and sales staff or distribution capabilities. If we
fail to establish successful marketing and sales capabilities or fail to enter
into successful marketing arrangements with third parties, our product revenues
will suffer.
Governmental and third-party payers may subject our products to sales
and pharmaceutical pricing controls that could limit our product revenues and
delay profitability. The continuing efforts of government and third-party payers
to contain or reduce the costs of health care through various means may reduce
our potential revenues. These payers' efforts could decrease the price that we
receive for any products we may develop and sell in the future. In addition,
third-party insurance coverage may not be available to patients for any products
we develop. If government and third-party payers do not provide adequate
coverage and reimbursement levels for our products, or if price controls are
enacted, our product revenues will suffer.
If physicians and patients do not accept our products, we may not
recover our investment. The commercial success of our products, if they are
approved for marketing, will depend upon the medical community and patients
accepting our products as being safe and effective. The market acceptance of our
products could be affected by a number of factors, including:
o the timing of receipt of marketing approvals;
o the safety and efficacy of the products;
o the emergence of equivalent or superior products; and
o the cost-effectiveness of the products.
If the medical community and patients do not ultimately accept our products
as being safe and effective, we may not recover our investment.
Risks Related to Our Industry
We face intense competition and if we are unable to compete
effectively, the demand for our products, if any, may be reduced. The
biotechnology and pharmaceutical industries are subject to rapid and intense
technological change. We face, and will continue to face, competition in the
development and marketing of our product candidates from academic institutions,
government agencies, research institutions and biotechnology and pharmaceutical
companies. Competition may also arise from, among other things:
o other drug development technologies;
o methods of preventing or reducing the incidence of disease, including
vaccines; and
o new small molecule or other classes of therapeutic agents.
Developments by others may render our product candidates or
technologies obsolete or noncompetitive. We are performing research on or
developing products for the treatment of several disorders including anxiety,
depression, insomnia, malignant glioma, other forms of cancer and multiple
sclerosis, and there are a number of competitors to products in our research
pipeline. If one or more of these products or programs are successful, the
market for our products may be reduced or eliminated.
Compared to us, many of our competitors and potential competitors have
substantially greater:
o capital resources;
o research and development resources, including personnel and technology;
o regulatory experience;
o preclinical study and clinical testing experience;
o manufacturing and marketing experience; and
o production facilities.
Any of these competitive factors could reduce demand for our products.
For more specific information about the competition we face, please see the
section "Business" under the subheading "Competition".
If we are unable to protect our intellectual property, our competitors
could develop and market products based on our discoveries, which may reduce
demand for our products. Our success will depend on our ability to, among other
things:
o obtain patent protection for our products;
o preserve our trade secrets;
o prevent third parties from infringing upon our proprietary rights; and
o operate without infringing upon the proprietary rights of others, both
in the United States and internationally.
Because of the substantial length of time and expense associated with
bringing new products through the development and regulatory approval processes
in order to reach the marketplace, the pharmaceutical industry places
considerable importance on obtaining patent and trade secret protection for new
technologies, products and processes. Accordingly, we intend to seek patent
protection for our proprietary technology and compounds. However, we face the
risk that we may not obtain any of these patents and that the breadth of claims
we obtain, if any, may not provide adequate protection of our proprietary
technology or compounds.
We also rely upon unpatented trade secrets and improvements, unpatented
know-how and continuing technological innovation to develop and maintain our
competitive position, which we seek to protect, in part, by confidentiality
agreements with our commercial collaborators, employees and consultants. We also
have invention or patent assignment agreements with our employees and some, but
not all, of our commercial collaborators and consultants. However, if our
employees, commercial collaborators or consultants breach these agreements, we
may not have adequate remedies for any such breach, and our trade secrets may
otherwise become known or independently discovered by our competitors.
We may not be able to adequately enforce any of our patents to protect
our proprietary technology and compounds. Litigation may be necessary to defend
against or assert infringement claims to enforce our issued patents and to
protect our trade secrets or know-how, or to determine the scope and validity of
the proprietary rights of others. Two of our European patents are subject to
opposition proceedings, which, if successful, could reduce the breadth of some
of our proprietary rights. These proceedings relate to our
corticotropin-releasing factor receptor patent and our broad patent covering
immune therapeutics in diabetes. In addition, interference proceedings declared
by the United States Patent and Trademark Office may be necessary to determine
the priority of inventions with respect to our patent applications or those of
our licensors. Litigation or interference proceedings may fail and, even if
successful, may result in substantial costs and be a distraction to management.
The technologies we use in our research as well as the drug targets we
select may unintentionally infringe the patents or violate the proprietary
rights of third parties. In such cases, we may be required to obtain licenses to
patents or proprietary rights of others in order to continue to commercialize
our products. However, we may not be able to obtain any licenses required under
any patents or proprietary rights of third parties on acceptable terms, or at
all. If we do not obtain those licenses, we could encounter delays in product
introductions while we attempt to design around those patents, or we could find
that we are unable to develop, manufacture or sell products requiring those
licenses. We are aware of pending and issued patent claims to certain uses of
some of the types of compounds we are developing.
If we are unable to resolve third-party disputes regarding the validity
of our patents or our alleged infringement of other third parties' patents, we
may not be able to sell some or all of our products. For more information about
our intellectual property, please see the section "Business" under the
subheading "Intellectual Property".
We face potential product liability exposure far in excess of our
limited insurance coverage. The use of any of our potential products in clinical
trials, and the sale of any approved products, may expose us to liability
claims. These claims might be made directly by consumers, health care providers,
pharmaceutical companies or others selling our products. We have obtained
limited product liability insurance coverage for our clinical trials in the
amount of $5 million per occurrence and $5 million in the aggregate. However,
insurance coverage is becoming increasingly expensive, and we may not be able to
maintain insurance coverage at a reasonable cost or in sufficient amounts to
protect us against losses due to liability. We intend to expand our insurance
coverage to include the sale of commercial products if we obtain marketing
approval for product candidates in development, but we may be unable to obtain
commercially reasonable product liability insurance for any products approved
for marketing. On occasion, juries have awarded large judgments in class action
lawsuits based on drugs that had unanticipated side effects. A successful
product liability claim or series of claims brought against us would decrease
our cash reserves and could cause our stock price to fall.
Our activities involve hazardous materials and we may be liable for any
resulting contamination or injuries. Our research activities involve the
controlled use of hazardous materials. We cannot eliminate the risk of
accidental contamination or injury from these materials. If an accident occurs,
a court may hold us liable for any resulting damages, which may reduce our cash
reserves and force us to seek additional financing.
SCIENTIFIC ADVISORY BOARD
We have assembled a Scientific Advisory Board that currently consists
of 12 individuals. Members of our Scientific Advisory Board are leaders in the
fields of neurobiology, immunology, endocrinology, psychiatry and medicinal
chemistry. Our Scientific Advisory Board members meet at least yearly to advise
us in the selection, implementation and prioritization of our research programs.
Some members meet more frequently to advise us with regard to our specific
programs.
Our Scientific Advisory Board presently consists of the following
individuals:
Susan G. Amara, Ph.D., a Senior Scientist and Professor at the Vollum
Institute for Advanced Biomedical Research, is an expert on the cellular and
molecular biology of neurotransmitter transporters, excitatory amino acid
transporter structure and regulation and signaling roles of neurotransmitter
transporters.
Floyd E. Bloom, M.D., is Chairman of the Department of
Neuropharmacology at The Scripps Research Institute. Dr. Bloom is an
internationally recognized expert in the fields of neuropharmacology and
neurobiology.
Michael Brownstein, M.D., Ph.D., is Chief of the Laboratory of Cell
Biology at the National Institute of Mental Health. He is a recognized expert in
molecular pharmacology as it applies to the field of neuroendocrinology, where
he has defined many of the pharmaceutically important neurotransmitter receptors
and transporter systems.
Roger D. Cone, Ph.D., a Senior Scientist at the Vollum Institute for
Advanced Biomedical Research, is an international expert on the neuroendocrine
system, with particular expertise on the melanocortin system and the
hypothalamic control of energy homeostasis. Dr. Cone is an editor of the journal
Endocrinology.
Stephen M. Hedrick, Ph.D., is Professor and Chairman of Cell Biology at
the University of California, San Diego. Dr. Hedrick is an expert in T cell
immunology and co-discovered the first T cell receptor genes and identified the
regions responsible for antigen binding. He is an editor for the Journal of
Immunology.
Florian Holsboer, M.D., Ph.D., is Director at the Max Planck Institute
fur Psychiatrie. Dr. Holsboer is an international expert on the role of
glucocorticoids and neuropeptides, particularly CRF, in neuropsychiatric
disorders. He coordinates the efforts of several hundred scientists and
clinicians at the Max Planck Institute, a major European neuropsychiatric
institute.
George F. Koob, Ph.D., is a Member of the Department of
Neuropharmacology at The Scripps Research Institute and an Adjunct Professor in
the Departments of Psychology and Psychiatry at the University of California,
San Diego. Dr. Koob is an internationally recognized behavioral pharmacology
expert on the role of peptides in the central nervous system, the neurochemical
basis of addiction and in the development of preclinical behavioral procedures
for the screening of anxiolytic and antidepressant drugs and memory enhancers.
Charles B. Nemeroff, M.D., Ph.D., is Chairman and Professor of the
Department of Psychiatry and Behavioral Sciences at Emory University School of
Medicine. Dr. Nemeroff is an internationally recognized expert on the effects of
neuropeptides on behavior and their relevance in clinically important conditions
such as depression, anxiety and schizophrenia, and has published over 400
articles on this subject.
Thomas Roth, Ph.D., is the Head of the Division of Sleep Disorder
Research at the Henry Ford Hospital Research Institute. Dr. Roth is an
internationally recognized expert in the field of sleep research. His areas of
specialization are sleep homeostasis and neuropharmacology of sleep.
Lawrence J. Steinman, M.D., is Chief Scientific Advisor,
Neuroimmunology and a member of our Founding Board of Scientific and Medical
Advisors and our Executive Committee.
Wylie W. Vale, Ph.D., is Chief Scientific Advisor, Neuroendocrinology
and a member of our Founding Board of Scientific and Medical Advisors and our
Executive Committee.
Stanley J. Watson, Jr., M.D., Ph.D., is Professor and Associate Chair
for Research in the Department of Psychiatry and Co-Director of the Mental
Health Research Institute at the University of Michigan. Dr. Watson is a
recognized expert in neuropeptides and their receptors and their role in
psychiatric diseases and behavior. Dr. Watson is also a member of the Institute
of Medicine of the National Academy of Sciences.
Each of the members of our Scientific Advisory Board has signed a
consulting agreement that contains confidentiality provisions and restricts him
or her from competing with us for the term of the agreement. Each member of our
Scientific Advisory Board receives either a per diem consulting fee or a
retainer fee. Each member also has received Neurocrine stock or stock options,
which vest over time. All members of our Scientific Advisory Board are full-time
employees of a university or research institute that has regulations and
policies, which limit their ability to act as part-time consultants or in other
capacities for any commercial enterprise, including Neurocrine. A change in
these regulations or policies could adversely affect our relationship with any
of our Scientific Advisory Board members.
ITEM 2. PROPERTIES
We lease approximately 93,000 square feet of space at our headquarters
in San Diego, California, of which approximately 65% is laboratory space
dedicated to research and development. This facility was constructed in 1998 and
is under lease through August 2013. Our lease payments are $208,000 per month
with annual increases of 4% on September 1st of each year. We have sublet
approximately 14,500 square feet of this building to two separate tenants
through July 31, 2001 and September 30, 2001, respectively.
