________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ------------------- TO ------------------
COMMISSION FILE NO. 000-28844
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ALGOS PHARMACEUTICAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 22-3142274
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
COLLINGWOOD PLAZA, 07753-6804
4900 ROUTE 33, (ZIP CODE)
NEPTUNE, NJ
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (732) 938-5959
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.01 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 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 was approximately $365 million, based on the last sales price of
the Common Stock as of March 2, 1998.
As of March 2, 1998 15,952,201 shares of Common Stock, $0.01 par value, of
the registrant were issued and outstanding.
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PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
Algos Pharmaceutical Corporation ('Algos' or the 'Company') is developing a
new class of proprietary drugs for managing pain which combine existing
analgesics with N-methyl-D-aspartate ('NMDA') receptor antagonist drugs that
have been approved for human use in other applications. Independent research and
the Company's pre-clinical studies and clinical trials conducted to date have
shown that the Company's products may provide significantly superior pain relief
compared to currently available analgesics, including narcotic drugs such as
morphine, hydrocodone and oxycodone, and non-narcotic analgesics such as
acetaminophen (e.g., Tylenol'r') and ibuprofen (e.g., Advil'r') . In addition,
the Company is using its NMDA antagonist technology to develop other products,
including extended duration local anesthetics for surgery, an intranasal
treatment of migraine, addiction treatments and an urge incontinence treatment.
The Company believes that its analgesic and anesthetic products have the
potential for more rapid market introduction than many other new drugs because
the Company's products combine existing drugs with extensive clinical safety
profiles and because clinical trials for new analgesics and anesthetics
historically have produced statistically significant results with fewer
patients. The Company expects to complete its first New Drug Application ('NDA')
for its most developmentally-advanced product with the United States Food and
Drug Administration ('FDA') by mid-year 1998.
The Company's products that have reached Phase II or Phase III clinical
trials or are scheduled for Phase II or Phase III clinical trials in 1998
include:
(i) Narcotic analgesic/NMDA antagonist combination products:
MorphiDex'tm', expected to be used primarily to treat moderate to severe
cancer pain, HydrocoDex'tm', expected to be used primarily to treat
moderate to moderately severe post-operative pain, trauma pain, and chronic
pain conditions, and OxycoDex'tm', expected to be used primarily to treat
moderate to moderately severe pain;
(ii) Non-narcotic analgesic/NMDA antagonist combination products
licensed to McNeil Consumer Products Company including a combination
product consisting of an NMDA antagonist and acetaminophen (which is the
largest selling over-the-counter ('OTC') analgesic) and a combination
product consisting of an NMDA antagonist and an OTC non-steroidal anti-
inflammatory drug ('NSAID');
(iii) Anesthetic/NMDA antagonist combination products: LidoDex NS'tm',
a combination of lidocaine and an NMDA antagonist for intranasal
administration for the treatment of migraine headache to be developed in
collaboration with Interneuron Pharmaceuticals, Inc. and LidoDex IED'tm',
an injectible local anesthetic/NMDA combination product intended to provide
anesthetic effect with an extended duration of effect for use in in-patient
and out-patient surgeries;
(iv) Neuropathic pain treatment consisting of an NMDA receptor
antagonist and an anticonvulsant, and
(v) Addiction treatment products including treatments for opiate
addiction, which the Company is developing in collaboration with the
National Institute on Drug Abuse ('NIDA'), National Institutes of Health
('NIH'), and a nicotine addiction treatment.
The Company believes its proprietary NMDA antagonist technology may be
applied in the development of other products. The Company is evaluating other
applications and may choose to advance additional products to clinical
development. In addition, based on clinical results, marketing studies or other
factors, the Company may determine to delay, modify, or suspend the development
of any of its products in clinical development.
1
CLINICAL DEVELOPMENT PROGRAMS
NARCOTIC ANALGESICS
Narcotic analgesic drugs remain the most common and useful treatment for
moderate to severe pain in both acute and chronic conditions. These drugs
consist of naturally occurring opiates (e.g., morphine), opiate derivatives
(e.g., codeine, hydrocodone, oxycodone) and synthetic opiates (e.g., methadone).
Drawbacks to these drugs include unwanted side effects such as mental
clouding, respiratory depression, nausea and constipation and the development of
rapid tolerance and physical dependence. Tolerance refers to the condition under
which a drug dose that was initially effective in producing analgesia becomes
less effective with repeated administrations. Therefore, to alleviate the same
level of pain, the drug dose has to be increased over time, potentially
increasing unwanted side effects and the potential for drug dependence.
Pre-clinical and clinical studies of the Company's narcotic analgesic/NMDA
antagonist combination products, including pivotal Phase II double-blinded,
placebo-controlled clinical trials of MorphiDex'tm', indicate superior
first-dose analgesic effects as compared to equivalent dosage levels of the
narcotic analgesic alone. Pre-clinical studies also indicated greater efficacy
of the Company's narcotic/NMDA antagonist combinations with repeated
administrations over time, when the narcotic analgesic administered alone became
less effective.
MorphiDex'tm'
Morphine is a narcotic primarily used to treat moderate to severe pain,
primarily cancer pain.
MorphiDex'tm', the Company's most developmentally-advanced product, is a
patented morphine and dextromethorphan combination. In January 1998, the Company
filed the Chemistry, Manufacturing and Controls Section of a sequential NDA with
a proposed indication for the relief of moderate-to-severe cancer pain. The
Company expects to file the remainder of this NDA by mid-year 1998.
In double-blind, placebo-controlled clinical trials completed to date,
MorphiDex has demonstrated superior pain relief over morphine alone and has been
shown to have a faster onset of meaningful pain relief and at least an eight
hour duration of effect. Completed studies conducted in post-operative pain
patients consisted of multiple double-blind, placebo-controlled studies in over
600 patients. Three long-term studies (two double-blind and one open study) of
cancer and non-cancer chronic pain patients are ongoing with more than 650
patients. The balance of the clinical program consists of bioavailability and
safety studies. As Algos continues its clinical trials, it may broaden the
indication for MorphiDex to all moderate to severe pain based primarily on
long-term-use safety data.
There is no guarantee that the Company will complete the filing in 1998 as
expected. There is no guarantee that, if the NDA filing is completed, it will be
accepted or approved without the need to file additional information. The FDA
will independently review the data submitted and the review process is an
uncertain one whose outcome cannot be guaranteed.
HydrocoDex'tm'
Hydrocodone is a narcotic primarily used to treat moderate to moderately
severe post-operative, musculoskeletal, trauma-related and chronic pain. The
analgesic products containing hydrocodone that are sold commercially in the U.S.
are combination products containing non-narcotic analgesics. Current products
include Lorcet'r' and Vicodin'r'. Hydrocodone/APAP was the most prescribed
drug in the U.S. in 1997.
HydrocoDex'tm' is a hydrocodone, acetaminophen (APAP) and dextromethorphan
combination product. The Company's initial research indicates that HydrocoDex
may offer superior pain relief and a longer duration compared to existing
hydrocodone/APAP combination products.
During 1997, the Company conducted two Phase II clinical studies of
HydrocoDex at various dosage strengths. The Company expects to initiate multiple
Phase II and Phase III studies in 1998.
2
OxycoDex'tm'
Oxycodone is an opiate narcotic that, in combination with acetaminophen or
aspirin, forms the basis for a group of products which are used for the
treatment of moderate to moderately severe pain. Current products include
Percocet'r' and Tylox'r'.
OxycoDex'tm' is a combination of oxycodone, acetaminophen and
dextromethorphan. The Company plans to initiate Phase II clinical trials with
OxycoDex as clinical development resources become available following the
completion of the MorphiDex NDA and initiation of major clinical trials of
HydrocoDex.
NON-NARCOTIC ANALGESICS
In June 1996, the Company entered into a license agreement (the 'McNeil
License Agreement') with McNeil Consumer Products Company, an affiliate of
Johnson & Johnson, pursuant to which the Company granted McNeil the exclusive
rights to develop certain acetaminophen/NMDA antagonist combination products and
certain NSAID/NMDA antagonist combination products (ibuprofen and certain other
NSAIDs approved for OTC use) for the treatment of pain.
Under the terms of the McNeil License Agreement, McNeil is required to
perform certain clinical development activities to retain the license and to
make payments to Algos based on the achievement of certain milestones. In
October 1997, the Company received a $1,000,000 milestone payment based upon the
entry into a large-scale clinical trial of a licensed product containing
acetaminophen. An acetaminophen/NMDA antagonist combination product and an
NSAID/NMDA antagonist combination product are currently under active development
by McNeil. McNeil may terminate the license at its option upon 60 days notice.
ANESTHETIC/NMDA ANTAGONIST COMBINATIONS
LidoDex NS'tm'
A project has been initiated with Interneuron Pharmaceuticals, Inc. for
LidoDex NS'tm', a combination of lidocaine and an NMDA antagonist for the
treatment of migraine. This agreement has three stages: (i) initial development
which encompasses Investigational New Drug Application ('IND') preparation, a
Phase I safety study and a Phase II efficacy study; (ii) Phase III clinicals;
and (iii) marketing activities. Initial development will be largely funded by
Interneuron, while costs of Phase III clinicals will be shared equally. An
article in the Journal of the American Medical Association concluded that
intranasal lidocaine provided rapid headache relief in more than half of the
patients in the cited study, but relapse was common. The Company is
investigating whether LidoDex NS'tm' may have a more prolonged effect.
Interneuron is currently conducting preclinical toxicological studies in
support of an IND which the Company expects to be filed in 1998, subject to
successful completion of the preclinical studies.