We believe that our property and equipment are generally well
maintained, in good operating condition and adequate for our current needs.
ITEM 3. LEGAL PROCEEDINGS
We are currently not subject to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been traded on the Nasdaq National Market System
under the symbol NBIX since our initial public offering on May 23, 1996. Prior
to that time there was no established public trading market for our common
stock. The following table sets forth for the periods indicated the high and low
sale price for the common stock as reported by the Nasdaq National Market. These
prices do not include retail markups, markdowns or commissions.
High Low
---- ---
Year Ended December 31, 1999
1st Quarter ....................................... $ 7.50 $ 4.88
2nd Quarter ....................................... 5.88 4.00
3rd Quarter ....................................... 5.94 3.75
4th Quarter ....................................... 29.63 5.38
Year Ended December 31, 2000
1st Quarter ....................................... 47.50 20.75
2nd Quarter ....................................... 39.75 13.94
3rd Quarter ....................................... 46.00 29.13
4th Quarter ....................................... 44.88 25.50
As of February 28, 2001, there were approximately 134 stockholders of
record of our common stock. We have not paid any cash dividends on our common
stock since inception and do not anticipate paying cash dividends in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data have been derived
from our audited consolidated financial statements. The information set forth
below is not necessarily indicative of the results of future operations and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and notes thereto appearing elsewhere in this Form 10-K.
2000 1999 1998 (1) 1997 1996
------ ------ ------- ------ ------
(in thousands, except for earnings/(loss) per share data)
STATEMENT OF OPERATIONS DATA
Revenues
Sponsored research and development ...... $ 6,881 $ 12,171 $ 8,751 $14,985 $9,092
Sponsored research and development
from related party ..................... - 491 3,610 - -
Milestones and license fees ............. 6,345 3,000 2,500 10,250 9,000
Grant income and other revenues ......... 1,362 1,129 1,176 909 1,124
------ ------ ------ ------ ------
Total revenues .......................... 14,588 16,791 16,037 26,144 19,216
Operating expenses
Research and development ................ 40,227 29,169 21,803 18,758 12,569
General and administrative .............. 9,962 7,476 6,594 5,664 3,697
Write-off of acquired in-process
research and development and licenses .. - - 4,910 - -
------ ------ ------ ------ ------
Total operating expenses ................ 50,189 36,645 33,307 24,422 16,266
Income (loss) from operations ............ (35,601) (19,854) (17,270) 1,722 2,950
Interest income, net .................... 6,048 2,851 4,000 3,931 2,598
Other income (expense) .................. 1,047 1,066 504 818 574
Equity in NPI net losses and other
adjustments, net ....................... - (885) (7,188) (1,130) -
------ ------ ------ ------ ------
Net income (loss) before income taxes .... (28,506) (16,822) (19,954) 5,341 6,122
Income taxes ............................. 302 - 1 214 248
------ ------ ------ ------ ------
Net income (loss) ........................ $(28,808) $(16,822) $(19,955) $ 5,127 $5,874
======== ======== ======== ====== ======
Earnings (loss) per share
Basic ................................... $ (1.30) $ (0.88) $ (1.10) $ 0.30 $ 0.39
Diluted ................................. (1.30) (0.88) (1.10) 0.28 0.36
Shares used in calculation of earnings
(loss) per share
Basic ................................... 22,124 19,072 18,141 16,930 14,971
Diluted ................................. 22,124 19,072 18,141 18,184 16,127
BALANCE SHEET DATA
Cash, cash equivalents and
short-term investments ................. 164,670 91,098 62,670 75,092 69,920
Working capital .......................... 154,556 86,168 60,064 69,362 68,023
Total assets ............................. 185,962 109,222 80,529 91,903 77,957
Long-term debt and capital
lease obligations ....................... 2,283 2,139 2,247 722 847
Accumulated deficit ...................... (70,480) (41,672) (24,850) (4,895) (10,022)
Total stockholders' equity ............... 163,208 96,354 71,958 83,152 72,767
- -----------------
<FN>
(1) Includes results of operations and financial position of
Northwest NeuroLogic, Inc. from May 28, 1998, the date of
acquisition (See Note 8 of the Notes to the Financial
Statements).
</FN>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations section contains forward-looking statements
which involve risks and uncertainties, pertaining generally to the expected
continuation of our collaborative agreements, the receipt of research payments
thereunder, the future achievement of various milestones in product development
and the receipt of payments related thereto, the potential receipt of royalty
payments, preclinical testing and clinical trials of potential products, the
period of time that our existing capital resources will meet our funding
requirements, and our financial results and operations. Our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of various factors, including those set forth below and those outlined
in the "Business" section included in Item 1.
Overview
We incorporated in California in 1992 and reincorporated in Delaware in
1996. Since we were founded, we have been engaged in the discovery and
development of novel pharmaceutical products for neurologic and endocrine
diseases and disorders. Our product candidates address some of the largest
pharmaceutical markets in the world including insomnia, anxiety, depression,
cancer and diabetes. To date, we have not generated any revenues from the sale
of products, and we do not expect to generate any product revenues in the
foreseeable future. We have funded our operations primarily through private and
public offerings of our common stock and payments received under research and
development agreements. We are developing a number of products with corporate
collaborators and will rely on existing and future collaborators to meet funding
requirements. We expect to generate future net losses in anticipation of
significant increases in operating expenses as products are advanced through the
various stages of clinical development. As of December 31, 2000, we have
incurred a cumulative deficit of $70.5 million and expect to incur operating
losses in the future, which may be greater than losses in prior years.
Results of Operations
Our revenues for the year ended December 31, 2000 were $14.6 million
compared with $16.8 million in 1999, and $16.0 million in 1998. The decline in
revenues from 1999 to 2000 resulted primarily from the conclusion of the
Novartis collaboration in January 2000 and the sponsored research portion of the
Eli Lilly & Company ("Eli Lilly") collaboration in October 1999. During 1999, we
received $6.8 million in revenues under these agreements, in addition to $3.0
million in milestones under the Wyeth-Ayerst Laboratories ("Wyeth-Ayerst")
agreement. The absence of these revenues during 2000 was partially offset by
$7.1 million in revenues received from Taisho Pharmaceuticals Co., Ltd.
("Taisho"). In addition, revenues received from Janssen Pharmaceutica, N.V.
("Janssen") were $3.0 million in 2000 compared to $2.4 million received in 1999.
Revenues for 1999 and 1998 were similar in total but had different
compositions resulting from several significant events. During 1999, we entered
into a collaborative agreement with Wyeth-Ayerst and agreed to a two-year
extension of our 1995 collaboration with Janssen. The new agreements generated
revenues of $8.4 million during 1999. Non-recurring revenues recorded in 1998
included $4.7 million in sponsored development and $2.3 million in milestones
received under the Novartis and Neuroscience Pharma, Inc. ("NPI") agreements. In
addition, due to the conclusion of the sponsored research portion of the Eli
Lilly agreement in October 1999, revenues received from Eli Lilly during 1999
were $3.2 million compared to $4.1 million received in 1998.
Research and development expenses increased to $40.2 million during
2000 compared with $29.2 million during 1999 and $21.8 million in 1998.
Increased expenses reflect advancement of our drug candidates through
progressive clinical development phases. We expect to incur significant
increases in future periods as later phases of development typically involve an
increase in the scope of studies, the number of patients treated and the number
of scientific personnel required to manage the trials.
General and administrative expenses increased to $10.0 million during 2000
compared with $7.5 million during 1999 and $6.6 million in 1998. Increased
expenses from 1999 to 2000 resulted primarily from $1.1 million in business
development consulting primarily relating to the Taisho agreement and $1.1
million of non-cash stock compensation charges relating to the employee stock
purchase program and consultant stock options. Increased expenses from 1998 to
1999 resulted primarily from the addition of personnel required to support
expanding research and development activities. We expect these expenses to
continue to rise in 2001 as we expand clinical studies.
During 1998, we wrote-off acquired in-process research and development
costs of $4.9 million. This amount included the acquisition of Northwest
NeuroLogic, Inc. ("NNL") and the in-licensing of drug candidates for our
insomnia and malignant glioma programs. Both of the in-licensed programs are
currently under clinical development.
Interest income increased to $6.3 million during 2000 compared with
$3.1 million during 1999 and $4.2 million for 1998. The increase in 2000,
compared with 1999 and 1998, primarily resulted from higher investment balances
achieved through offerings of our common stock. We completed a private placement
of 2.3 million shares in December 1999, resulting in net proceeds of $39.5
million. In December 2000, we sold 3.2 million shares in a public offering,
which resulted in net proceeds of $90.4 million. Due to the increase in cash
reserves generated from these transactions, we anticipate an increase in
interest income during 2001.
In December 1999, we sold our investment in NPI and recorded a gain of
$526,000. Our proportionate share of NPI operating losses during 1999 and 1998
were $764,000 and $3.4 million, respectively. In addition, we recorded a
write-down in the investment value of $646,000 during 1999 and $3.8 million
during 1998 relating to the decline in cash redemption value of the NPI
preferred shares.
Other income consists primarily of sublease income from unrelated
parties. The fluctuations in sublease income from year-to-year reflect facility
capacity in excess of our needs. Excess space is subleased until it is needed to
support company growth. During 2001, we expect sublease income to decrease
significantly as increases in personnel will require more office and laboratory
space.
Net loss for 2000 was $28.8 million, or $1.30 per share, compared with
$16.8 million, or $0.88 per share, and $20.0 million, or $1.10 per share, for
1999 and 1998, respectively. The increase in net loss primarily resulted from an
increase in scientific personnel and expanded clinical development activities.
We expect operating losses to increase for the foreseeable future as we continue
to expand our clinical development efforts.
To date, our revenues have come principally from funded research and
achievements of milestones under corporate collaborations. The nature and amount
of these revenues from period to period may lead to substantial fluctuations in
the results of year-to-year revenues and earnings. Accordingly, results and
earnings of one period are not predictive of future periods.
Liquidity and Capital Resources
At December 31, 2000, our cash, cash equivalents, and short-term
investments totaled $164.7 million compared with $91.1 million at December 31,
1999. The increase in cash balances at December 31, 2000 resulted from the
public offering of our common stock, which generated net cash proceeds of $90.4
million.
Net cash used by operating activities during fiscal year 2000 was $18.6
million compared with $10.3 million during 1999 and $10.7 million during 1998.
The increase in cash used in operations during 2000 compared with 1999 and 1998
resulted primarily from the increase in clinical development activities and the
addition of scientific personnel.
Net cash used by investing activities during fiscal year 2000 was $75.7
million compared to $21.2 million in 1999 and net cash provided by investing
activities of $4.7 million in 1998. The fluctuations in cash used and provided
resulted primarily from the timing differences in the investment purchases,
sales, maturities and the fluctuations in our portfolio mix between cash
equivalents and short-term investment holdings. We expect similar fluctuations
to continue in future periods. Capital equipment purchases for 2001 are expected
to be approximately $4.0 million and will be financed primarily through leasing
arrangements.
Net cash provided by financing activities during fiscal year 2000 was
$94.1 million compared with $41.0 million and $1.9 million during 1999 and 1998,
respectively. Cash provided during 2000 includes $90.4 million of net proceeds
from the public offering of our common stock. Cash provided during 1999 includes
$39.5 million of net proceeds received from the private sale of our common
stock. Cash provided during 1998 resulted primarily from capital lease
financings.