Injectable Anesthetic
The Company, in collaboration with Brigham and Women's Hospital, Harvard
Medical School, has conducted research into the potentiation of local
anesthetics by NMDA antagonists. Pre-clinical studies have indicated that the
NMDA antagonist dextromethorphan may increase the depth and duration of
anesthesia of lidocaine. With the current emphasis on preemptive analgesia, same
day surgery and shorter hospital stays, the Company believes that a longer
duration anesthetic may provide greater patient comfort when post-surgical pain
is most severe and could reduce the need for administering certain analgesics
for post-operative pain. The Company intends to seek a development partner for
these products and proceed with further clinical development activities on a
collaborative basis in 1998.
3
NEUROPATHIC PAIN TREATMENT
Independent studies suggest that both NMDA antagonists and certain
anticonvulsants may be useful in the treatment of neuropathic pain, persistent
pain resulting from certain abnormalities of the nervous system.
In 1998, the Company is initiating a Phase II clinical study to evaluate
the effect of a combination of an NMDA antagonist and an existing anticonvulsant
on patients with chronic pain following a spinal cord injury.
ADDICTION TREATMENT DRUGS
Opiate and Cocaine Addiction Treatment
NIDA estimates that there are two million opiate addicts in the United
States. The Company is developing NMDA antagonist-based products as opiate
addiction treatment drugs. Pre-clinical studies have indicated that the use of
NMDA antagonists may provide more effective control of opiate cravings and
dependence.
In 1997, the Company completed a Cooperative Research and Development
Agreement with the National Institute on Drug Abuse of the National Institutes
of Health to evaluate the Company's technology for the treatment of heroin
addiction. Under the terms of the agreement, NIDA will fund up to five clinical
studies to assess a product's ability to reduce addict relapse following
detoxification on methadone, the current maintenance therapy for heroin
addiction. The studies, the first of which was initiated in 1997, will measure
safety, withdrawal intensity, cross-tolerance and relapse.
Nicotine Addiction
Laboratory research and preclinical studies suggest that NMDA antagonists
may be useful in the treatment of addiction to other substances. In 1998, the
Company intends to initiate a Phase II clinical study to evaluate the effect of
an NMDA antagonist on nicotine addiction.
OTHER PRODUCTS
Urge Urinary Incontinence
An estimated five million people in the U.S. suffer from urge urinary
incontinence. Existing urge urinary incontinence drugs generally have unpleasant
side effects and low levels of efficacy. Company-sponsored pre-clinical studies
have indicated that NMDA antagonists may block the bladder micturition reflex. A
Phase II clinical trial at the Stanford University School of Medicine evaluating
an NMDA antagonist in urge incontinent patients was completed in 1997. The
Company is currently compiling the results of the study.
New Product Development, Generally
The Company is considering a number of other possible products. The
Company's drug development program is based upon a continuous review of clinical
results, newly published scientific papers, the possibility of joint development
or research arrangements with research institutions or commercial organizations,
the availability of resources, including acceptable third party clinical
facilities and available funds. Accordingly, the Company's development program
is subject to revision and change at any time without notice. The preceding
discussion with respect to the Company's plans is a description of the Company's
present intentions as of the date of this report, and the Company does not
expect to update this schedule prior to its next annual report, although it may
choose to do so. Its product development schedule and plans for drug development
constitute forward-looking statements and are subject to the numerous
contingencies and risks set forth under 'Risk Factors.'
4
SCIENTIFIC OVERVIEW
A key element of the Company's technology is the use of NMDA antagonists
which block the NMDA receptor. NMDA receptors are believed to be present in
nerve cells in the brain and spinal cord. There is increasing evidence that
there may also be peripheral NMDA receptors.
Research indicates that the NMDA receptor may play a role in pain response,
neuropathic pain, development of tolerance to and dependence on narcotic
analgesics and development of hyperalgesia due to chronic administration of
opiate narcotics. According to this theory, activation of this receptor results
in a cascade of intracellular events beginning with the influx of extracellular
calcium. This influx of calcium results in activation of the enzyme protein
kinase C and its subsequent translocation from cytosol to the membrane. Through
protein phosphorylation, enduring changes then occur in the membrane
constituents including receptors. This cascade of events beginning with the
activation of the NMDA receptor has been implicated in numerous neuroplastic
phenomena such as post-tetanic potentiation resulting in sensitized and overly
active nerve cells and consequently may cause spontaneous pain and/or increased
sensitivity to pain.
It is believed that narcotic analgesics reduce pain by binding to opiate
receptors located on nerve cells in the brain and spinal cord. Although the
initial effect of this binding is to inhibit the nerve cell and thereby reduce
pain, opiate receptor activation is also believed to stimulate the NMDA receptor
leading to the cascade of events described in the previous paragraph. Some
researchers believe that increased NMDA receptor activation represents the
underlying cellular mechanism of opiate tolerance and dependence. Pre-clinical
studies indicate that by blocking the NMDA receptor, tolerance to and dependence
on opiates may be reduced and the development of hyperalgesia prevented. The
involvement of the NMDA receptor in dependence is also the basis for development
of NMDA antagonists to treat drug addiction.
CORPORATE AND GOVERNMENT COLLABORATIONS
The McNeil License Agreement resulted in an initial payment of $2.0 million
by McNeil to the Company in 1996, a milestone payment of $1.0 million in 1997
based upon the entry into a large-scale clinical trial of a licensed product
containing acetaminophen, and provides for additional payments of up to $7.0
million by McNeil upon the achievement of certain milestones, generally relating
to product development and patent issuances. In addition, the Company will be
entitled to receive royalty payments from McNeil based upon net product sales
subject to minimum royalties commencing a certain time after execution of the
agreement, provided that certain conditions have been met, even if McNeil has
not commenced marketing of an acetaminophen product or an NSAID product. McNeil
will bear substantially all costs of developing products it selects. The McNeil
License Agreement extends until the later of the expiration of the Company's
patent rights or ten years, provided that the McNeil License Agreement is
terminable: (i) by either party in the event of a material breach by the other
party upon 90 days notice or upon certain events of bankruptcy; (ii) by McNeil,
at any time upon 60 days notice; and (iii) by the Company under certain
circumstances. Under certain circumstances, the McNeil License Agreement could
terminate with respect to either acetaminophen or NSAID products without
terminating with respect to the other category. In the event of a termination by
McNeil, McNeil must pay all royalty payments and milestone payments due through
the date of termination and the technology licensed by McNeil reverts to the
Company. In such event, the Company retains the rights to the results of two
clinical studies funded by the Company, and McNeil retains the rights to the
results of the clinical studies funded by McNeil during the term of the McNeil
License Agreement. See 'Business -- Patents, Trade Secrets and
Licenses -- Licenses.'
In December 1996, the Company entered into a development and marketing
collaboration and license agreement with Interneuron Pharmaceuticals, Inc. for
the development and commercialization of a product to treat acute migraine
headache. The agreement grants to Interneuron rights, co-exclusive with Algos,
to use Algos patents and know-how to manufacture and market the product. In the
initial stage of development, Algos will supply formulation development in
support of the IND and Interneuron will perform toxicology, Phase I safety and
Phase I/II safety and efficacy studies. Thereafter, the companies will generally
share equally the remaining development costs, including clinical trials,
regulatory activities, and manufacturing scale-up, and similarly share in
marketing and
5
profits of the resulting product, if any. After the initial stage of
development, the agreement may be terminated by either Company with the
terminating party retaining an interest in a resulting product, either in the
form of a royalty on sales or the repayment of certain of its development costs.
In 1997, the Company entered into a Cooperative Research and Development
Agreement with NIDA, NIH, to conduct joint research on a methadone/NMDA
antagonist combination drug as a potential treatment for opiate addiction. Under
the agreement, NIDA and the Company will jointly develop research protocols for
up to five clinical studies designed primarily to test dextromethorphan for
safety, tolerability and efficacy when co-administered with methadone. NIDA will
conduct the clinical studies and provide certain statistical and analytic
services. Algos will provide NIDA with drug supplies and scientific and
administrative support. The agreement provides for joint ownership of inventions
made jointly by NIDA and the Company and provides the Company with an option to
license any patent rights developed by NIDA. The agreement may be terminated by
either party at any time upon 30 days notice.
ACADEMIC AND RESEARCH COLLABORATIONS
VIRGINIA COMMONWEALTH UNIVERSITY, THE MEDICAL COLLEGE OF VIRGINIA
In 1994, the Company entered into a collaborative research agreement with
The Medical College of Virginia with the option for subsequent annual renewals.
Under the terms of this agreement, The Medical College of Virginia provides
pre-clinical research exclusively to the Company in the field of: (i) prevention
of tolerance to and dependence on opiates, opiate derivatives and opioids; (ii)
treatment of chronic pain; and (iii) treatment of neuropathic pain.
BETH ISRAEL HEALTH CARE SYSTEM
In 1997, the Company entered into a research agreement with Beth Israel
Health Care System. Under the terms of the agreement, the Company will provide a
total of $500,000 over a five-year period to fund certain costs of clinical
trials in pain medicine and palliative care. The Company may contract with Beth
Israel Health Care System for the conduct of trials under the direction of Dr.
Russell Portenoy, which would be separately funded. Beth Israel has agreed to
give priority to the scheduling of clinical studies requested by Algos. The
Company can terminate the agreement at any time upon providing continued
funding for a period of six months.
ALLEGHENY UNIVERSITY
In 1997, the Company entered into a research agreement with Allegheny
University. Under the terms of the agreement, Allegheny performs certain
pre-clinical research exclusively for the Company evaluating the effects of
combinations of anti-epileptics and NMDA receptor antagonists on pain. The
Company will obtain the rights to any developed intellectual property related to
NMDA receptor antagonist combinations. In addition, the Company will have the
first option to negotiate a license for other intellectual property developed
and owned by Allegheny.
TECHNICAL DEVELOPMENT AND PRODUCTION
The Company generally seeks to contract third parties for formulation
development, manufacture of clinical trial materials and scale-up work. The
Company generally selects third party contractors that it believes have the
capability to commercially manufacture the products. The key advantage to this
approach is that the third party contractor which performed the developmental
work will have the equipment, operational parameters and validated testing
procedures already in place for the commercial manufacture of the Company's
products. The Algos management team is experienced in selecting and managing
activities at third party contract companies. By selecting qualified third party
contractors or by choosing development partners that provide full-scale contract
manufacturing services, the Company believes it will be able to shorten
development and production scale-up time.
6
MARKETING
Algos plans to market its products either directly or through co-marketing
or licensing agreements with pharmaceutical companies. The Company's marketing
strategy is to develop a direct sales force in the U.S. in market segments with
relatively concentrated distribution channels to target key prescribing
physicians, pain management centers, hospitals, health maintenance organizations
and pharmaceutical buyer groups. Algos does not expect to establish a direct
sales capability until such time as one or more of its products in development
approaches marketing approval from the FDA. Although Algos believes that it will
be able to recruit an effective marketing and sales force at that time, no
assurance can be given that it will be able to do so. In market segments that
require large or specialized sales capabilities, such as OTC analgesic products
and certain foreign countries, the Company will seek strategic alliances with
leading pharmaceutical companies such as under the McNeil License Agreement.
Implementation of this strategy will depend on the market potential of the
Company's products, its financial resources and timely regulatory approvals. No
assurance can be given that any of the Company's products will gain significant
market asseptance.
COMPETITION
The Company's products under development are expected to address several
different markets. The Company's proposed products will be competing with
currently existing or future products of other companies. Competition among
these products will be based on, among other things, product efficacy, safety,
reliability, availability, price and patent position. Many of the Company's
existing or potential competitors have substantially greater financial,
technical and human resources than the Company, may be better equipped to
develop, manufacture and market products and have more extensive experience in
pre-clinical testing and human clinical trials. These companies may develop and
introduce products and processes competitive to those of the Company.
The Company competes with pharmaceutical companies that develop, produce
and market products in the United States, Europe and elsewhere. In addition,
academic institutions, government agencies and other public and private
organizations conducting research may seek patent protection, discover new drugs
or establish collaborative arrangements for drug research. The Company's
narcotic analgesic and anesthetic products, when developed and marketed, will
primarily compete with products marketed by medium-sized pharmaceutical
companies. In other analgesic segments, such as antiarthritic and OTC analgesic
products, the Company's products, when developed and marketed, will compete with
products marketed by some of the largest pharmaceutical companies in the U.S. In
these segments, the Company may enter into license agreements with
pharmaceutical companies having greater resources than the Company.
PATENTS, TRADE SECRETS AND LICENSES
PATENT RIGHTS
The Company seeks to protect its proprietary position by, among other
methods, filing United States and foreign patent applications with respect to
the development of its products and their uses. The Company plans to prosecute
and defend its patent applications, issued patents and proprietary information.
The Company's ability to compete effectively will depend in part on its ability
to develop and maintain proprietary aspects of its planned products. As of March
1, 1998 the Company has an exclusive license for five U.S. patents, one pending
U.S. patent application for which it has received a notice of allowance and six
other pending U.S. patent applications under its agreement with The Medical
College of Virginia, and several corresponding pending foreign patent
applications. In addition to these licensed patents, the Company owns nine
pending U.S. patent applications and plans to file additional patent
applications.
Of the patents issued to The Medical College of Virginia, U.S. Patent No.
5,321,012 entitled 'Inhibiting the Development of Tolerance to and/or Dependence
on a Narcotic Addictive Substance' (issued June 14, 1994) claims compositions
and methods for inhibiting the development of tolerance to and/or dependence on
a variety of narcotic analgesics including codeine, fentanyl, heroin,
hydrocodone, morphine and oxycodone employing any one of several specific
nontoxic NMDA antagonists including dextromethorphan and dextrorphan; U.S.
Patent No. 5,352,683 entitled 'Method for the Treatment of Chronic Pain' (issued
October 4, 1994) claims a method for treating chronic pain employing any one of
7
several specific nontoxic NMDA antagonists such as those previously mentioned;
U.S. Patent No. 5,502,058 entitled 'Method for the Treatment of Pain' (issued
March 26, 1996) covers a method of alleviating preexisting or prospectively
occurring pain employing dextromethorphan or dextrorphan in combination with
lidocaine; U.S. Patent No. 5,556,838 (issued September 17, 1996) claims a
composition containing any nontoxic NMDA antagonist, or any nontoxic substance
that blocks a major intracellular consequence of NMDA receptor activation, and
any one of several addictive substances, including morphine; and U.S. Patent No.
5,654,281 (issued August 5, 1997) claims a method for inhibiting the development
of tolerance to and/or dependence on any addictive substance employing a
nontoxic NMDA antagonist such as dextromethorphan.
Reflecting the Company's major research and development direction, its
patent program is primarily focused on securing intellectual property rights to
technology for the following categories of its business: (i) the use of
pharmacologically acceptable NMDA antagonists for the management of acute,
chronic, pre-operative and post-operative pain states, (ii) the use of NMDA
antagonists for the potentiation of local anesthesia and (iii) the use of NMDA
antagonists for the treatment of other conditions such as urge urinary
incontinence.
The Company also relies upon trade secrets, know-how, continuing innovation
and licensing opportunities to develop and maintain its competitive position. It
is the Company's current practice to require its employees, consultants, members
of its Medical and Research Advisory Board, sponsored researchers and other
advisors to execute confidentiality agreements upon the commencement of
employment or consulting relationships with the Company. These agreements
provide that all confidential information developed or made known to the
individual during the course of the individual's relationship with the Company
is to be kept confidential and not disclosed to third parties, subject to
certain exceptions. In the case of employees, the agreements provide that all
inventions conceived by the individual shall be the exclusive property of the
Company. There can be no assurance, however, that these agreements will provide
meaningful protection for the Company's trade secrets or adequate remedies in
the event of unauthorized use or disclosure of such information.
The Company engages in collaborations and sponsored research agreements and
enters into pre-clinical and clinical testing agreements with academic and
research institutions and U.S. government agencies, such as NIH. Consistent with
pharmaceutical industry and academic standards, and the rules and regulations
under the Federal Technology Transfer Act of 1986, these agreements may provide
that developments and results will be freely published, that information or
materials supplied by the Company will not be treated as confidential and that
the Company may be required to negotiate a license to any such developments and
results in order to commercialize products incorporating them. There can be no
assurance that the Company will be able to successfully obtain any such license
at a reasonable cost or that such developments and results will not be made
available to competitors of the Company on an exclusive or a non-exclusive
basis.
The Company's success depends in part on its ability to obtain patent
protection for its products and to preserve its trade secrets and operate
without infringing on the proprietary rights of third parties. The patent
positions of pharmaceutical firms, including the Company, are generally
uncertain and involve complex legal and factual questions. Consequently, even
though the Company is currently prosecuting its patent applications with the
U.S. Patent and Trademark Office ('PTO') and certain foreign patent authorities,
the Company does not know whether any of its applications will result in the
issuance of any patents, or if any patents issue, whether they will provide
significant proprietary protection or will be circumvented or invalidated. Since
patent applications in the U.S. are maintained in secrecy until patents issue,
and since publication of discoveries in the scientific or patent literature tend
to lag behind actual discoveries by several months, the Company cannot be
certain that it was the first creator of inventions claimed by pending patent
applications or that the Company was the first to file patent applications for
such inventions. Issued patents may be later modified or revoked by the PTO in
proceedings instituted by the Company or others. In addition, no assurance can
be given that the Company's patents will afford protection against competitors
with similar compounds or technologies, that others will not obtain patents
claiming aspects similar to those covered by the Company's patents or
applications, or that the patents of others will not have an adverse effect on
the ability of the Company to do business. The Company's patents may not prevent
others from developing competitive positions using related technology. Other
entities may obtain patents which cover aspects of the
8
Company's products or processes which are necessary for or useful to the
development, manufacture or use of the Company's products. As a result, the
Company may be required to obtain licenses from others to develop, manufacture
or market such products. There can be no assurance that the Company will be able
to obtain any such licenses on commercially reasonable terms, if at all. No
assurance can be given that any patent issued to, or licensed by, the Company
will provide protection that has commercial significance. See 'Risk
Factors -- Uncertain Ability to Protect Proprietary Technology.'
LICENSES
The Company has licensed from The Medical College of Virginia certain
patents or pending patent applications owned by The Medical College of Virginia
in the field of pain management (in the country in which any such product or
part thereof is made, used, sold or manufactured). The Company is obligated to
pay royalties for the life of the patent equal 4% of net sales of licensed
products. If a product is combined with a drug or other substance for which the
Company is paying an additional royalty, the royalty rate paid to The Medical
College of Virginia is generally reduced by the amount of such additional
royalty. If the Company enters into sublicensing agreements for a covered
product, the Company will pay The Medical College of Virginia 50% of royalty
payments received from such sublicensees' net sales for each year until the
payments total $500,000 for such year, 33% until the payments total an
additional $500,000 for such year and 25% thereafter. The Company pays no
license signing fees or milestone payments. The McNeil License Agreement is a
sublicense agreement of the Company's license agreement with The Medical College
of Virginia.