In July 2000, we licensed to Taisho the exclusive rights to develop and
commercialize NBI-6024 in Europe and Asia. In December 2000, we expanded our
collaboration with Taisho, providing Taisho the exclusive rights to develop and
commercialize our altered peptide ligand (APL) for diabetes in North America and
other countries outside of Europe and Asia. With the expanded agreement, we will
collaborate in the worldwide clinical development of NBI-6024 and we will
receive funding for activities we conduct on behalf of the collaboration. The
worldwide collaboration is valued at up to $100 million, including all potential
licensing fees, purchase fees, milestones and development expenses. In addition,
we will receive payments based on any future sales of NBI-6024. NBI-6024 is
currently in Phase I/II clinical trials, with Phase II trials planned for 2001.
As of December 31, 2000, we have received $2.0 million in option fees, $4.0
million in license fees, $4.0 million in milestones, and $829,000 in
reimbursements of third-party costs. The license fees were deferred and are
being recognized as revenues over the life of the agreement at $319,000 in 2000,
818,000 in each of the years 2001 through 2004 and $409,000 in 2005.
In September 1999, we signed an amendment to our 1995 agreement with
Janssen. The amendment provides for a new sponsored research period designed to
identify new corticotropin-releasing factor receptor antagonists, which will be
subject to the terms of the original agreement signed in 1995. The term of the
amendment is from April 1999 through February 2001. Under the agreement, we will
receive $5.0 million in sponsored research funding, up to $3.5 million in
milestone achievements and reimbursement of all outside and third-party costs
associated with the project. As of December 31, 2000, we have received $4.6
million in sponsored research and $755,000 in reimbursements of third-party
costs.
In January 1999, we entered into an agreement with Wyeth-Ayerst, the
pharmaceutical division of American Home Products, on the research, development
and commercialization of compounds, which modulate excitatory amino acid
transporters for the treatment of neurodegenerative and psychiatric diseases.
The Wyeth-Ayerst agreement provides for sharing proprietary
technologies, funding for research, payments for milestones reached, plus
royalties on sales from products resulting from the collaboration. Under the
terms of the agreement, we expect to receive three to five years of funding for
research and development as well as worldwide royalties on commercial sales of
products that result from the collaboration. Wyeth-Ayerst will also provide us
with access to chemical libraries for screening within the collaborative field.
As of December 31, 2000, we have received $6.0 million in sponsored research
payments, $3.0 million for the achievement of four milestones and $50,000 in
license fees, which are being deferred and recognized over the life of the
agreement.
During 1998, we expensed acquired in-process research and development
of $4.9 million. These charges consisted of $4.2 million for the acquisition of
Northwest NeuroLogic, through which we received licenses to the melanocortin
receptor and excitatory amino acid transporters programs, and $710,000 for
licenses to insomnia and brain cancer compounds. We performed scientific due
diligence related to the acquired projects and because they were based on narrow
scientific hypotheses, we concluded that none of these programs had alternative
future uses.
The nature and efforts required to develop the acquired in-process
research and development into commercially viable products include research to
identify a clinical candidate, preclinical development, clinical testing, FDA
approval and commercialization. This process may cost in excess of $100 million
and can take as long as 10 years to complete. It is also important to note that
if a clinical candidate is identified, the further development of that candidate
can be halted or abandoned at any time due to a number of factors. These factors
include, but are not limited to, funding constraints, safety or a change in
market demand.
Because of our limited financial resources, our strategy to develop
some of our programs is to enter into collaborative agreements with major
pharmaceutical companies. Through these collaborations, we could partially
recover our research costs through contract research and milestone revenues. The
collaborators would then be financially responsible for all clinical development
and commercialization costs.
In May 1998, when we acquired the in-process research and development
programs from NNL, we estimated the costs to identify a clinical candidate and
provide minimal research support during the clinical development stages for the
melanocortin receptor program to be $15.4 million over an 8-year period. Costs
to identify a clinical candidate and provide minimal research support during the
clinical development stages of the excitatory amino acid transporters program
were estimated at $22.4 million. Estimated revenues from the collaborative
arrangements were anticipated to reduce our net costs. The clinical development
and commercialization costs were to be completely funded by the collaborator.
During fiscal year 2001, we anticipate that our gross costs for
continued research on these programs will approximate $5 million. Our research
efforts may not result in clinical candidates for either compound. We intend to
collaborate on the melanocortin receptor technology. We would expect the
collaborator to then be responsible for the clinical development,
commercialization and funding. Our excitatory amino acid transporters program is
currently under a collaborative agreement with Wyeth-Ayerst. Consequently, we
cannot estimate the time or resources they will commit to the development of
this program.
Our insomnia and brain cancer compounds are both in the early stages of
clinical testing. During 2001, we expect to spend approximately $35 million on
additional clinical testing of the brain cancer and insomnia compounds. We
expect the clinical testing of both compounds to continue for at least the next
two years, but our efforts may not result in commercially viable products. If
our efforts were completely successful and we did not collaborate on these
compounds, we estimate that each compound could cost an additional $50-$150
million and take up to five years to reach commercial viability.
For each of our programs, we periodically assess the scientific
progress and merits of the programs to determine if continued research and
development is economically viable. Certain of our programs have been terminated
due to the lack of scientific progress and lack of prospects for ultimate
commercialization. Because of the uncertainties associated with research and
development of these programs, we may not be successful in achieving
commercialization. As such, the ultimate timeline and costs to commercialize a
product cannot be accurately estimated.
We believe that our existing capital resources, together with interest
income and future payments due under our strategic alliances, will be sufficient
to satisfy our current and projected funding requirements for at least the next
12 months. However, we cannot guarantee that these capital resources and
payments will be sufficient to conduct our research and development programs as
planned. The amount and timing of expenditures will vary depending upon a number
of factors, including progress of our research and development programs.
We will require additional funding to continue our research and product
development programs, to conduct preclinical studies and clinical trials, for
operating expenses, to pursue regulatory approvals for our product candidates,
for the costs involved in filing and prosecuting patent applications and
enforcing or defending patent claims, if any, the cost of product in-licensing
and any possible acquisitions, and we may require additional funding to
establish manufacturing and marketing capabilities in the future. We may seek to
access the public or private equity markets whenever conditions are favorable.
We may also seek additional funding through strategic alliances and other
financing mechanisms, potentially including off-balance sheet financing. We
cannot assure you that adequate funding will be available on terms acceptable to
us, if at all. If adequate funds are not available, we may be required to
curtail significantly one or more of our research or development programs or
obtain funds through arrangements with collaborators or others. This may require
us to relinquish rights to certain of our technologies or product candidates.
We expect to incur operating losses over the next several years as our
research, development, preclinical studies and clinical trial activities
increase. To the extent that we are unable to obtain third-party funding for
such expenses, we expect that increased expenses will result in increased losses
from operations. We cannot assure you that we will successfully develop our
products under development or that our products, if successfully developed, will
generate revenues sufficient to enable us to earn a profit.
Interest Rate Risk
We are exposed to interest rate risk on our short-term investments and
on our long-term debt. The primary objective of our investment activities is to
preserve principal while at the same time maximizing yields without
significantly increasing risk. To achieve this objective, we invest in highly
liquid and high quality government and other debt securities. To minimize our
exposure due to adverse shifts in interest rates, we invest in short-term
securities with maturities of less than 44 months. If a 10% change in interest
rates were to have occurred on December 31, 2000, this change would not have had
a material effect on the fair value of our investment portfolio as of that date.
Due to the short holding period of our investments, we have concluded that we do
not have a material financial market risk exposure.
Interest risk exposure on long-term debt relates to our note payable,
which bears a floating interest rate of prime plus one quarter percent (9.75% at
December 31, 2000, 8.75% at December 31, 1999 and 8.00% at December 31, 1998).
At December 31, 2000, 1999 and 1998, the note balance was $311,000, $461,000 and
$610,000, respectively. This note is payable in equal monthly installments
through January 2003. Based on the balance of our long-term debt, we have
concluded that we do not have a material financial market risk exposure.
Cautionary Note on Forward-Looking Statements
Our business is subject to significant risks, including but not limited
to, the risks inherent in our research and development activities, including the
successful continuation of our strategic collaborations, the successful
completion of clinical trials, the lengthy, expensive and uncertain process of
seeking regulatory approvals, uncertainties associated both with the potential
infringement of patents and other intellectual property rights of third parties,
and with obtaining and enforcing our own patents and patent rights,
uncertainties regarding government reforms and of product pricing and
reimbursement levels, technological change and competition, manufacturing
uncertainties and dependence on third parties. Even if our product candidates
appear promising at an early stage of development, they may not reach the market
for numerous reasons. Such reasons include the possibilities that the product
will be ineffective or unsafe during clinical trials, will fail to receive
necessary regulatory approvals, will be difficult to manufacture on a large
scale, will be uneconomical to market or will be precluded from
commercialization by proprietary rights of third parties. For more information
about the risks we face, see "Risk Factors" included in Part I of this report.
New Accounting Pronouncements
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101). SAB 101 provides
guidance in applying generally accepted accounting principles to revenue
recognition in financial statements, including the recognition of nonrefundable
up-front fees received in conjunction with a research and development
arrangement. The adoption of this pronouncement was required effective with the
fourth quarter of 2000.
As required by the adoption, we reviewed all up-front payments, license
fees and milestones received in the current and prior years. Up-front payments
have been received for program cost reimbursements incurred during a negotiation
period. License fees are received in exchange for a grant to use our proprietary
technologies on an as-is basis, for the term of the collaborative agreement.
Milestones are received for specific scientific achievements determined at the
beginning of the collaboration. These achievements are remote and unpredictable
at the onset of the collaboration and are based on the success of scientific
efforts.
Based on that review, we determined that $4.2 million of license fees
received during 2000 were subject to the adoption of SAB 101. All other fees
received relate to agreements under which the research portion of the
collaboration has been completed or the agreements have been terminated
entirely. In accordance with Accounting Principles Board (APB) Opinion No. 20,
the adoption of SAB 101 was recognized by including the cumulative effect of the
change in accounting principle in the net loss for the fourth quarter of 2000.
Our otherwise reported net loss for the year ended December 31, 2000 was
increased by approximately $3.8 million. These license fee revenues were
deferred and will be amortized as income at $915,000 in 2001, $835,000 in 2002,
$828,000 in 2003, $818,000 in 2004 and $409,000 in 2005.
In March 2000, the Financial Accounting Standards Board, or FASB,
released Interpretation No. 44, "Accounting for Certain Transactions involving
Stock Compensation, an interpretation of APB Opinion No. 25," (FIN 44) which
provides clarification of Opinion 25 for certain issues such as the
determination of who is an employee, the criteria for determining whether a plan
qualifies as a non-compensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination. We believe that our practices are in conformity with this guidance,
and therefore FIN 44 had no impact on our financial statements.
In June 1998, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 133,"Accounting for Derivative Instruments and Hedging
Activities." We expect to adopt the new Statement effective January 1, 2001.