GOVERNMENT REGULATION
In the U.S., pharmaceutical products intended for therapeutic or diagnostic
use in humans are subject to rigorous FDA regulation. The process of completing
clinical trials and obtaining FDA approvals for a new drug is likely to take a
number of years and require the expenditure of substantial resources. There can
be no assurance that any product will receive such approval on a timely basis,
if at all. See 'Risk Factors -- Government Regulation; No Assurance of United
States or Foreign Regulatory Approval.'
Applicable FDA regulations treat the Company's combination of
dextromethorphan with analgesics such as morphine, acetaminophen and ibuprofen
and local anesthetics such as lidocaine as new drugs and require the filing of
an NDA and approval by the FDA. However, since each of these drugs has been
separately approved by the FDA, management believes that the risks associated
with the development of these new proprietary drugs are less than the risks
inherent in new molecular drug discovery.
The steps required before a new pharmaceutical product for use in humans
may be marketed in the U.S. include (i) pre-clinical studies, (ii) submission to
the FDA of an IND, which must become effective before human clinical trials
commence, (iii) adequate and well-controlled human clinical trials to establish
the safety and effectiveness of the product, (iv) submission of an NDA to the
FDA, and (v) FDA approval of the NDA prior to any commercial sale or shipment of
the product.
Pre-clinical studies include laboratory evaluation of product chemistry and
formulation, and animal studies to assess the potential safety and effectiveness
of the product. The results of the pre-clinical studies are submitted to the FDA
as a part of an IND and are reviewed by the FDA prior to the commencement of
human clinical trials. Unless the FDA objects to, or otherwise responds to, an
IND, the IND becomes effective 30 days following its receipt by the FDA.
Clinical trials are typically conducted in three sequential phases,
although phases may overlap. In Phase I, the investigational new drug usually is
administered to healthy human subjects and is tested for safety (adverse
effects), dosage, tolerance, metabolism, distribution, excretion and
pharmacodynamics (clinical pharmacology). Phase II involves studies in a limited
patient population to (i) determine the effectiveness of the investigational new
drug for specific indications, (ii) determine dosage tolerance and optimal
dosage and (iii) identify possible adverse effects and safety risks. When an
investigational new drug is found to be effective and to have an acceptable
safety profile in Phase II evaluation, Phase III trials are undertaken to
further evaluate clinical effectiveness and to further test for safety within an
expanded patient population at geographically dispersed clinical study sites.
For analgesic drugs, Phase II analgesic efficacy studies have historically
served as the pivotal studies for an NDA. Phase III
9
studies for these products normally focus greater attention on safety in larger
patient populations rather than efficacy. There can be no assurance that Phase
I, Phase II or Phase III testing will be completed successfully within any
specified time period, if at all, with respect to any of the Company's products
subject to such testing. Furthermore, the FDA may suspend clinical trials at any
time there is concern that the participants are being exposed to an unacceptable
health risk.
The results of pharmaceutical development, pre-clinical studies and
clinical trials are submitted to the FDA in the form of an NDA for approval of
the marketing and commercial shipment of the product. The FDA may require
additional testing or information before approving the NDA. The FDA may deny an
NDA approval if safety, efficacy or other regulatory requirements are not
satisfied. Moreover, if regulatory approval of the product is granted, such
approval may require post-marketing testing and surveillance to monitor the
safety of the product or may entail limitations on the indicated uses for which
the product may be marketed. Finally, product approval may be withdrawn if
compliance with regulatory standards is not maintained or if problems occur
following initial marketing.
At present, pharmaceutical products generally may not be exported from the
U.S. for other than research purposes until the FDA has approved the product for
marketing in the U.S. However, a company may apply to the FDA for permission to
export finished products or partially processed products to a limited number of
countries prior to obtaining FDA approval for marketing in the U.S.
The Company is also subject to regulation under federal and state laws,
including the Occupational Safety and Health Act, the Environmental Protection
Act, the Clean Air Act, national restrictions on technology transfer, and
import, export and customs regulations. In addition, all of the Company's
products that contain narcotics are subject to Drug Enforcement Agency ('DEA')
regulations relating to storage, distribution and physician prescribing
procedures. There can be no assurance that any portion of the regulatory
framework under which the Company currently operates will not change and that
such change will not have a material effect on the current and anticipated
operations of the Company.
Whether or not FDA approval has been obtained, approval of a pharmaceutical
product by comparable governmental regulatory authorities in foreign countries
must be obtained prior to the commencement of clinical trials and subsequent
marketing of such product in such countries. The approval procedure varies from
country to country, and the time required may be longer or shorter than that
required for FDA approval.
EMPLOYEES
At March 2, 1998, the Company had twenty-one employees and three executive
consultants, including five Ph.Ds and/or MDs. In addition, the Company engages
consultants from time to time to perform services on a per diem or hourly basis.
ITEM 2. PROPERTIES
The Company's executive office is currently located at Collingwood Plaza,
4900 Route 33, Neptune, New Jersey 07753. The leased property consists of
approximately 6,000 square feet of office and storage space.
The Company's current lease agreement expires in April 1998 at which time
it intends to relocate its executive office. The Company has entered into a
ten-year lease agreement for a building consisting of approximately 21,000
square feet of office space, which is being constructed and is expected to be
completed in April 1998.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
10
PART II
ITEM 5. MARKET PRICE
As of March 25, 1998, Algos had approximately 122 shareholders of record
and the Company believes that the number of beneficial holders exceeds 500.
Common shares of the Company are traded in the over-the-counter market and their
price quoted on the NASDAQ Stock Market under the symbol 'ALGO.' The following
table sets forth the range of the highest and lowest sales prices for the
Company's common stock since public trading commenced:
HIGH LOW
---- ---
Year Ended December 31, 1996:
Third Quarter, beginning September 26................................... 14 1/2 14
Fourth Quarter.......................................................... 15 9 7/8
Year Ended December 31, 1997:
First Quarter........................................................... 20 3/4 10 7/8
Second Quarter.......................................................... 19 1/4 14
Third Quarter........................................................... 31 5/8 14 3/4
Fourth Quarter.......................................................... 33 21 1/2
The Company has never declared or paid any cash dividends on its capital
stock.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information set forth below should be read in
conjunction with 'Management's Discussion and Analysis of Financial Condition
and Results of Operations' and with the Company's financial statements and
related notes contained elsewhere in this report.
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
----- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Revenues.......................................... $ 215(1) $ -- $ -- $ 2,000 $ 1,000
Operating expenses:
Research and development..................... 40 654 1,615 3,344 9,799
General and administrative................... 436 623 760 2,467 2,458
----- ------- ------- ------- -------
Total operating expenses................ 476 1,277 2,375 5,810 12,257
----- ------- ------- ------- -------
Interest income................................... 4 153 253 723 2,435
----- ------- ------- ------- -------
Net loss.......................................... $(257) $(1,124) $(2,122) $(3,087) $(8,823)
----- ------- ------- ------- -------
----- ------- ------- ------- -------
Net loss per common share, basic and diluted(2)... $(0.35) $(0.36) $(0.56)
------- ------- -------
------- ------- -------
Weighted average common shares outstanding(2)..... 6,003 8,535 15,863
------- ------- -------
------- ------- -------
DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
----- ------- ------- ------- -------
(IN THOUSANDS)
Balance Sheet Data:
Cash and cash equivalents, marketable securities,
and interest receivable......................... $ 124 $ 5,634 $ 3,707 $48,576 $41,808
Working capital................................... 81 5,503 3,419 47,932 36,368
Total assets...................................... 153 5,765 3,820 49,202 42,360
Deficit accumulated during the development
stage........................................... (642) (1,766) (3,888) (6,976) (15,798)
Total stockholders' equity........................ 108 5,618 3,521 48,228 39,759
(footnotes on next page)
11
(footnotes from previous page)
(1) Represents revenues from consulting activities in which the Company has
ceased to engage.
(2) Based on the historical number of common shares outstanding in all periods
presented in accordance with Statement of Financial Accounting Standard No.
128. Presentation of pro forma amounts adjusted to reflect options,
warrants, and preferred stock conversions has been deleted as provided by
Securities and Exchange Commission Staff Accounting Bulletin No. 98.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Algos, a development stage company, is engaged primarily in the development
and commercialization of proprietary pharmaceutical products. Since its
formation in January 1992, the Company has devoted a substantial amount of its
efforts to licensing technology, recruiting key management and staff, developing
products, filing patents and other regulatory applications and raising capital.
The Company has incurred losses since its inception and expects to incur
operating losses in the future. The Company expects that its product development
expenses will increase significantly as the drugs that the Company currently has
under development move into advanced clinical trials and as additional drugs are
developed. In January 1998, the Company initiated the filing of a sequential NDA
for MorphiDex. If the NDA is completed, the Company may incur significant costs
associated with the possible commercialization of MorphiDex prior to the first
commercial sale of the product, including inventory, the establishment of a
sales force, initial promotional activities and other administrative expenses.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Revenue:
The Company, which is in the development stage, earned $1,000,000 of
revenue from the McNeil License Agreement in 1997 compared to $2,000,000 earned
under the agreement in 1996. The current year's revenue represents a contractual
milestone payment due the Company upon initiation of a large-scale clinical
trial of a licensed product. In 1996, the Company received $2,000,000, which was
due upon execution of the agreement. Under the terms of the agreement, the
Company may receive future payments upon the attainment of specified development
milestones. However, the agreement is cancelable by McNeil at any time upon 60
days notice.
Research and development:
In 1997, research and development expenses were $9,799,358, an increase of
$6,455,742, or 193%, from 1996. The increase was primarily attributable to the
development of MorphiDex, which progressed to a more advanced stage of clinical
development, involving clinical studies of greater size and number. The current
year also included the costs of manufacturing small-scale test batches of
MorphiDex and the expansion of development activities for other products. In
addition, personnel costs increased as a result of additions to the Company's
development staff.
General and administrative:
In 1997, general and administrative expenses were $2,458,411, a decrease of
$8,166, or less than 1%, from 1996. The decrease reflects a one-time charge of
$915,000 in 1996 related to the issuance of Series B Preferred Stock in
connection with an amendment to a license agreement. This decrease was mostly
offset by increases in professional fees, insurance, and other general and
administrative costs resulting from the Company's increased business activities
following the completion of its initial public offering ('IPO') in October 1996.
12
Interest income:
In 1997, interest income increased substantially due to the investment of
the IPO proceeds over the full calendar year.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Revenue:
In 1996, the Company recognized $2,000,000 of license revenue representing
the initial payment under the McNeil License Agreement.
Research and development:
In 1996, research and development expenses were $3,343,616, an increase of
$1,728,673, or 107%, from 1995. The 1996 period reflects expansion of the
Company's clinical trials, particularly trials of its most
developmentally-advanced product MorphiDex and the Company's non-narcotic drugs
licensed to McNeil. Fees to clinical investigators and contract research
organizations, and related increases in clinical drug supplies, consultants,
etc. were partially offset by reduced spending on pre-clinical studies and
formulation development.
General and administrative expenses:
In 1996, general and administrative expenses were $2,466,577, an increase
of $1,706,537, or 225%, from 1995. The increase was due primarily to a charge of
$915,000 relating to the issuance of Series B Preferred Stock in connection with
an amendment to the license agreement with The Medical College of Virginia and
to amortization of unearned compensation expense of approximately $361,000 in
connection with the grant of stock options. Added professional fees and
compensation expense also contributed to the increase.
Interest income:
In 1996, interest income increased as a result of the investment of
proceeds from the Company's IPO in October 1996.
LIQUIDITY AND CAPITAL RESOURCES
In 1997, 1996, and 1995, spending for the Company's product development
efforts and related activities resulted in net cash outflows from operations of
$7,296,261, $1,556,604 and $1,929,321, respectively. Accumulated cash balances
at December 31, 1994, which resulted from the Company's 1994 private placement
of Series A Preferred Stock were sufficient to fund the Company's operations
into 1996. In 1996, in order to expand its development programs, the Company
completed its initial public offering of 3,625,000 shares of Common Stock, which
provided net proceeds to the Company of $46.4 million. A portion of these funds
and $3.0 million received to date from the McNeil License Agreement were used to
fund the Company's operations in 1997.
The Company has entered into several research and development commitments,
primarily related to its development of MorphiDex. The Company expects that its
development expenses will continue to increase as its development programs
expand and additional preclinical studies and clinical trials are initiated. In
addition, the Company will incur increased expenses as a result the planned
expansion of its research and development staff, including the costs and
expenses of relocating to larger office facilities. In January 1998, the Company
initiated the filing of a sequential NDA for MorphiDex. If the NDA is completed,
the Company may incur significant costs associated with the possible
commercialization of MorphiDex prior to the first commercial sale of the
product, including inventory, the establishment of a sales force, initial
promotional activities and other administrative expenses.
The Company's funding requirements will depend on a number of factors,
including the results of its development efforts, the timing and cost of
obtaining required regulatory approvals, the development of competing
technologies, the amount of resources required for the establishment of
marketing and distribution capabilities, the execution of licensing or other
collaborative research agreements on terms acceptable to the Company, and the
cost of prosecuting and defending patents. The Company had cash, cash
equivalents, and marketable securities of $41.8 million at December 31, 1997.
The Company currently expects that these funds will be sufficient to fund its
operations for the
13
development of products currently in clinical trials. If, however, additional
trials are necessary or advisable, the Company may require additional funds to
complete such trials. In the event that revenue and income from successful
product introductions or other internally generated funds are insufficient for
such efforts, the Company will need to raise additional funds by incurring debt,
issuing additional equity, or entering into collaborative or license
arrangements. In addition, the Company may decide to initiate development of
additional products. Development of additional products would require additional
funds. See 'Risk Factors -- Need for Additional Funds.'
NET OPERATING LOSS CARRYFORWARDS
At December 31, 1997, the Company had accumulated net operating loss
carryforwards of approximately $12.9 million and $13.0 million for federal and
state tax purposes, respectively. Federal carryforwards expire in 2009 through
2012 and are available to reduce future taxable income recognized in the
carryforward period, if any. Due to the uncertainty of future taxable income,
the Company has established a valuation allowance for these carryforwards and
has not recognized their potential benefit on a current basis. The future
utilization of these carryforwards may be limited by Section 382 of the Internal
Revenue Code related to changes in Company ownership.
OTHER
Generally, the Company's results of operations are not significantly
affected by seasonal factors and the Company does not believe that inflation has
had a significant impact on its business.
In June 1997, the Financial Accounting Standards Board ('FASB') issued
Statement of Financial Accounting Standards ('SFAS') No. 130, 'Reporting
Comprehensive Income' which establishes standards for determining and reporting
comprehensive income and its components. Comprehensive income represents the
change in net assets of a business enterprise as a result of nonowner
transactions. The Company will adopt SFAS No. 130 in the first quarter of 1998.
The FASB has also issued SFAS No. 131, 'Disclosure about Segments of an
Enterprise and Related Information', and SFAS No. 132, 'Employers' Disclosures
about Pensions and Other Postretirement Benefits', which are effective in 1998.
These standards are not expected to have a significant impact on the Company's
financial statements.
The Company believes that its financial and operational systems will
function properly with respect to the use of dates in the year 2000 and
thereafter. The Company estimates that the costs associated with the Year 2000
issue will be insignificant and will not have a material impact on the Company's
financial position or operating results. However, there is no assurance that the
Company's vendors will not have Year 2000 problems that will affect the Company.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this form 10-K contain
'forward-looking' statements, within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, that are based on management's beliefs and assumptions, current
expectations, estimates and projections. Statements that are not historical
facts, including statements which are preceded by, followed by, or that include
the words 'believes,' 'anticipates,' 'plans,' 'expects,' or similar expressions
and statements about the Company's development schedule and future use of funds
are forward-looking statements. Many of the factors that will determine the
Company's future results are beyond the ability of the Company to control or
predict. These statements are subject to risks and uncertainties and, therefore,
actual results may differ materially. The reader should not rely on any
forward-looking statement. The Company undertakes no obligations to update any
forward-looking statements whether as a result of new information, future events
or otherwise.
Important factors that may affect future results include, but are not
limited to: uncertainty associated with pre-clinical studies and clinical trials
and regulatory approval; the effect of economic conditions; impact of
competitive products and pricing; product development; changes in laws and
regulations; customer demand; possible future litigation; availability of future
financing; and uncertainty of market acceptance of new products. Readers should
evaluate any statement in light of these important factors. See 'Risk Factors.'
ITEM 8. FINANCIAL STATEMENTS
14
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
ALGOS PHARMACEUTICAL CORPORATION:
We have audited the accompanying balance sheets of Algos Pharmaceutical
Corporation (a development stage enterprise) (the 'Company') as of December 31,
1997 and 1996, and the related statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended December 31, 1997
and for the period January 1, 1992 (date of inception) to December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Algos Pharmaceutical
Corporation as of December 31, 1997 and 1996 and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997 and for the period January 1, 1992 (date of inception) to December 31, 1997
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Princeton, New Jersey
March 4, 1998
15
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 48,575,719 $ 20,246,152
Marketable securities, current................................................ 17,922,359
Interest receivable........................................................... 484,789
Prepaid expenses.............................................................. 330,083 315,679
------------ ------------
Total current assets..................................................... 48,905,802 38,968,979
Marketable securities, noncurrent.................................................. 3,004,580
Restricted cash.................................................................... 150,000
Property and equipment, net........................................................ 86,682 146,328
Other assets....................................................................... 209,257 90,591
------------ ------------
Total assets............................................................. $ 49,201,741 $ 42,360,478
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 456,684 $ 1,861,976
Other current liabilities..................................................... 516,786 739,415
------------ ------------
Total current liabilities................................................ 973,470 2,601,391
------------ ------------
Commitments
Stockholders' equity:
Preferred stock, $100,000 and $0 aggregate liquidation preference............. 1,000
Common stock, $.01 par value, 50,000,000 shares authorized, 15,669,101 and
15,951,701 shares outstanding as of December 31, 1996 and 1997,
respectively................................................................. 156,691 159,517
Additional paid-in-capital.................................................... 55,902,403 56,151,504
Unearned compensation expense................................................. (856,150) (753,707)
Deficit accumulated during the development stage.............................. (6,975,673) (15,798,227)
------------ ------------
Total stockholders' equity............................................... 48,228,271 39,759,087
------------ ------------
Total liabilities and stockholders' equity............................... $ 49,201,741 $ 42,360,478
------------ ------------
------------ ------------
The accompanying notes are an integral part of these statements.