This statement requires the recognition of all derivative instruments as either
assets or liabilities in the statement of financial position and the measurement
of those instruments at fair value. The Company does not expect the adoption of
this statement to have a material impact on its results of operations or
financial position.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS 140 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities and is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. The adoption of SFAS 140 is not expected to have
a material impact on our financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures about Market Risk is contained
in Item 7, Management Discussion and Analysis--Interest Rate Risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the list of the Company's Financial Statements filed with this Form
10-K under Item 14 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
Information required by this item will be contained in the Company's
Notice of 2001 Annual Meeting of Stockholders and Proxy Statement, pursuant to
Regulation 14A, to be filed with the Securities and Exchange Commission within
120 days of December 31, 2000. Such information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item will be contained in the Company's
Notice of 2001 Annual Meeting of Stockholders and Proxy Statement, pursuant to
Regulation 14A, to be filed with the Securities and Exchange Commission within
120 days of December 31, 2000. Such information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item will be contained in the Company's
Notice of 2001 Annual Meeting of Stockholders and Proxy Statement, pursuant to
Regulation 14A, to be filed with the Securities and Exchange Commission within
120 days of December 31, 2000. Such information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item will be contained in the Company's
Notice of 2001 Annual Meeting of Stockholders and Proxy Statement, pursuant to
Regulation 14A, to be filed with the Securities and Exchange Commission within
120 days of December 31, 2000. Such information is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
1. List of Financial Statements. The following financial
statements of Neurocrine Biosciences, Inc. and Report of Ernst
& Young LLP, Independent Auditors, are included in this
report: Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheet as of December 31, 2000 and 1999
Consolidated Statement of Operations for the years ended
December 31, 2000, 1999 and 1998 Consolidated Statement of
Stockholders' Equity for the years ended December 31, 2000,
1999 and 1998 Consolidated Statement of Cash Flows for the
years ended December 31, 2000, 1999 and 1998 Notes to the
Consolidated Financial Statements (includes unaudited Selected
Quarterly Financial Data)
2. List of all Financial Statement schedules. All schedules are
omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements
or notes thereto.
3. List of Exhibits required by Item 601 of Regulation S-K. See
part (c) below.
(b) Reports on Form 8-K. Current Reports filed pursuant to Sections 13(a)
or 15(d) of the Exchange Act on Forms 8-K dated December 14, 2000 and
December 15, 2000.
1. The Registrant filed a Current Report on Form 8-K dated April
6, 2000 to report pursuant to Item 5 (Other Events) and Item 7
(Final Statements, Pro Forma Financial Information and
Exhibits) announcing Janssen Pharmaceutica's replacement of
R121919 with a back-up compound
2. The Registrant filed a Current Report on Form *-K dated
December 14, 2000 to report pursuant to Item 5 (Other Events)
and Item 7 (Final Statements, Pro Forma Financial Information
and Exhibits) the incorporation by reference of its final
prospectus dated December 5, 2000. 3. The Registrant filed a
Current Report on Form 8-K dated December 15, 2000 to report
pursuant to Item 5 (Other Events) the expansion of its
collaboration with Taisho Pharmaceuticals Co., LTD.
(c) Exhibits. The following exhibits are filed as part of, or incorporated
by reference into, this report:
Exhibit
Number Description
- --------------------------------------------------------------------------------
2.1 Agreement and Plan of Reorganization dated May 1, 1998, between
Northwest NeuroLogic, Inc., NBI Acquisition Corporation and the
Registrant (7)
2.2 Form of Warrant pursuant to the Agreement and Plan of Reorganization
dated May 1, 1998 (7)
3.1 Restated Certificate of Incorporation (1)
3.2 Bylaws (1)
3.3 Certificate of Amendment of Bylaws (1)
4.1 Form of Common Stock Certificate (1)
4.2 Form of warrant issued to existing warrant holders (1)
4.3 Information and Registration Rights Agreement dated September 15, 1992,
as amended (1)
4.4* Registration Rights Agreement dated May 28, 1998, between certain
investors and the Registrant (7)
4.5 Amended and Restated Rights Agreement by and between the Registrant and
American Stock Transfer & Trust Company, as Rights Agent, dated as of
July 19, 1999 (9)
4.6 Stock Purchase Agreement dated December 20 through 23, 1999, between
Neurocrine Biosciences, Inc. and each of the Purchasers named therein
(11)
10.1 Purchase and Sale Agreement and Escrow Instructions between MS Vickers
II, LLC and the Registrant dated February 13, 1997 (3)
10.2 1992 Incentive Stock Plan, as amended (10)
10.3 1996 Employee Stock Purchase Plan (1)
10.4 1996 Director Stock Option Plan and form of stock option agreement (1)
10.5 Form of Director and Officer Indemnification Agreement (1)
10.6 Employment Agreement dated March 1, 1997, between the Registrant and
Gary A. Lyons, as amended May 24, 2000 (4) (13)
10.7 Employment Agreement dated March 1, 1997, between the Registrant and
Paul W. Hawran, as amended May 24, 2000 (4) (13)
10.8 Consulting Agreement dated September 25, 1992, between the Registrant
and Wylie A. Vale, Ph.D. (1)
10.9 Consulting Agreement effective January 1, 1992, between the Registrant
and Lawrence J. Steinman, MD (1)
10.10 License Agreement dated July 17, 1992, by and between The Salk
Institute for Biological Studies and the Registrant (1)
10.11 License Agreement dated November 16, 1993, by and between The Salk
Institute for Biological Studies and the Registrant (1)
10.12 License Agreement dated October 19, 1992, by and between the Board of
Trustees of the Leland Stanford Junior University and the Registrant
(1)
10.13 Agreement dated January 1, 1995, by and between the Registrant and
Janssen Pharmaceutica, N.V. (1)
10.14* Research and License Agreement dated October 15, 1996, between the
Registrant and Eli Lilly and Company (2)
10.15* Lease between Science Park Center LLC and the Registrant dated July 31,
1997 (5)
10.16* Option Agreement between Science Park Center LLC (Optionor) and the
Registrant dated July 31, 1997 (Optionee) (5)
10.17* Construction Loan Agreement Science Park Center LLC and the Registrant
dated July 31, 1997 (5)
10.18 Secured Promissory Note Science Park Center LLC and the Registrant
dated July 31, 1997 (5)
10.19* Operating Agreement for Science Park Center LLC between Nexus
Properties, Inc. and the Registrant dated July 31, 1997 (5)
10.20 Form of incentive stock option agreement and nonstatutory stock option
agreement for use in connection with 1992 Incentive Stock Plan (1)
10.21* Patent License Agreement dated May 7, 1998, between the US Public
Health Service and the Registrant (7)
10.22* Patent License Agreement dated April 28, 1998, between and among Ira
Pastan, David Fitzgerald and the Registrant (7)
10.23* Sub-License and Development Agreement dated June 30, 1998, by and
between DOV Pharmaceutical, Inc. and the Registrant (7)
10.24* Warrant Agreement dated June 30, 1998, between DOV Pharmaceutical, Inc.
and the Registrant (7)
10.25* Warrant Agreement dated June 30, 1998, between Jeff Margolis and the
Registrant (7)
10.26* Warrant Agreement dated June 30, 1998, between Stephen Ross and the
Registrant (7)
10.27* Collaboration and License Agreement dated January 1, 1999, by and
between American Home Products Corporation acting through its
Wyeth-Ayerst Laboratories Division and the Registrant (8)
10.28* Employment Agreement dated January 1, 1999, between the Registrant and
Margaret Valeur-Jensen, as amended May 24, 2000 (8) (13)
10.29* Employment Agreement dated February 9, 1998, between the Registrant and
Bruce Campbell, as amended May 24, 2000 (8) (13)
10.30 Amended 1992 Incentive Stock Plan, as amended May 27, 1997, May 27,
1998 and May 21, 1999 (8)
10.31* Agreement by and among Dupont Pharmaceuticals Company, Janssen
Pharmaceutica, N.V. and Neurocrine Biosciences, Inc. dated September
28, 1999 (10)
10.32* Amendment Number One to the Agreement between Neurocrine Biosciences,
Inc. and Janssen Pharmaceutica, N.V. dated September 24, 1999 (10)
10.33* License Agreement between the Registrant and Taisho Pharmaceutical Co.,
Ltd. dated July 21, 2000 (13)
10.34** Amendment No. 1 dated November 30, 2000 to the License Agreement
between the Registrant and Taisho Pharmaceutical Co., Ltd. dated July
21, 2000
10.35 2001 Stock Option Plan (14)
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see page 34)
- -----------
(1) Incorporated by reference to the Company's Registration
Statement on Form S-1 (Registration No. 333-03172)
(2) Incorporated by reference to the Company's Report on Form 10-K
for the fiscal year ended December 31, 1996
(3) Incorporated by reference to the Company's amended Quarterly
Report on Form 10-Q filed on August 15, 1997
(4) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q filed on August 14, 1997
(5) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q filed on November 14, 1997
(6) Incorporated by reference to the Company's Report on Form 8-K
filed on March 13, 1998
(7) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q filed on November 16, 1998
(8) Incorporated by reference to the Company's Report on Form 10-K
for the fiscal year ended December 31, 1998
(9) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q filed on August 11, 1999
(10) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q filed on November 12, 1999
(11) Incorporated by reference to the Company's Report on Form S-3
filed on January 20, 2000
(12) Incorporated by reference to the Company's Report on Proxy
filed on April 27, 2000
(13) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q filed on August 11, 2000
(14) Incorporated by reference to the Company's Registration
Statement on Form S-8 filed March 15, 2001 * Confidential
treatment has been granted with respect to certain portions of
the exhibit ** Confidential treatment has been requested with
respect to certain portions of the exhibit
(d) Financial Statement Schedules. See Item 14 (a)(2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NEUROCRINE BIOSCIENCES, INC.
A Delaware Corporation
By: /s/Gary A. Lyons
----------------
Gary A. Lyons
President and Chief Executive Officer
Date: March 29, 2001
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Gary A. Lyons and Paul Hawran, jointly
and severally his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendment to this Report on Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ Gary A. Lyons President, Chief Executive March 29, 2001
- ---------------------------- Officer and Director
Gary A. Lyons (Principal Executive Officer)
/s/ Paul W. Hawran Chief Financial Officer March 29, 2001
- ---------------------------- (Principal Financial
Paul W. Hawran and Accounting Officer)
/s/ Joseph A. Mollica Chairman of the March 29, 2001
- ---------------------------- Board of Directors
Joseph A. Mollica.
/s/ Richard F. Pops Director March 29, 2001
- ----------------------------
Richard F. Pops
/s/ Stephen A. Sherwin Director March 29, 2001
- ----------------------------
Stephen A. Sherwin
/s/ Lawrence J. Steinman Director March 29, 2001
- ----------------------------
Lawrence J. Steinman
/s/ Wylie W. Vale Director March 29, 2001
- ----------------------------
Wylie W. Vale
NEUROCRINE BIOSCIENCES, INC.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Ernst & Young LLP, Independent Auditors .................... F-2
Consolidated Balance Sheet ........................................... F-3
Consolidated Statement of Operations ................................. F-4
Consolidated Statement of Stockholders' Equity ....................... F-5
Consolidated Statement of Cash Flows ................................. F-6
Notes to the Consolidated Financial Statements ....................... F-7
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Neurocrine Biosciences, Inc.
We have audited the accompanying consolidated balance sheet of Neurocrine
Biosciences, Inc. as of December 31, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Neurocrine
Biosciences, Inc. at December 31, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, in 2000, the
Company changed its method of revenue recognition.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
San Diego, California
January 29, 2001
NEUROCRINE BIOSCIENCES, INC.