16
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
CUMULATIVE FROM
FOR THE YEAR ENDED DECEMBER 31, INCEPTION TO
----------------------------------------- DECEMBER 31,
1995 1996 1997 1997
----------- ----------- ----------- ---------------
Revenues.......................................... $ 2,000,000 $ 1,000,000 $ 3,311,000
----------- ----------- ---------------
Operating expenses:
Research and development..................... $ 1,614,943 3,343,616 9,799,358 15,576,631
General and administrative................... 760,040 2,466,577 2,458,411 7,113,250
----------- ----------- ----------- ---------------
Total operating expenses................ 2,374,983 5,810,193 12,257,769 22,689,881
----------- ----------- ----------- ---------------
Loss from operations.............................. (2,374,983) (3,810,193) (11,257,769) (19,378,881)
Interest income................................... 252,548 722,715 2,435,215 3,580,654
----------- ----------- ----------- ---------------
Net loss.......................................... $(2,122,435) $(3,087,478) $(8,822,554) $ (15,798,227)
----------- ----------- ----------- ---------------
----------- ----------- ----------- ---------------
Net loss per common share, basic and diluted...... $ (0.35) $ (0.36) $ (0.56)
----------- ----------- -----------
----------- ----------- -----------
Weighted average common shares outstanding........ 6,002,635 8,535,080 15,862,562
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of these statements.
17
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
CUMULATIVE FROM
FOR THE YEAR ENDED DECEMBER 31, INCEPTION TO
----------------------------------------- DECEMBER 31,
1995 1996 1997 1997
----------- ----------- ----------- ---------------
Cash flows from operating activities:
Net loss $(2,122,435) $(3,087,478) $(8,822,554) $ (15,798,227)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 35,782 44,038 51,386 162,683
Amortization of unearned compensation... 424,690 278,269 702,959
Amortization of discount on marketable
securities............................ (79,564) (79,564)
Common stock issued for technology...... 125,000
Preferred stock issued for services..... 25,000
Preferred stock issued under license
agreement............................. 915,000 915,000
Changes in assets and liabilities:
Interest receivable................ (484,789) (484,789)
Prepaid expenses................... 5,476 (319,026) 14,404 (315,679)
Other assets....................... (675) (207,666) 118,666 (90,591)
Accounts payable................... 102,371 298,387 1,405,292 1,861,976
Other current liabilities.......... 50,160 375,451 222,629 739,415
----------- ----------- ----------- ---------------
Net cash used in operating activities........ (1,929,321) (1,556,604) (7,296,261) (12,236,817)
----------- ----------- ----------- ---------------
Cash flows from investing activities:
Investment in marketable securities.......... (20,997,375) (20,997,375)
Purchases of property and equipment.......... (22,500) (30,016) (111,032) (309,011)
----------- ----------- ----------- ---------------
Net cash used in investing activities........ (22,500) (30,016) (21,108,407) (21,306,386)
----------- ----------- ----------- ---------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock,
net........................................ 50,000 6,659,015
Proceeds from issuance of common stock,
net........................................ 24,950 46,405,239 75,101 47,130,340
----------- ----------- ----------- ---------------
Net cash provided by financing activities.... 24,950 46,455,239 75,101 53,789,355
----------- ----------- ----------- ---------------
Net increase (decrease) in cash and cash
equivalents..................................... (1,926,871) 44,868,619 (28,329,567) 20,246,152
Cash and cash equivalents, beginning of period.... 5,633,971 3,707,100 48,575,719
----------- ----------- ----------- ---------------
Cash and cash equivalents, end of period.......... $ 3,707,100 $48,575,719 $20,246,152 $ 20,246,152
----------- ----------- ----------- ---------------
----------- ----------- ----------- ---------------
The accompanying notes are an integral part of these statements.
18
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FROM INCEPTION TO DECEMBER 31, 1997
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
-------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
-------- ------- ---------- --------
Issuance of Common Stock, January 1992, $.10 per share...... 4,841,664 $ 48,417
Issuance of Common Stock for technology, January 1992, $.10
per share................................................. 968,336 9,683
Net loss....................................................
-------- ------- ---------- --------
Balance, December 31, 1992.................................. 5,810,000 58,100
Capital contributions, including $25,000 of technology......
Net loss....................................................
-------- ------- ---------- --------
Balance, December 31, 1993.................................. 5,810,000 58,100
Issuance of Series A Preferred Stock, May through August
1994, $10.00 per share, net of offering costs............. 700,000 $7,000
Issuance of Series A Preferred Stock for services, May 1994,
$10.00 per share.......................................... 2,500 25
Exercise of stock options................................... 415 4
Net loss....................................................
-------- ------- ---------- --------
Balance, December 31, 1994.................................. 702,500 7,025 5,810,415 58,104
Exercise of stock options................................... 199,615 1,996
Net loss....................................................
-------- ------- ---------- --------
Balance, December 31, 1995.................................. 702,500 7,025 6,010,030 60,100
Exercise of warrants........................................ 5,000 50
Issuance of Series B Preferred Stock under license
agreement, June 1996, $9.15 per share..................... 100,000 1,000
Exercise of stock options................................... 161,821 1,618
Issuance of Common Stock, October 1996, $14.00 per share,
net of offering costs..................................... 3,625,000 36,250
Conversion of Series A Preferred Stock...................... (707,500) (7,075) 5,872,250 58,723
Unearned compensation expense...............................
Amortization of unearned compensation expense...............
Net loss....................................................
-------- ------- ---------- --------
Balance, December 31, 1996.................................. 100,000 1,000 15,669,101 156,691
Exercise of stock options................................... 133,630 1,336
Exercise of warrants........................................ 48,970 490
Conversion of Series B Preferred Stock...................... (100,000) (1,000) 100,000 1,000
Unearned compensation expense...............................
Amortization of unearned compensation expense...............
Net loss....................................................
-------- ------- ---------- --------
Balance, December 31, 1997.................................. 0 $ 0 15,951,701 $159,517
-------- ------- ---------- --------
-------- ------- ---------- --------
The accompanying notes are an integral part of these statements.
19
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY -- (CONTINUED)
FROM INCEPTION TO DECEMBER 31, 1997
DEFICIT
ACCUMULATED
ADDITIONAL UNEARNED DURING THE TOTAL
PAID IN COMPENSATION DEVELOPMENT STOCKHOLDERS'
CAPITAL EXPENSE STAGE EQUITY
----------- ------------ ------------ --------------
Issuance of Common Stock, January 1992, $.10 per share...... $ 451,583 $ 500,000
Issuance of Common Stock for technology, January 1992, $.10
per share................................................. 90,317 100,000
Net loss.................................................... $ (385,434) (385,434)
----------- ------------ ------------ --------------
Balance, December 31, 1992.................................. 541,900 (385,434) 214,566
Capital contributions, including $25,000 of technology...... 150,000 150,000
Net loss.................................................... (256,640) (256,640)
----------- ------------ ------------ --------------
Balance, December 31, 1993.................................. 691,900 (642,074) 107,926
Issuance of Series A Preferred Stock, May through August
1994, $10.00 per share, net of offering costs............. 6,602,015 6,609,015
Issuance of Series A Preferred Stock for services, May 1994,
$10.00 per share.......................................... 24,975 25,000
Exercise of stock options................................... 46 50
Net loss.................................................... (1,123,686) (1,123,686)
----------- ------------ ------------ --------------
Balance, December 31, 1994.................................. 7,318,936 (1,765,760) 5,618,305
Exercise of stock options................................... 22,954 24,950
Net loss.................................................... (2,122,435) (2,122,435)
----------- ------------ ------------ --------------
Balance, December 31, 1995.................................. 7,341,890 (3,888,195) 3,520,820
Exercise of warrants........................................ 49,950 50,000
Issuance of Series B Preferred Stock under license
agreement, June 1996, $9.15 per share..................... 914,000 915,000
Exercise of stock options................................... 17,851 19,469
Issuance of Common Stock, October 1996, $14.00 per share,
net of offering costs..................................... 46,349,520 46,385,770
Conversion of Series A Preferred Stock...................... (51,648)
Unearned compensation expense............................... 1,280,840 $(1,280,840)
Amortization of unearned compensation expense............... 424,690 424,690
Net loss.................................................... (3,087,478) (3,087,478)
----------- ------------ ------------ --------------
Balance, December 31, 1996.................................. 55,902,403 (856,150) (6,975,673) 48,228,271
Exercise of stock options................................... 14,764 16,100
Exercise of warrants........................................ 58,511 59,001
Conversion of Series B Preferred Stock......................
Unearned compensation expense............................... 175,826 (175,826)
Amortization of unearned compensation expense............... 278,269 278,269
Net loss.................................................... (8,822,554) (8,822,554)
----------- ------------ ------------ --------------
$56,151,504 $ (753,707) $(15,798,227) $ 39,759,087
----------- ------------ ------------ --------------
----------- ------------ ------------ --------------
The accompanying notes are an integral part of these statements.
20
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Algos Pharmaceutical Corporation (the 'Company'), is engaged primarily in
the development of proprietary pain management pharmaceuticals. Since its
formation in January 1992, the Company has devoted a substantial portion of its
efforts to developing products, licensing technology, filing regulatory
applications and raising capital. The Company is subject to a number of risks
common to companies in similar stages of development including, but not limited
to, the lack of assurance of successful product development and regulatory
approval, the absence of manufacturing, marketing and distribution capabilities,
the risk of technological obsolescence, changes in pricing and customer demand
and the ability to obtain future financing.