Consolidated Balance Sheet
(in thousands)
December 31,
---------------------
2000 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 21,078 $ 21,265
Short-term investments, available-for-sale ........... 143,592 69,833
Receivables under collaborative agreements ........... 5,974 1,458
Other current assets ................................. 1,761 2,257
--------- ---------
Total current assets .............................. 172,405 94,813
Property and equipment, net .......................... 11,300 11,181
Licensed technology and patent applications costs, net 362 615
Other assets ......................................... 1,895 2,613
--------- ---------
Total assets ...................................... $185,962 $109,222
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................... $ 1,065 $ 2,447
Accrued liabilities .................................. 11,135 5,069
Deferred revenues .................................... 1,172 155
Current portion of long-term debt .................... 149 149
Current portion of capital lease obligations ......... 1,438 825
--------- ---------
Total current liabilities ......................... 14,959 8,645
Long-term debt, net of current portion ............... 162 312
Capital lease obligations, net of current portion .... 2,121 1,827
Deferred rent ........................................ 1,646 1,005
Deferred revenues .................................... 2,890 -
Other liabilities .................................... 976 1,079
--------- ---------
Total liabilities ................................. 22,754 12,868
Commitments and contingencies (See Note 6) ............... - -
Stockholders' equity:
Preferred Stock, $0.001 par value; 5,000,000 shares
authorized; no shares issued and outstanding ...... - -
Common Stock, $0.001 par value; 50,000,000 shares
authorized; issued and outstanding shares were
25,314,470 in 2000 and 21,608,011 in 1999 ......... 25 22
Additional paid in capital ........................... 233,565 138,798
Deferred compensation ................................ (59) (411)
Stockholder notes .................................... (104) (119)
Accumulated other comprehensive (loss) income ........ 261 (264)
Accumulated deficit .................................. (70,480) (41,672)
--------- ---------
Total stockholders' equity ........................ 163,208 96,354
--------- ---------
Total liabilities and stockholders' equity ........ $185,962 $109,222
========= =========
See accompanying notes.
NEUROCRINE BIOSCIENCES, INC.
Consolidated Statement of Operations
(in thousands)
Year-ended December 31,
----------------------------
2000 1999 1998
------- ------- -------
Revenues:
Sponsored research and development ........... $ 6,881 $ 12,171 $ 8,751
Sponsored research and development
from related party .......................... - 491 3,610
Milestones and license fees .................. 6,345 3,000 2,500
Grant income and other revenues .............. 1,362 1,129 1,176
------- ------- -------
Total revenues ............................ 14,588 16,791 16,037
Operating expenses:
Research and development .................... 40,227 29,169 21,803
General and administrative .................. 9,962 7,476 6,594
Write-off of acquired in-process research
and development and licenses ............... - - 4,910
------- ------- -------
Total operating expenses ................. 50,189 36,645 33,307
Income (loss) from operations ................. (35,601) (19,854) (17,270)
Other income and expenses:
Interest income .............................. 6,276 3,082 4,151
Interest expense ............................. (228) (231) (151)
Equity in NPI losses and
other adjustments, net ...................... - (885) (7,188)
Other income ................................. 1,047 1,066 504
------- ------- -------
Income (loss) before taxes .................... (28,506) (16,822) (19,954)
Income taxes .................................. 302 - 1
------- ------- -------
Net income (loss) ............................. $(28,808) $(16,822) $(19,955)
======= ======= =======
Earnings (loss) per common share:
Basic and diluted ............................ $ (1.30) $ (0.88) $ (1.10)
Shares used in the calculation of
earnings (loss) per common share:
Basic and diluted ............................ 22,124 19,072 18,141
See accompanying notes.
NEUROCRINE BIOSCIENCES, INC.
Consolidated Statement of Stockholders' Equity
(in thousands)
Notes
Common Stock Additional Receivable
------------------- Paid In Unearned from
Shares Amount Capital Compensation Stockholders
--------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 ................. 17,687 $18 $ 88,586 $ (439) $(120)
Net loss .......................................... - - - - -
Unrealized gain on short-term investments ......... - - - - -
Comprehensive loss ................................ - - - - -
Issuance of common stock for warrants ............. 60 - 142 - -
Issuance of common stock for option exercises ..... 81 - 286 - -
Issuance of common stock pursuant to the
Employee Stock Purchase Plan .................... 30 - 205 - -
Issuance of common stock in exchange for
NPI Preferred Stock ............................. 679 1 3,854 - -
Issuance of common stock for NNL Acquisition ...... 392 - 4,032 - -
Issuance of common stock for milestone achievement 2 - 17 - -
Payments received on stockholder notes ............ - - - - 1
Amortization of deferred compensation, net ........ - - (58) 252 -
-------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 ................. 18,931 19 97,064 (187) (119)
Net loss .......................................... - - - - -
Unrealized gain on short-term investments ......... - - - - -
Comprehensive loss ................................ - - - - -
Issuance of common stock for option exercises ..... 307 - 1,507 - -
Issuance of common stock pursuant to the Employee
Stock Purchase Plan .............................. 42 - 213 - -
Issuance of common stock, net of offering costs ... 2,328 3 39,293 - -
Amortization of deferred compensation, net ........ - - 721 (224) -
-------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 ................. 21,608 22 138,798 (411) (119)
Net loss .......................................... - - - - -
Unrealized gain on short-term investments ......... - - - - -
Comprehensive loss ................................ - - - - -
Issuance of common stock for warrants ............. 23 - - -
Issuance of common stock for stock purchase agreement 6 - 1 - -
Issuance of common stock for option exercises ..... 354 - 2,328 - -
Issuance of common stock pursuant to the Employee
Stock Purchase Plan .............................. 98 - 1,339 - -
Issuance of common stock, net of offering costs ... 3,225 3 90,353 - -
Payments received on stockholder notes ............ - - - - 15
Reversal of accrued 12/99 private placement costs . - - 182 - -
Amortization of deferred compensation, net ........ - - 564 352 -
-------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 ................. 25,314 $25 $233,565 $ (59) $(104)
=============================================================
NEUROCRINE BIOSCIENCES, INC.
Consolidated Statement of Stockholders' Equity
(in thousands, continued)
Accumulated
Other Total
Comprehensive Accumulated Stockholders'
Income (Loss) Deficit Equity
-------------------------------------
BALANCE AT DECEMBER 31, 1997 ................. $ 2 $ (4,895) $ 83,152
Net loss .......................................... - (19,955) (19,955)
Unrealized gain on short-term investments ......... 29 - 29
-------
Comprehensive loss ................................ - - (19,926)
Issuance of common stock for warrants ............. - - 142
Issuance of common stock for option exercises ..... - - 286
Issuance of common stock pursuant to the
Employee Stock Purchase Plan .................... - - 205
Issuance of common stock in exchange for
NPI Preferred Stock ............................. - - 3,855
Issuance of common stock for NNL Acquisition ...... - - 4,032
Issuance of common stock for milestone achievement - - 17
Payments received on stockholder notes ............ - - 1
Amortization of deferred compensation, net ........ - - 194
---------------------------------------
BALANCE AT DECEMBER 31, 1998 ................. 31 (24,850) 71,958
Net loss .......................................... - (16,822) (16,822)
Unrealized gain on short-term investments ......... (295) - (295)
-------
Comprehensive loss ................................ - - (17,117)
Issuance of common stock for option exercises ..... - - 1,507
Issuance of common stock pursuant to the Employee
Stock Purchase Plan .............................. - - 213
Issuance of common stock, net of offering costs ... 39,296
Amortization of deferred compensation, net ........ - - 497
---------------------------------------
BALANCE AT DECEMBER 31, 1999 ................. (264) (41,672) 96,354
Net loss .......................................... - (28,808) (28,808)
Unrealized gain on short-term investments ......... 525 - 525
-------
Comprehensive loss ................................ - - 68,071
Issuance of common stock for warrants ............. - -
Issuance of common stock for stock purchase agreement - - 1
Issuance of common stock for option exercises ..... - - 2,328
Issuance of common stock pursuant to the Employee
Stock Purchase Plan .............................. - - 1,339
Issuance of common stock, net of offering costs 90,356
Payments received on stockholder notes ............ - - 15
Reversal of accrued 12/99 private placement costs . - - 182
Amortization of deferred compensation, net ........ - - 916
---------------------------------------
BALANCE AT DECEMBER 31, 2000 ................. $ 261 $(70,480) $163,208
=======================================
See accompanying notes.
NEUROCRINE BIOSCIENCES, INC.
Consolidated Statement of Cash Flows
(in thousands)
Twelve Months Ended December 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
CASH FLOW FROM OPERATING ACTIVITIES
Net (loss) income ........................................... $(28,808) $(16,822) $(19,955)
Adjustments to reconcile net income (loss) to net cash
Provided by (used in) operating activities:
Acquisition of Northwest NeuroLogic for Common Stock .. - - 4,200
Equity in NPI losses and other adjustments, net ....... - 885 7,188
Depreciation and amortization ......................... 2,198 2,066 1,720
Loss on abandonment of assets ......................... 80 133 460
Gain on sale of equipment ............................. - - (15)
Deferred revenues ..................................... 3,907 (14) (1,750)
Deferred rent ......................................... 868 748 (402)
Compensation expenses recognized for stock options .... 2,677 497 194
Change in operating assets and liabilities,
net of acquired business:
Accounts receivable and other current assets ...... (4,020) (752) (2,898)
Other non-current assets .......................... 1,014 (357) 291
Accounts payable and accrued liabilities .......... 3,439 3,360 271
---------- ---------- ----------
Net used in operating activities ............................ (18,645) (10,256) (10,696)
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of short-term investments ......................... (151,582) (87,728) (41,618)
Sales/maturities of short-term investments .................. 78,348 68,562 50,006
Purchases of property and equipment, net .................... (2,440) (2,061) (3,683)
---------- ---------- ----------
Net cash flows (used in) provided by investing activities ... (75,674) (21,227) 4,705
CASH FLOW FROM FINANCING ACTIVITIES
Issuance of Common Stock .................................... 93,360 41,016 433
Proceeds received from long-term obligations ................ 1,741 981 2,500
Principal payments on long-term obligations ................. (984) (957) (1,006)
Payments received on notes receivable from stockholders ..... 15 - 1
---------- ---------- ----------
Net cash flows provided by financing activities ............. 94,132 41,040 1,928
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents ........ (187) 9,557 (4,063)
Cash and cash equivalents at beginning of the period ........ 21,265 11,708 15,771
---------- ---------- ----------
Cash and cash equivalents at end of the period .............. $ 21,078 $ 21,265 $ 11,708
========== ========== ==========
SUPPLEMENTAL DISCLOSURES
Supplemental disclosures of cash flow information:
Interest paid ......................................... $ 228 $ 231 $ 150
Taxes paid ............................................ 302 - 1
Schedule of noncash investing and financing activities:
Conversion of note receivable to investment in NPI .... - - $ 1,401
Conversion of NPI Preferred Stock to investment in NPI - - 3,855
See accompanying notes.
NEUROCRINE BIOSCIENCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activities. Neurocrine Biosciences, Inc. (the "Company" or
"Neurocrine") was incorporated in California on January 17, 1992 and was
reincorporated in Delaware in March 1996. Neurocrine is a leading neuroscience
company focused on the discovery and development of novel therapeutics for
neuropsychiatric, neuroinflammatory and neurodegenerative diseases and
disorders. The Company's neuroscience, endocrine and immunology disciplines
provide a unique biological understanding of the molecular interaction between
central nervous, immune and endocrine systems for the development of therapeutic
interventions for anxiety, depression, insomnia, stroke, malignant brain tumors,
multiple sclerosis, obesity and diabetes.
Principles of Consolidation. The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary, Northwest
NeuroLogic, Inc. ("NNL"). Significant intercompany accounts and transactions
have been eliminated in consolidation. In December 1999, NNL was merged with and
into the Company.
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 amounts reported in the financial
statements and the accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents. The Company considers all highly liquid investments
with a maturity of three months or less when purchased, to be cash equivalents.
Short-Term Investments Available-for-Sale. In accordance with Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Debt
and Equity Securities," short-term investments are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses reported in comprehensive income. The
amortized cost of debt securities in this category is adjusted for amortization
of premiums and accretion of discounts to maturity. Such amortization is
included in investment income. Realized gains and losses and declines in value
judged to be other-than-temporary, if any, on available-for-sale securities are
included in investment income or loss. The cost of securities sold is based on
the specific identification method. Interest and dividends on securities
classified as available-for-sale are included in interest income.
The Company invests its excess cash primarily in investment grade debt
instruments, marketable debt securities of U.S. government agencies, and
high-grade commercial paper. Management has established guidelines relative to
diversification and maturities that maintain safety and liquidity.
Property and Equipment. Property and equipment are carried at cost.
Depreciation and amortization are provided over the estimated useful lives of
the assets, ranging from three to ten years, using the straight-line method.
Licensed Technology and Patent Application Costs. Licensed technology
consists of worldwide licenses to patents related to the Company's platform
technology, which are capitalized at cost and amortized over periods of 7 to 11
years. These costs are regularly reviewed to determine that they include costs
for patent applications the Company is pursuing. Costs related to applications
that are not being actively pursued are evaluated under Accounting Principles
Board (APB) Statement 17 "Intangible Assets" and are adjusted to an appropriate
amortization period, which generally results in immediate write-off. Assets
written-off during 2000 had a net book value of $80,000. Accumulated
amortization at December 31, 2000 and 1999 was $753,000 and $685,000,
respectively.
Impairment of long-lived assets. In accordance with SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," if indicators of impairment exist, the Company assesses the
recoverability of the affected long-lived assets by determining whether the
carrying value of such assets can be recovered through undiscounted future
operating cash flows. If impairment is indicated, the Company measures the
amount of such impairment by comparing the carrying value of the asset to the
present value of the expected future cash flows associated with the use of the
asset. While the Company's current and historical operating and cash flow losses
are indicators of impairment, the Company believes the future cash flows to be
received from the long-lived assets will exceed the assets carrying value, and
accordingly the Company has not recognized any impairment losses through
December 31, 2000.
Industry Segment and Geographic Information. The Company operates in a
single industry segment - the discovery and development of therapeutics for the
treatment of neurologic and endocrine diseases and disorders. The Company has no
foreign operations.
Research and Development Revenue and Expenses. Revenues under
collaborative research agreements and grants are recognized as research costs
are incurred over the period specified in the related agreement or as the
services are performed. These agreements are on a best-efforts basis and do not
require scientific achievement as a performance obligation and provide for
payment to be made when costs are incurred or the services are performed. All
fees are nonrefundable to the collaborators. Up-front, nonrefundable payments
for license fees and advance payments for sponsored research revenues received
in excess of amounts earned are classified as deferred revenue and recognized as
income over the period earned. Milestone payments are recognized as revenue upon
achievement of pre-defined scientific events. Revenues from government grants
are recognized based on a percentage-of-completion basis as the related costs
are incurred. The Company recognizes revenue only on payments that are
nonrefundable and when the work is performed. Research and development costs are
expensed as incurred. Such costs include proprietary research and development
activities and expenses associated with collaborative research agreements.
Research and development expenses relating to collaborative agreements and
grants were approximately $10.1 million, $7.2 million and $12.0 million during
2000, 1999 and 1998, respectively.
Stock-Based Compensation. As permitted by SFAS 123, "Accounting for
Stock-Based Compensation," the Company has elected to follow APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations in
accounting for stock-based employee compensation. Deferred compensation is
recorded for employee options only in the event that the fair market value of
the stock on the date of the option grant exceeds the exercise price of the
options. The deferred compensation is amortized over the vesting period of the
options.
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44, (FIN 44), "Accounting for Certain Transactions Involving
Stock Compensation - An Interpretation of APB 25". This interpretation clarifies
the definition of employee for purposes of applying APB 25, the criteria for
determining whether a plan qualifies as a non-compensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and the accounting for an exchange of stock compensation awards
in a business combination. FIN 44 was effective and the Company adopted the
interpretation on July 1, 2000. The adoption did not have a material impact on
the Company's consolidated results of operations.
Deferred charges for options granted to non-employees has been
determined in accordance with SFAS 123 and EITF 96-18 as the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measured. Deferred charges for options granted to
non-employees are periodically remeasured as the underlying options vest and are
included in deferred compensation in the financial statements.
Earnings Per Share. Basic and diluted earnings per share are calculated
in accordance with SFAS 128, "Earnings per Share." All earnings per share
amounts for all periods have been presented, and where appropriate, were
restated to conform to the requirements of SFAS 128.
Comprehensive Income. Comprehensive income is calculated in accordance
with SFAS 130, "Comprehensive Income." The Statement requires the disclosure of
all components of comprehensive income, including net income and changes in
equity during a period from transactions and other events and circumstances
generated from non-owner sources. The Company's other comprehensive income
consisted of gains and losses on short-term investments and is reported in the
consolidated statement of stockholders' equity.
Reclassifications. Certain reclassifications have been made to prior
year amounts to conform to the presentation for the year ended December 31,
2000.
Impact of Recently Issued Accounting Standards. In December 1999, the
SEC issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements." SAB 101 provides guidance in applying generally accepted
accounting principles to revenue recognition in financial statements, including
the recognition of nonrefundable up-front fees received in conjunction with a
research and development arrangement. The adoption of this pronouncement was
required effective with the fourth quarter of 2000.
As required by the adoption, the Company reviewed all up-front
payments, license fees and milestones received in the current and prior years.
Up-front payments have been received for program cost reimbursements incurred
during a negotiation period. License fees are received in exchange for a grant
to use our proprietary technologies on an as-is basis, for the term of the
collaborative agreement. Milestones are received for specific scientific
achievements determined at the beginning of the collaboration. These
achievements are remote and unpredictable at the onset of the collaboration and
are based on the success of scientific efforts.
Based on that review, the Company determined that $4.2 million of
license fees received during 2000 were subject to the adoption of SAB 101. All
other fees received relate to agreements under which the research portion of the
collaboration has been completed or the agreements have been terminated
entirely. In accordance with APB 20, the adoption of SAB 101 was recognized by
including the cumulative effect of the change in accounting principle in the net
loss for the fourth quarter of 2000. The otherwise reported net loss for the
year ended December 31, 2000 was increased by approximately $3.8 million. These
license fee revenues were deferred and will be amortized as income at $915,000
in 2001, $835,000 in 2002, $828,000 in 2003, $818,000 in 2004 and $409,000 in
2005.
In June 1998, the FASB issued SFAS 133,"Accounting for Derivative
Instruments and Hedging Activities." The Company expects to adopt the new
Statement effective January 1, 2001. This statement requires the recognition of
all derivative instruments as either assets or liabilities in the statement of
financial position and the measurement of those instruments at fair value. The
Company does not expect the adoption of this statement to have a material impact
on its results of operations or financial position.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS 140 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities and is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. The adoption of SFAS 140 is not expected to have
a material impact on the Company's financial statements.
Note 2. Short-Term Investments
The following is a summary of short-term investments classified as
available-for-sale securities (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
December 31, 2000
US Government securities ...... $ 2,000 $ - $ (3) $ 1,997
Corporate debt securities ..... 141,331 264 - 141,595
-------- ---- ------ --------
Total securities ..... $143,331 $264 $ (3) $143,592
======== ==== ====== ========
December 31, 1999
US Government securities ...... $ 1,997 $ - $ (24) $ 1,973
Corporate debt securities ..... 68,100 7 (247) 67,860
------- ---- ------ --------
Total securities ..... $ 70,097 $ 7 $ (271) $ 69,833
======= ==== ======= ========
Gross realized gains and losses were not material for any of the
reported periods. The amortized cost and estimated fair value of debt securities
by contractual maturity at December 31, 2000 are shown below (in thousands).
Amortized Estimated
Cost Fair Value
--------- ---------
Due in one year or less ....................... $ 48,000 $ 48,000
Due after one year through four years ......... 95,331 95,592
--------- ---------
$ 143,331 $ 143,592
========= =========
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2000 and 1999 consist of the
following (in thousands):
2000 1999
--------- ---------
Land .................................. $ 5,003 $ 5,299
Furniture and fixtures ................ 2,051 1,982
Equipment ............................. 11,179 9,046
Leasehold improvements ................ 1,113 875
--------- ---------
19,346 17,202
Less accumulated depreciation ......... (8,046) (6,021)
--------- ---------
Net property and equipment ............ $ 11,300 $ 11,181
========= =========
Furniture and equipment under capital leases were $8.5 million and $6.7
million at December 31, 2000 and 1999, respectively. Accumulated depreciation of
furniture and equipment under capital leases totaled $5.0 million and $4.0
million at December 31, 2000 and 1999, respectively. The Company entered into
$1.8 million of additional capital leases during 2000 and $981,000 during 1999.
NOTE 4. ACCRUED LIABILITIES
Accrued liabilities at December 31, 2000 and 1999 consist of the
following (in thousands):
2000 1999
--------- ---------
Accrued employee benefits ................ $ 2,992 $ 1,331
Accrued professional fees ................ 1,229 270
Accrued offering expenses ................ 277 1,222
Accrued development costs ................ 6,199 1,828
Taxes payable ............................ 26 27
Other accrued liabilities ................ 412 391
--------- --------
$ 11,135 $ 5,069
======== ========
NOTE 5. LONG-TERM DEBT
During 1997, the Company partially financed the purchase of land under
a 5 year note payable for approximately $747,000, which bears interest at a
floating rate of prime plus one quarter percent (9.75% and 8.75% at December 31,
2000 and 1999, respectively). The note is repayable in equal monthly
installments beginning February 1998.
At December 31, 2000, the balance of the note was $311,000. The
repayment schedule for the note is $149,000 for each year 2001 through 2002 and
$13,000 in the year 2003.
NOTE 6. COMMITMENTS AND CONTINGENCIES
Capital Lease Obligations. The Company has financed certain equipment
under capital lease obligations, which expire on various dates through the year
2005 and bear interest at rates between 6.0% and 9.6%. The lease commitments are
repayable in monthly installments.
Operating Leases. In May 1997, the Company purchased two adjacent
parcels of land in San Diego for $5.0 million. In August 1997, the Company sold
one parcel to Science Park Center LLC, a California limited liability company
(the "LLC"), of which the Company owns a nominal minority interest, in exchange
for a note receivable in the amount of $3.5 million plus interest of 8.25%.
However, for accounting purposes, this transaction does not qualify as a sale
under SFAS No. 98 and therefore, the entire amount of the note receivable is
included in land. The amount included in land at December 31, 2000 and 1999 was
$3.5 and $3.8 million, respectively. The second parcel of land will be held
until such time as additional facilities are required.
During 1998, the LLC constructed an expanded laboratory and office
complex, which was leased by the Company under a 15-year operating lease,
commencing September 1998. The Company has the option to purchase the facility
at any time during the term of the lease at a predetermined price. The lease
contains a 4% per year escalation in base rent fees, effective with each
anniversary. The Company subleases a portion of the space to two unrelated
parties. In August 2001, the first sublease will revert to a month-to-month
lease. The second sublease will expire in September 2001.
Repayment schedules for the capital lease obligations and operating
lease commitments at December 31, 2000 are as follows (in thousands):
Capital Operating
Fiscal Year: Leases Leases
------------ ------ ------
2001 .......................................... $ 1,662 $ 2,525
2002 .......................................... 1,073 2,626
2003 .......................................... 672 2,731
2004 .......................................... 480 2,841
2005 .......................................... 112 2,954
Thereafter .................................... - 26,926
-------- ----------
Total minimum payments ...................... $ 3,999 $ 40,603
=========
Less: amounts representing interest .......... (440)
---------
Future minimum payments ....................... 3,559
Less: current portion ........................ (1,438)
---------
Future payments on capital lease obligations .. $ 2,121
=========
Rent expense was $2.5 million, $2.7 million and $2.4 million for the
years ended December 31, 2000, 1999 and 1998, respectively. Sublease income was
$1.2 million, $1.2 million and $837,000 for the years ended December 31, 2000,
1999, and 1998, respectively.