In May 1996, the Company effected an 8.3-for-1 stock split in the form of a
stock dividend. All historical share and per share data have been restated to
reflect the stock split.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
DEVELOPMENT STAGE ENTERPRISE
The accompanying statements have been prepared in accordance with the
provisions of Statement of Financial Accounting Standard (SFAS) No. 7,
'Accounting and Reporting by Development Stage Enterprises.'
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
The Company considers money market securities with maturities of three
months or less, when purchased, to be cash equivalents. A bank certificate of
deposit that serves as collateral for an irrevocable letter of credit required
by the terms of the Company's March 1997 lease agreement is included in
restricted cash.
PROPERTY AND EQUIPMENT, NET
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation is provided on the straight-line method over the estimated useful
lives of the assets which range from three to seven years. Gains and losses on
depreciable assets retired or sold are recognized in the statement of operations
in the year of disposal. Repairs and maintenance expenditures are expensed as
incurred.
REVENUE
License fees are recognized as revenue when contract milestones are
attained or when otherwise earned in accordance with the terms of the underlying
agreements.
21
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
'Accounting for Income Taxes.' SFAS No. 109 requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of temporary
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the years in which the
differences are expected to reverse.
LOSS PER SHARE
The Company has adopted SFAS No. 128, 'Earnings Per Share', for the
calculation and presentation of net loss per common share. SFAS No. 128 requires
the presentation of basic and diluted per share amounts on a retroactive basis
for all periods presented. Basic per share amounts are calculated by dividing
the net loss applicable to common stock by the weighted average number of common
shares outstanding during the period. Diluted per share amounts are calculated
by dividing the net loss applicable to common stock by the weighted average
number of common shares outstanding plus dilutive common share equivalents.
Since the Company incurred losses in all periods presented, options and warrants
to purchase 935,825, 1,049,165, and 1,028,405 shares of common stock that were
outstanding at December 31, 1995, 1996, and 1997, respectively, 702,500 shares
of Series A Convertible Preferred Stock that were outstanding at December 31,
1995 and 100,000 shares of Convertible Series B Preferred Stock that were
outstanding at December 31, 1996 were not included in diluted per share
calculations, as their effect would be antidilutive.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, 'Reporting Comprehensive Income', which establishes standards for
determining and reporting comprehensive income and its components. Comprehensive
income represents the change in net assets of a business enterprise as a result
of nonowner transactions. The Company will adopt SFAS No. 130 in the first
quarter of 1998.
The FASB has also issued SFAS No. 131, 'Disclosure about Segments of an
Enterprise and Related Information', and SFAS No. 132, 'Employers' Disclosures
about Pensions and Other Postretirement Benefits', which are effective in 1998.
These standards are not expected to have a significant impact on the Company's
financial statements.
3. MARKETABLE SECURITIES
Marketable securities at December 31, 1997 include the following debt
securities:
ESTIMATED
AMORTIZED FAIR UNREALIZED
COST MARKET VALUE GAINS (LOSSES)
----------- ------------ --------------
U.S. Treasury and federal agency debt securities................... $20,926,939 $20,958,130 $31,191
The securities are classified as held-to-maturity securities and are stated
at their amortized cost. Noncurrent marketable securities have maturities in
excess of one year and less than two years.
22
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
DECEMBER 31,
--------------------
1996 1997
-------- --------
Office furniture and equipment........................................ $111,042 $152,727
Computer equipment.................................................... 86,937 156,284
-------- --------
197,979 309,011
Less accumulated depreciation......................................... 111,297 162,683
-------- --------
$ 86,682 $146,328
-------- --------
-------- --------
5. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
DECEMBER 31,
--------------------
1996 1997
-------- --------
Accrued compensation.................................................. $214,750 $346,797
Accrued research expenses............................................. 302,036 392,618
-------- --------
$516,786 $739,415
-------- --------
-------- --------
6. INCOME TAXES
At December 31, 1997, the Company had available net operating loss
carryforwards and research and development credits for federal income tax
purposes of approximately $12,900,000 and $562,000, respectively, which expire
in the years 2009 through 2012. At December 31, 1997, the Company had available
net operating loss carryforwards and research and development credits for state
income tax purposes of approximately $13,000,000 and $425,000, respectively,
which expire in the years 1999 through 2004. The use of federal net operating
loss and credit carryforwards may be subject to limitations under section 382 of
the Internal Revenue Code pertaining to changes in stock ownership. Due to the
uncertainty of their realization, a full valuation allowance has been
established for the potential income tax benefit of net operating loss and
credit carryforwards and temporary differences. The increase in the valuation
allowance amounted to $906,300, $1,122,200 and $4,745,000 in 1995, 1996, and
1997, respectively. Deferred tax assets (liabilities) for federal and state
income taxes consist of the following:
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
Net operating loss carryforwards................................ $ 1,776,900 $ 5,612,200
Research and development tax credits............................ 149,100 987,600
License costs................................................... 355,300 360,700
Accrued liabilities and other................................... 147,400 211,700
Depreciation and amortization................................... 5,900 7,400
----------- -----------
Total deferred tax assets....................................... 2,434,600 7,179,600
Valuation allowance............................................. (2,434,600) (7,179,600)
----------- -----------
Net deferred tax assets......................................... $ 0 $ 0
----------- -----------
----------- -----------
23
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS
LICENSING AGREEMENTS
The Company has a license agreement with a university for certain pain
management technology which requires the Company to pay royalties equal to 4% of
sales of licensed products. If the Company enters into sublicensing agreements
for a covered product, the Company will pay the university 50% of royalty
payments received from such sublicensees' net sales for each year until the
payments total $500,000 for such year, 33% until the payments total an
additional $500,000 for such year and 25% thereafter.
LEASES
Rent expense for the Company's office facilities amounted to $21,841,
$22,475 and $58,275 for the years ended December 31, 1995, 1996, and 1997
respectively and $126,199 cumulatively from the date of inception.
The Company's current lease agreement expires in April 1998 at which time
it intends to relocate its executive office. In March 1997, the Company entered
into a ten-year operating lease agreement for a building consisting of
approximately 21,000 square feet of office space expected to be completed in
April 1998. Effective upon completion of the building, minimum annual lease
payments under the lease will amount to approximately $269,000 per year for the
first five years and aggregate approximately $1.6 million in the second
five-year period. The agreement provides the Company with an option to extend
the lease term for an additional five-year period and an option to purchase the
building during the fourth or fifth year of the initial lease term.
RESEARCH CONTRACTS
The Company routinely contracts with universities, medical centers,
contract research organizations and other institutions for the conduct of
research and clinical studies on the Company's behalf. These agreements are
generally for the duration of the contracted study and contain provisions that
allow the Company to terminate the study prior to its completion.
8. SIGNIFICANT AGREEMENTS
In June 1996, the Company entered into a license agreement with McNeil
Consumer Products Company, an affiliate of Johnson & Johnson, which provides
McNeil with exclusive worldwide marketing rights to certain of the Company's
products under development. The Company received payments of $2,000,000 and
$1,000,000 in 1996 and 1997 respectively and may receive additional payments
based on the achievement of certain milestones. McNeil will be responsible for
substantially all of the remaining development costs of its licensed provides.
In addition, the Company will receive royalties based on sales of licensed
products, if any. The agreement may be terminated by McNeil upon 60 days notice.
In December 1996, the Company entered into a development and marketing
collaboration and license agreement with Interneuron Pharmaceuticals, Inc. for
the development and commercialization of a product to treat acute migraine
headache. The agreement grants to Interneuron rights, co-exclusive with Algos,
to use Algos patents and know-how to manufacture and market the product. After
an initial stage of development in which it is expected that Interneuron's
development costs will exceed those of Algos, the agreement provides that the
companies will generally share equally the remaining development costs,
including pre-clinical studies, clinical trials, and regulatory activities, and
similarly share in marketing and profits of the resulting product, if any. After
the initial stage of development, the agreement may be terminated by either
Company with the terminating party retaining an interest in a
24
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
resulting product, either in the form of a royalty on sales or the repayment of
certain of its development costs.
In 1996, the Company contributed certain intangible assets having no book
value to a newly formed company, U.S. Dermatologics, Inc. (formerly PharmaDyn,
Inc.), and received preferred stock with an aggregate stated value and
liquidation preference of $2,800,000, and all of the transferee's common stock.
The common stock was subsequently distributed to the Company's stockholders,
warrant holders and certain of its employees. The preferred stock provides for
an annual cumulative dividend of 30%, which may be paid in the form of cash or
common stock, and a share of other earnings. The preferred stock may be redeemed
for the stated value plus accrued dividends at any time at the transferee's
option or at the Company's option at the end of two years. The Company entered
into a Services Agreement with U.S. Dermatologics, Inc. to provide certain
consulting and administrative services for a transitional period. The Agreement
expires in June 1998. The Company's charges for services provided through
December 31, 1997 amount to approximately $180,000 and are due in 1998. The
Company recorded no gain or recovery in connection with the transactions as
management believes that at the present time realization is not assured.
9. STOCKHOLDERS' EQUITY
The Company is authorized to issue 10,000,000 shares of $.01 par value per
share preferred stock with rights, preferences and limitations determined by the
Board of Directors of the Company, 100,000 of which have been designated Series
B.
In 1994, the Company issued 702,500 shares of convertible Series A
Preferred Stock and certain selling agents received warrants to purchase an
aggregate of 40,750 shares of convertible Series A Preferred Stock. In
connection with the Company's 1996 initial public offering of Common Stock, all
outstanding shares of convertible Series A Preferred Stock were converted to
Common Stock and warrants were converted to Common Stock warrants at a rate of
8.30 common shares for each Series A Preferred Share or warrant. As of December
31, 1996 and 1997, warrants to purchase 296,725 and 247,755 shares of common
stock were outstanding and exercisable, respectively, at an exercise price of
$1.20 per share. The warrants expire in 2001.
In 1996, the Company issued 100,000 shares of convertible Series B
Preferred Stock in connection with an amendment to a license agreement with a
university and recorded an administrative expense of $915,000. In 1997, all
shares of convertible Series B Preferred Stock were converted by the holders to
Common Stock at a rate of 1.0 common shares for each Series B Preferred Share.
10. OTHER RELATED PARTY TRANSACTIONS
Certain directors and shareholders of the Company have been associated with
law firms that rendered various legal services to the Company. The Company
recorded charges of approximately $16,000, $443,000, and $165,000 in 1995, 1996,
and 1997 respectively, and $790,000 from the date of inception, for these
services, including services rendered in connection with issuances of stock. As
of December 31, 1996 and 1997, $4,500 and $0 of these charges were unpaid,
respectively.
11. STOCK OPTION PLANS
The 1996 Stock Option Plan permits the grant of non-qualified stock options
and incentive stock options to purchase shares of Common Stock covering 415,000
authorized but unissued or reacquired shares of Common Stock. Unless sooner
terminated by the Board of Directors, the 1996 Stock Option Plan will expire on
January 31, 2006. The Compensation Committee of the Board of Directors has the
authority to select the persons to whom grants are to be made, to designate the
number of shares of Common Stock to be covered by such grants, to determine the
exercise price of options, to establish the
25
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
vesting period of options, and to take all other actions for the administration
of the 1996 Stock Option Plan. The 1996 Stock Option Plan permits the payment of
the option exercise price to be made in cash or by delivery of shares of Common
Stock valued at their fair market value on the date of exercise or delivery of
other property, or by a recourse promissory note payable to the Company, or by a
combination of the foregoing. The Company's Board of Directors has authorized an
increase of 800,000 in the number of shares available under the 1996 Stock
Option Plan subject to shareholder approval.
The 1996 Non-Employee Director Stock Option Plan (the Director Plan) covers
83,000 authorized but unissued or reacquired shares of Common Stock and is
intended to assist the Company in attracting and retaining qualified
non-employee directors. The Director Plan is administered by the Board of
Directors and provides for automatic grants of non-qualified stock options to
purchase 10,000 shares of Common Stock to each non-employee director at the time
of appointment or Election to the Board of Directors. The exercise price of the
options shall be the fair market value of a share of Common Stock on the date of
grant. Each option shall generally become exercisable in cumulative annual
installments of one-third on each of the first three annual meetings of the
Company's stockholders following the date of grant so long as the non-employee
director continues to serve as a director of the Company. In addition, each
non-employee director shall be granted an option to purchase 5,000 shares of
Common Stock on an annual basis. Unless sooner terminated by the Board of
Directors, the Director Plan will expire in 2006.
In 1994, 1995 and 1996, the Company also granted options under prior plans.
A summary of the status of the Company's stock option plans as of December
31, 1995, 1996, and 1997 and changes in the years then ended is as follows:
1995 1996 1997
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
Outstanding at beginning of year.................. 772,315 $0.13 597,600 $0.13 752,440 $ 1.39
Granted........................................... 24,900 $0.12 316,690 $3.13 166,500 $16.62
Exercised......................................... (199,615) $0.13 (161,850) $0.12 (133,630) $ 0.12
Cancelled......................................... (4,660) $ 4.21
-------- -------- -------- -------- -------- --------
Outstanding at end of year........................ 597,600 $0.13 752,440 $1.39 780,650 $ 4.81
-------- -------- --------
-------- -------- --------
Options exercisable at end of year................ 215,800 343,530 503,216
Weighted average fair value of options granted
during the year:
Exercise price equal to market value of
stock...................................... $ 0.01 $4.30 $11.13
Exercise price greater than market value of
stock......................................
Exercise price less than market value of
stock...................................... $ 4.60
The fair value of each option grant is estimated using the Black-Scholes
option pricing model for grants after the Company's October 1996 initial public
offering of Common Stock and a minimum value method for prior grants. The
following weighted-average assumptions were used for grants in 1995, 1996, and
1997 respectively: no dividend yield for all years, risk-free interest rates of
6.0%, 6.2%, and 6.3%, expected lives of 1.0, 3.9, and 5.0 and expected
volatility of 55% in 1996 and 60% in 1997.
26
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of stock options outstanding as of December 31, 1997 is as
follows:
OUTSTANDING EXERCISABLE
-------------------------------- ------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES NUMBER LIFE PRICE NUMBER PRICE
- ------------------------------------------------------------- ------- ----------- -------- ------- --------
$ 0.12 - $ 0.13.............................................. 543,650 2.9 $ 0.13 435,750 $ 0.13
$10.00 - $15.00.............................................. 158,500 8.0 $14.11 50,866 $13.48
$15.01 - $20.00.............................................. 67,000 6.6 $17.10 16,500 $17.11
$20.01 - $30.00.............................................. 11,500 8.1 $26.50 100 $29.56
------- -------
780,650 4.3 $ 4.81 503,216 $ 2.04
------- -------
------- -------
The Company records compensation expense for stock option grants in
accordance with APB No. 25, 'Accounting for Stock Issued to Employees.' Had the
Company elected to record compensation for stock option grants in accordance
with SFAS No. 123, 'Accounting for Stock-Based Compensation', the Company's pro
forma net income and earnings per share amounts would be as follows:
1995 1996 1997
----------- ----------- -----------
Net loss......................................... ($2,122,610) ($3,118,334) ($9,480,118)
Net loss per common share, basic and diluted..... ($0.35) ($0.37) ($0.60)
Pro forma amounts reflect options granted after 1994 and are not likely to
be representative of amounts in future years, as additional options are awarded
and vested.
12. SUBSEQUENT EVENT -- EMPLOYMENT AGREEMENT
In 1998, the Company's employment agreement with its President was extended
through the year 2000. The Company's minimum obligation for base salaries under
employment agreements with officers amounts to approximately $1.2 million.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not Applicable.
27
PART III
The information required by Item 10, Directors and Executive Officers of
the Registrant; Item 11, Executive Compensation; Item 12, Security Ownership of
certain Beneficial Owners and Management; and Item 13, Certain Relationships and
Related Transactions will be included in and is incorporated by reference from
the Registrant's definitive proxy statement to be filed pursuant to Regulation
14A within 120 days after the close of its fiscal year.
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Exhibits:
EXHIBIT
NO. TITLE
- -------- ------------------------------------------------------------------------------------------------------------
3.1 -- Form of Amended and Restated Certificate of Incorporation of Algos Pharmaceutical Corporation(1)
3.2 -- Form of Amended and Restated By-laws of Algos Pharmaceutical Corporation(1)
4.1 -- Form of Stock Certificate of Common Stock(1)
5.1 -- Opinion of Latham & Watkins as to the validity of the Common Stock(1)
10.1.1 -- Employment Agreement with Respect to John W. Lyle
10.1.3 -- Employment Agreement with Respect to Frank S. Caruso(1)
10.2.1 -- 1994 Stock Option Plan(1)
10.2.2 -- Form of 1996 Stock Option Plan(1)
10.2.3 -- Form of 1996 Non-Employee Director Stock Option Plan(2)
10.3.1 -- Algos Pharmaceutical Corporation Stockholders' Agreement(1)
10.4.1 -- License Agreement with The Medical College of Virginia(1)'D''D'
10.4.2 -- License Agreement with McNeil(1)'D''D'
10.4.3 -- Registration Rights Agreement with The Medical College of Virginia(1)
10.5 -- Lease Agreement with Commercial Realty & Resources Corp.(3)
21 -- Subsidiaries of the Registrant(1)
23 -- Consent of Coopers & Lybrand L.L.P.
27.1 -- Financial Data Schedule, December 31, 1997
27.2 -- Financial Data Schedule, December 31, 1996, with Historical EPS
27.3 -- Financial Data Schedule, September 30, 1996, with Historical EPS
27.4 -- Financial Data Schedule, December 31, 1995 and June 30, 1995, with Historical EPS
99 -- Risk Factors
- ------------
(1) Incorporated by reference to the Registrant's registration statement on Form
S-1 declared effective on September 25, 1996.
(2) Incorporated by reference to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1997.
'D''D' Portions of this Exhibit have received confidential treatment pursuant to
Rule 406(b) under the Securities Act.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ALGOS PHARMACEUTICAL CORPORATION
By: /S/ JOHN W. LYLE
.................................
JOHN W. LYLE
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
- ------------------------------------------ -------------------------------------------- -------------------
/S/ JOHN W LYLE President, Chief Executive Officer and March 30, 1998
......................................... Director
JOHN W. LYLE
/S/ DONALD G. DRAPKIN Director March 30, 1998
.........................................
DONALD G. DRAPKIN
/S/ MICHAEL HYATT Director March 30, 1998
.........................................
MICHAEL HYATT
/S/ ROGER H. KIMMEL Director March 30, 1998
.........................................
ROGER H. KIMMEL
/S/ JAMES R. LEDLEY Assistant Secretary and Director March 30, 1998
.........................................
JAMES R. LEDLEY
/S/ DIETER A. SULSER Director March 30, 1998
.........................................
DIETER A. SULSER
/S/ GARY ANTHONY Chief Financial Officer March 30, 1998
.........................................
GARY ANTHONY
30
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as............................ 'tm'
The registered trademark symbol shall be expressed as................. 'r'
The dagger symbol shall be expressed as............................... 'D'