Future minimum sublease income to be received under non-cancelable
subleases at December 31, 2000 will be $297,000 for the year ending December 31,
2001.
Licensing and Research Agreements. The Company has entered into
licensing agreements with various universities and research organizations, which
are cancelable at the option of the Company with terms ranging from 30-180 days
written notice. Under the terms of these agreements, the Company has received
licenses to technology, or technology claimed, in certain patents or patent
applications. The Company is required to pay royalties on future sales of
products employing the technology or falling under claims of a patent, and,
certain agreements require minimum royalty payments. Certain agreements also
require the Company to make payments upon the achievement of specified
milestones. Due to the uncertainty of the pharmaceutical development process,
the Company continually reassesses the value of the license agreements and
cancels them as research efforts are discontinued on these programs.
Note 7. Stockholders' Equity
Common Stock Issuances. From inception through 1996, the Company has
issued Common Stock in various private and public offerings, as well as to
corporate collaborators, at prices between $5.00 and $30.00 per share resulting
in aggregate net proceeds of approximately $201.9 million. This total includes a
December 2000 public offering, in which the Company sold 3.2 million shares of
its Common Stock at $30 per share. The net proceeds generated from this
transaction were $90.4 million.
Options. The Company has authorized 6.5 million shares of its Common
Stock for issuance upon exercise of options or stock purchase rights granted
under the 1992 Incentive Stock Option Plan, 1996 Director Option Plan and the
1997 NNL Stock Option Plan. These plans provide for the grant of stock options
and stock purchase rights to officers, directors, and employees of, and
consultants and advisors to, the Company. Options under these plans have terms
of up to 10 years from the date of grant and may be designated as incentive
stock options or nonstatutory stock options under the plans.
A summary of the Company's stock option activity, and related
information for the years ended December 31 follows:
2000 1999 1998
-------------------- ------------------- --------------------
Weighted Weighted Weighted
Options Average Options Average Options Average
(in Exercise (in Exercise (in Exercise
thousands) Price thousands) Price thousands) Price
-------------------- ------------------- --------------------
Outstanding at January 1, ... 3,158 $ 5.91 2,793 $6.02 2,653 $5.84
Granted ..................... 1,136 29.66 1,142 6.03 677 6.26
Exercised ................... (354) 6.56 (412) 4.79 (81) 3.64
Canceled .................... (29) 11.69 (365) 6.52 (456) 5.76
-------------------- ------------------- --------------------
Outstanding at December 31, . 3,911 $12.75 3,158 $5.91 2,793 $6.02
==================== =================== ====================
A summary of options outstanding as of December 31, 2000 follows:
Options Outstanding Options Exercisable
- -------------- ----------------------------------------- -----------------------
Weighted
Average
Range Outstanding Remaining Weighted Exercisable Weighted
of Exercise as of Contractual Average As of Average
Prices 12/31/00 Life Exercise Price 12/31/00 Exercise Price
- -------------- ---------------------------------------- ------------------------
$0.02 to $4.19 510 3.6 $ 2.47 447 $2.47
4.25 to 4.94 544 5.7 4.47 416 4.35
5.00 to 6.50 599 7.9 5.52 275 5.57
6.56 to 7.38 498 6.7 7.17 398 7.22
7.75 to 10.25 598 6.4 8.47 476 8.43
11.19 to 34.44 589 9.3 22.70 58 19.35
34.50 to 43.44 573 9.4 36.39 70 35.01
---------------------------------------- ------------------------
3,911 7.1 $12.75 2,140 $6.96
The weighted average fair values of the options granted during 2000,
1999 and 1998 were $20.51, $3.75 and $5.59, respectively.
Pro forma information regarding net income (loss) is required by SFAS
No. 123 and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model using the following weighted-average assumptions for 2000, 1999
and 1998, respectively: risk-free interest rates of 5.0%, 6.4% and 5.5%; a
dividend yield of 0.0% (for all years), volatility factors of the expected
market price of the Company's common stock of .81, .74 and .88; and a weighted
average expected life of the option of 5 years (for all years presented).
For purposes of pro forma disclosures, the estimated fair value of the
options granted is amortized to expense over the options' vesting period. The
pro forma effect on net losses for 2000, 1999 and 1998 is not likely to be
representative of the effects on reported income or loss in future years because
these amounts reflect less than full vesting for options granted during these
periods. The Company's pro forma information for the years ended December 31,
2000, 1999, and 1998 follows (in thousands, except for per share data):
2000 1999 1998
---------- ---------- ----------
Net income (loss) as reported ............... $(28,808) $(16,822) $(19,955)
Earnings (loss) per share (diluted) ......... (1.30) (0.88) (1.10)
Pro forma net income (loss) ................. (31,057) (18,303) (20,758)
Pro forma earnings (loss) per share (diluted) (1.40) (0.96) (1.14)
Employee Stock Purchase Plan. The Company has reserved 425,000 shares
of Common Stock for issuance under the 1996 Employee Stock Purchase Plan, as
amended on May 24, 2000 (the "Purchase Plan"). The Purchase Plan permits
eligible employees to purchase Common Stock through payroll deductions at a
purchase price equal to 85% of, the lesser of the fair market value per share of
Common Stock on the enrollment date or on the date on which the shares are
purchased. As of December 31, 2000, 267,000 shares have been issued pursuant to
the Purchase Plan.
Warrants. The Company has outstanding warrants to purchase 356,000
shares of Common Stock at an exercise price of $10.50 per share. These warrants
generally expire in 2007. At December 31, 2000, all outstanding warrants were
exercisable.
The following shares of Common Stock are reserved for future issuance
at December 31, 2000 (in thousands):
Stock option plans ...................................... 4,142
Employee stock purchase plan ............................ 158
Warrants ................................................ 356
------
Total ................................................... 4,656
======
Of the shares available for future issuance under the Plan, 3.9 million
are outstanding grants and 231,000 remain available for future grant.
NOTE 8. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT AND LICENSES
Northwest NeuroLogic, Inc. In May 1998, the Company acquired the assets
and liabilities of NNL in exchange for shares of the Company's Common Stock and
stock options valued at $4.2 million. Since the acquisition, the operations of
NNL have been included in the Company's consolidated statements of operations.
The acquisition was accounted for as a purchase and, accordingly, the purchase
price was allocated to the assets acquired and the liabilities assumed based on
the estimated fair market values. Substantially all of the purchase price was
allocated to the in-process research and development. The value allocated to the
technology was then expensed because it had not reached technological
feasibility and had no future alternative uses. The Company performed scientific
due diligence related to the acquired projects, and because they were based on
narrow scientific hypotheses, the Company concluded that neither program had
alternative future uses.
The nature and efforts required to develop the acquired in-process
research and development into commercially viable products include research to
identify a clinical candidate, preclinical development, clinical testing, FDA
approval and commercialization. This process may cost in excess of $100 million
and can take as long as 10 years to complete. It is also important to note that
if a clinical candidate is identified, the further development of that candidate
can be halted or abandoned at any time due to a number of factors. These factors
include, but are not limited to, funding constraints, safety or a change in
market demand.
Because of limited financial resources, the Company's strategy to
develop some of its programs is to enter into collaborative agreements with
major pharmaceutical companies. Through these collaborations, the Company could
partially recover its research costs through contract research and milestone
revenues. The collaborators would then be financially responsible for all
clinical development and commercialization costs.
In May 1998, when the Company acquired the in-process research and
development programs from NNL, it estimated the costs to identify a clinical
candidate and provide minimal research support during the clinical development
stages for the melanocortin receptor program to be $15.4 million over an 8-year
period. Costs to identify a clinical candidate and provide minimal research
support during the clinical development stages of the excitatory amino acid
transporters program were estimated at $22.4 million. Estimated revenues from
the collaborative arrangements were anticipated to reduce the Company's net
costs. The clinical development and commercialization costs were to be
completely funded by the collaborator.
During fiscal year 2001, the Company anticipates that its gross costs
for continued research on these programs will approximate $5.0 million. The
Company cannot be certain that its research efforts will result in clinical
candidates for either compound. The Company intends to collaborate on the
melanocortin receptor technology. The Company would expect the collaborator to
then be responsible for the clinical development, commercialization and funding.
The excitatory amino acid transporters program is currently under a
collaborative agreement with Wyeth-Ayerst. Consequently, the Company cannot
estimate the time or resources Wyeth-Ayerst will commit to the development of
this program.
The following are pro forma unaudited results of operations for the
year ended December 31, 1998 (in thousands, except per share data) had the
purchase of NNL been consummated as of January 1, 1998. This pro forma
information is not necessarily indicative of the actual results that would have
been achieved nor is it necessarily indicative of future results.
Revenues ............................................ $16,325
Net loss ............................................ (20,013)
Loss per share basic and diluted .................... $ (1.09)
Other. During 1998, the Company purchased licenses for technologies
relating to insomnia and brain cancer in the amount of $710,000. These projects
were in the early stages of development, have not reached technological
feasibility and have no known alternative uses. Consequently, the costs of these
licenses were expensed.
The insomnia and brain cancer compounds are both in the early stages of
clinical testing. During 2001, the Company expects to spend approximately $35
million on additional clinical testing of the brain cancer and insomnia
compounds. The Company expects the clinical testing of both compounds to
continue for at least the next two years, but its efforts may not result in
commercially viable products. If the Company's efforts were completely
successful and it did not collaborate on these compounds, it is estimated that
each compound could cost an additional $50 - $150 million and take up to five
years to reach commercial viability.
Note 9. Collaborative Research and Development Agreements
Taisho Pharmaceuticals Co., Ltd. In December 1999, the Company entered
into an agreement with Taisho Pharmaceutical Co., Ltd. (Taisho) providing an
exclusive option to obtain European, Asian and North American development and
commercialization rights for our altered peptide ligand product (APL), NBI-6024,
for Type 1 Diabetes. In June 2000, Taisho exercised its option as to Europe and
Asia. In November 2000, the agreement was amended to include worldwide
development and commercialization rights. Taisho and the Company formed a
steering committee to oversee the worldwide development of NBI-6024. Under this
agreement, the Company is entitled to receive license fees, milestone payments,
and after the November amendment, sponsored research funding and reimbursement
of 100% of worldwide development expenses. In addition, the Company will receive
payments on product sales in Europe and Japan for the term of the patents
covering NBI-6024 subject to adjustment for payments to third parties. The
Company is also entitled to receive up to $43.0 million for milestones, plus
additional amounts for research funding and reimbursement of development costs
and potential sublicense fees. As of December 31, 2000, the Company has received
$2.0 million for the exclusive negotiating option, $3.0 million in license fees
for the European and Asian commercialization rights, $1.0 million in license
fees for the remaining worldwide rights, $4.0 million in milestone payments and
$829,000 in reimbursement of development costs. The license fees were deferred
and are being recognized as revenues over the life of the agreement at $319,000
in 2000, $818,000 in each of the years 2001 through 2004 and $409,000 in 2005.
Wyeth-Ayerst Laboratories. In January 1999, the Company entered into an
agreement with Wyeth-Ayerst Laboratories (Wyeth-Ayerst), the pharmaceutical
division of American Home Products Corporation, on the research, development and
commercialization of compounds which modulate excitatory amino acid transporters
(EAATs) for the treatment of neurodegenerative and psychiatric diseases. EAATs
are part of the family of neurotransmitter transporters and play a key role in
regulating the actions of neurotransmitters and brain function.
The agreement, valued at up to $80.3 million if a product is
commercialized, includes: sharing proprietary technologies, funding for
research, payments for milestones reached, plus royalties on sales from products
resulting from the collaboration. Under the terms of the agreement, Neurocrine
expects to receive three to five years of funding for research and development
as well as worldwide royalties on commercial sales of products that result from
the collaboration. Wyeth-Ayerst will also provide Neurocrine with access to
chemical libraries for screening within the collaborative field. As of December
31, 2000, the Company received $6.0 million in sponsored research payments, $3.0
million for the achievement of four milestones and $50,000 in license fees,
which are being deferred and recognized over the life of the agreement.
Eli Lilly and Company. In October 1996, the Company entered into an
agreement with Eli Lilly and Company (Eli Lilly) under which Neurocrine received
three years of sponsored research payments totaling $17.2 million. The Company
is also entitled to milestone payments for certain development and regulatory
accomplishments. The Company will have the option to receive co-promotion rights
and share profits from commercial sales of select products that result from the
collaboration in the U.S. or receive royalties on U.S. product sales. The
Company will receive royalties on product sales for the rest of the world.
The collaborative research portion of the agreement was completed as
scheduled in 1999. The Company will continue to receive milestone payments and
royalties upon the successful continuation of the development portion of the
agreement, if any.
Janssen Pharmaceutica, N.V. In January 1995, the Company entered into a
research and development agreement with Janssen Pharmaceutica, N.V. (Janssen).
Under the Janssen agreement, the Company is entitled to receive up to $10.0
million in milestone payments for the indications of anxiety, depression and
substance abuse, and up to $9.0 million in additional milestone payments for
other indications. The Company has granted Janssen an exclusive worldwide
license to manufacture and market products. In exchange, the Company is entitled
to receive royalties on worldwide product sales and has certain rights to
co-promote such products in North America. Janssen is responsible for funding
all clinical development and marketing activities, including reimbursements to
Neurocrine for its promotional efforts, if any. As of December 31, 1998, the
Company has received $2.0 million in up-front license fees, $9.7 million for
three years of sponsored research and $3.5 million in milestone payments. The
collaborative research portion of the agreement was completed as scheduled in
1997 with the selection of a clinical candidate and the commencement of clinical
trials in Europe. There were no additional revenues received under this
agreement in 1999 or 2000.
In September 1999, the Company signed an amendment to its 1995
agreement with Janssen to identify new corticotropin-releasing factor receptor
antagonist compounds. The amendment provides for a new sponsored research period
to begin April 1999 and conclude in February 2001. All other terms of the
agreement will be governed by the original agreement signed in 1995. Under the
amendment, the Company will receive $5.0 million in sponsored research funding,
up to $3.5 million in milestone achievements and reimbursement of all outside
and third party costs associated with the project. As of December 31, 2000, the
Company has received $4.6 million in sponsored research and $755,000 in
reimbursements of third party costs.
In April 2000, Janssen discontinued development of the compound
licensed under the 1995 agreement and replaced it with a back-up compound, which
resulted from research under the 1999 amendment. Since the new compound is
subject to the terms of the original agreement, the Company will continue to
receive milestone payments and royalties upon the successful continuation of the
development portion of the agreement. Janssen has the right to terminate the
Agreement upon six months notice. However, in the event of termination, other
than termination by Janssen for cause or as a result of the acquisition of
Neurocrine, all product and technology rights become the exclusive property of
Neurocrine
Novartis. In January 1996, the Company entered into an agreement with
Novartis under which Novartis paid the Company $5.0 million in up-front license
fees and was obligated to provide Neurocrine with $7.0 million in research and
development funding during the first two years of the agreement. In addition,
the Company was eligible to receive up to $15.5 million in further research and
development funding thereafter. As of December 31, 1999, the Company has
received $18.8 million in sponsored research and development payments and $9.1
million of milestone payments.
On July 7, 1999, Novartis exercised its right to terminate the
agreement, effective January 7, 2000. As a result, Neurocrine reacquired the
worldwide rights to its multiple sclerosis compound, MSP771.
Note 10. Related Party Transactions
Neuroscience Pharma, Inc. In March 1996, the Company along with a group
of Canadian institutional investors (the "Canadian Investors") established NPI.
The Company's contribution was to license certain technology and Canadian
marketing rights to NPI. The Canadian Investors contributed approximately $9.5
million in cash in exchange for shares of NPI Preferred Stock (the "Preferred
Shares"), which was convertible into shares of the Company's Common Stock at the
option of the Canadian Investors. In addition, the Canadian Investors received
warrants exercisable for 383,875 shares of the Company's Common Stock at an
exercise price of $10.50 per share and may be eligible to receive additional
warrants upon the attainment of certain additional funding. As of December 31,
2000, 29,625 warrants have been exercised.
During 1997 and 1998, the Investors converted their Preferred Shares to
shares of the Company's Common Stock. As a result, the Company recorded an
investment in NPI equal to the market value of Common Stock issued in exchange
for the Preferred Shares and has recognized its proportionate share of the NPI
net losses in accordance with the equity method of accounting. Equity in NPI
losses totaled $764,000 and $3.4 million in 1999 and 1998, respectively.
During 1996, the Company entered into a sponsored research agreement
with NPI. The terms of the agreement called for NPI to fund additional research
efforts on technologies licensed to NPI by the Company. Associated with the
costs of research on those certain programs, the Company recognized revenues of
$491,000 and $3.6 million during 1999 and 1998, respectively.
The Preferred Shares were redeemable for cash at the Company's option.
The redemption feature of the Preferred Shares limited their value to the
balance of cash and cash equivalents maintained by NPI. Consequently, the
Company reduced the value of its NPI investment by $647,000 during 1999 and $3.8
million during 1998. The balance of the Company's investment in NPI was $0 at
December 31, 1999, and $1.4 million at December 31, 1998.
In December 1999, the Company sold its investment in NPI in exchange
for cash, receivables and potential royalties on worldwide sales resulting from
certain of NPI's future products. The Company recorded a gain of $526,000 on the
sale of this investment. The gain was calculated using the total consideration
of cash and receivables, less the carrying value of the NPI investment. No value
was assigned to potential royalties on future product sales due to the
uncertainty of this event. This transaction, as well as those discussed above,
is included in "Equity in NPI losses and other adjustments, net" reported on the
Consolidated Statement of Operations.
Note 11. Earnings per Share
The following data show the amounts used in computing earnings per
share and the effect on income and the weighted-average number of shares of
dilutive potential common stock (in thousands, except for earning per share
data):
Year Ended December 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
Numerator:
Net income (loss) ...................... $(28,808) $(16,822) $(19,955)
Effect of dilutive securities .......... - - -
--------- --------- ---------
Numerator for earnings (loss) per share $(28,808) $(16,822) $(19,955)
========= ========= =========
Denominator:
Denominator for basic earnings
(loss) per share ...................... 22,124 19,072 18,141
Effect of dilutive securities:
Employee stock options ............. ** ** **
Convertible preferred stock ........ ** ** **
Warrants ........................... ** ** **
-------- -------- ---------
Dilutive potential of common shares .... ** ** **
-------- -------- ---------
Demoninator for diluted earnings
(loss) per share 22,124 19,072 18,141
======== ======== =========
Basic earnings (loss) per share ........ $ (1.30) $ (0.88) $ (1.10)
Diluted earnings (loss) per share ...... $ (1.30) $ (0.88) $ (1.10)
**Antidilutive
Note 12. Income Taxes
At December 31, 2000, the Company had Federal and California income tax
net operating loss carry-forwards of approximately $43.1 million and $24.3
million, respectively. The Federal and California tax loss carry-forwards will
begin to expire in 2010 and 2003, respectively, unless previously utilized. The
Company also has Federal and California research tax credit carry-forwards of
approximately $6.0 million and $2.9 million, respectively, which will begin to
expire in 2007 and 2012, respectively, unless previously utilized. The Company
has Federal Alternative Minimum Tax credit carry-forwards of approximately
$257,000, which will carry-forward indefinitely.
Pursuant to Internal Revenue Code Sections 382 and 383, annual use of
the Company's net operating loss and credit carry-forwards may be limited
because of cumulative changes in ownership of more than 50%, which occurred
during 1992 and 1993. However, the Company does not believe such changes will
have a material impact upon the utilization of these carry-forwards.
Significant components of the Company's deferred tax assets as of
December 31, 2000 and 1999 are shown below. A valuation allowance of $27.2
million and $13.5 million at December 31, 2000 and 1999, respectively, have been
recognized to offset the net deferred tax assets as realization of such assets
is uncertain. Amounts are shown in thousands as of December 31, of the
respective years:
2000 1999
--------- ----------
Deferred tax assets:
Net operating loss carry-forwards ......... $ 16,487 $ 7,400
Tax credit carry-forwards ................. 8,140 4,649
Capitalized research and development ...... 2,098 935
Other, net ................................ 479 520
--------- ---------
Total deferred tax assets ................... 27,204 13,504
Valuation allowance ......................... (27,204) (13,504)
---------- ----------
Net deferred tax assets ..................... $ - $ -
========== ==========
The provision for income taxes on earnings subject to income taxes
differs from the statutory federal rate at December 31, 2000, 1999 and 1998, due
to the following:
2000 1999 1998
-------- -------- --------
Federal income taxes at 34% .................. $(9,692) $(5,719) $(6,785)
State income tax, net of federal benefit ..... - - 1
Tax effect on non-deductible expenses ........ 335 932 4,213
Increase in valuation allowance .............. 9,357 4,787 2,572
------- ------- -------
$ - $ - $ 1
======= ======= =======
NOTE 13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for
the years ended December 31, 2000 and 1999 (unaudited, in thousands, except for
earnings per share data):
------------------------------------------------------------ -------------
Quarter Ended
------------------------------------------------------------ Year Ended
Mar 31 Jun 30 Sep 30 Sep 30 Dec 31 Dec 31
As Reported Restated (1)
------------------------------------------------------------ -------------
Fiscal Year End 2000
Revenues ........................... $ 2,778 $ 2,942 $ 5,323 $ 2,426 $ 6,442 $ 14,588
Operating expenses ................. 10,004 10,322 15,008 15,008 14,855 50,189
Net Loss ........................... (6,047) (5,192) (8,135) (11,032) (6,537) (28,808)
Earnings per share - Diluted ....... $ (0.28) $ (0.24) $ (0.37) $ (0.50) $ (0.29) $ (1.30)
Shares used in the calculation of
earnings per share - Diluted ..... 21,771 21,897 22,032 22,032 22,789 22,124
----------------------------------------------------------------
Quarters Ended
-------------------------------------------------- Year Ended
Mar 31 Jun 30 Sep 30 Dec 31 Dec 31
----------------------------------------------------------------
Fiscal Year End 1999
Revenues ........................... $ 3,551 $ 3,810 $ 5,231 $ 4,199 $ 16,791
Operating expenses ................. 8,077 9,190 10,213 9,165 36,645
Net Loss ........................... (4,089) (4,637) (4,407) (3,689) (16,822)
Earnings per share - Diluted ....... $ (0.22) $ (0.24) $ (0.23) $ (0.19) $ (0.88)
Shares used in the calculation of
earnings per share - Diluted ..... 18,955 18,961 19,006 19,361 19,072
(1) During the fourth quarter of 2000, the Company adopted SAB 101, Revenue
Recognition in Financial Statements. SAB 101 provides, among other revenue
items, guidance in the recognition of nonrefundable, up-front fees received
in conjunction with a research and development arrangement. The result of
the adoption of SAB 101 was to reduce recognition of license fee revenues
reported during the third quarter of 2000 by $2.9 million. These revenues
were deferred and will be recognized as income, ratably over the estimated
lives of the respective agreements. The adoption of SAB 101 did not require
an adjustment for revenues recorded prior to December 31, 1999.