EXHIBIT 99
RISK FACTORS
The Company operates in a rapidly changing environment that involves a
number of risks that may significantly affect the Company's results, some of
which are beyond the Company's control. The following discussion highlights some
of these risks, and others are discussed elsewhere herein and in other documents
filed by the Company with the Securities and Exchange Commission.
Development Stage of the Company; Continuing Losses; Uncertainty of Future
Profitability
Since its formation in January 1992, the Company has been engaged
primarily in organizational and start-up activities, conducting research and
development programs, recruiting officers and key scientists, and negotiating
and consummating technology licensing and research agreements. The Company has
no revenues from product sales and no history of manufacturing or marketing. To
date, substantially all of its funding has been provided by contributions of
capital made by its founders, sales of its stock and payments from McNeil
pursuant to the McNeil License Agreement. There can be no assurance that the
Company will have any source of product revenue or that its operations will
eventually generate sufficient revenues to achieve profitability. The Company
has experienced losses since its inception and losses are continuing and are
expected to continue. Therefore, the Company has a limited history upon which
investors may base an evaluation of its likely performance. The Company's
prospects must be considered in light of the potential problems, expenses,
complications and delays frequently encountered in connection with the
formation of a new business, the development of new pharmaceutical products,
including obtaining the necessary regulatory approvals, the utilization of
unproven technology and the competitive market environment in which the Company
plans to operate.
Uncertainty Associated with Pre-Clinical Studies and Clinical Trials
In order to receive regulatory approval to sell its products
commercially, the Company must demonstrate in pre-clinical studies and clinical
trials that its potential products are safe and effective in humans. Although
the results of the Company's initial pre-clinical studies and clinical trials to
date have been encouraging, the results of initial pre-clinical studies and
clinical trials are not by themselves predictive of results that will be
obtained from subsequent or more extensive trials. Furthermore, there can be no
assurance that clinical trials of products under development will demonstrate
the safety and efficacy of such products to the extent necessary to obtain
regulatory approvals. Many pharmaceutical companies have suffered significant
setbacks in advanced clinical trials, even after promising results in earlier
trials. The failure to adequately demonstrate
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the safety and efficacy of a product could delay or prevent regulatory approval
of such product and could have a material adverse effect on the Company.
The rate of completion of clinical trials is dependent upon, among other
factors, the enrollment of patients. Patient accrual is a function of many
factors, including the size of the patient population, the proximity of patients
to clinical sites, the eligibility criteria for the study and the existence of
competitive clinical trials. Delays in planned patient enrollment in the
Company's current trials or future clinical trials may result in increased
costs, program delays or both, which could have a material adverse effect on the
Company. There can be no assurance that if clinical trials are completed the
Company will be able to submit an NDA as scheduled or that any such application
will be reviewed and approved by the FDA in a timely manner, or at all. See
"Business -- Government Regulation" in the Company's 1997 Annual Report on
Form 10-K.
Government Regulation; No Assurance of United States or Foreign Regulatory
Approval
The FDA and comparable agencies in foreign countries impose substantial
requirements on the introduction of therapeutic pharmaceutical products through
lengthy and detailed laboratory and clinical testing and other costly and
time-consuming procedures. Satisfaction of these requirements typically takes a
number of years, varies substantially based upon the type, complexity and
novelty of the pharmaceutical products and is subject to uncertainty. Government
regulation also affects the manufacture and marketing of pharmaceutical
products. Regulatory approvals, if granted, may include significant limitations
on the indicated uses for which a product may be marketed. The FDA actively
enforces regulations prohibiting marketing of products for non-indicated use.
Failure to comply with applicable regulatory requirements can result in, among
other things, government imposed fines, suspensions of approvals, seizures or
recalls of products, operating restrictions and criminal prosecutions.
Furthermore, changes in existing regulations or adoption of new regulations
could prevent the Company from obtaining, or affect the timing of, future
regulatory approvals. The effect of government regulation may be to delay
marketing of the Company's new products for a considerable period of time, to
impose costly procedures upon the Company's activities and to furnish a
competitive advantage to larger companies that compete with the Company. There
can be no assurance that FDA or other regulatory approval for any products
developed by the Company will be granted on a timely basis, if at all. Any such
delay in obtaining, or failure to obtain, such approvals would adversely affect
the marketing of the Company's products and the ability to generate product
revenue. The Company is also subject to certain DEA regulations, including
restrictions on storage, transportation and administration, for its
narcotic products. Government regulation may increase at any time, creating
additional hurdles for the Company. The extent of potentially adverse government
regulation which might arise from future legislation or administrative action
cannot be predicted. See 'Business -- Government Regulation' in the Company's
1997 Annual Report on Form 10-K.
Uncertainty of Market Acceptance
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Even if regulatory approvals are obtained, uncertainty exists as to
whether the Company's products will be accepted by the market. A number of
factors may limit the market acceptance of the Company's products, including the
timing of regulatory approvals and market entry relative to competitive
products, the availability of alternative products, the price of the Company's
products relative to alternative products, the availability of third-party
reimbursement and the extent of marketing efforts by third-party distributors or
agents retained by the Company. There can be no assurance of the Company's
ability, or the length of time required, to achieve market acceptance of the
Company's products. In addition, certain of the Company's products contain
narcotic ingredients that may require stringent record-keeping obligations,
strict storage requirements and other limitations on such products' availability
that could limit the commercial usage of such products.
Need for Additional Funds
The amount and timing of the Company's expenditures will depend on the
progress of its research and development, the cost and timing of regulatory
approvals, the amount of spending on sales, marketing and distribution
activities in preparation for the possible commercialization of MorphiDex,
general market conditions, relationships with potential strategic partners,
changes in the focus and direction of the Company's research and development
programs, competitive and technological advances and other factors. The
Company's cash requirements may vary materially from those now planned and no
assurance can be given that development costs will not exceed the amounts
budgeted for such purposes. The Company may require additional funding for its
research and product development programs, operating expenses, regulatory
clearances and sales and marketing expenses. Adequate funds for these purposes,
whether obtained through financial markets or through collaborative or other
arrangements with partners or from other sources, may not be available when
needed or on terms acceptable to the Company. Insufficient funds may require the
Company to delay, scale back or eliminate certain of its research and
development programs or to make arrangements with third parties to commercialize
products or technologies that the Company would otherwise seek to develop
itself. As a result, the Company may not be able to independently develop any or
all of the products described in this Report.
Limited Sales and Marketing Experience
The Company intends to market and sell certain of its products, if
successfully developed and approved, through a direct sales force in the United
States. The Company currently has no marketing and sales staff, and has yet to
establish any product distribution channels. In order to market its products
directly, the Company must develop a sales force with technical expertise. There
can be no assurance that the Company will be able to successfully establish a
direct sales organization or distribution channels. Failure to establish a sales
force capability in the U.S. may have a material adverse effect on the Company.
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Reliance on Third-Party Manufacturers
The Company currently uses, and expects to continue to use, outside
contractors to manufacture drug supplies for its clinical trials. In addition,
the Company currently intends to use outside contractors to manufacture products
approved for sale, if any. There is no assurance that supplies from any such
contractor will not be reduced or interrupted due to FDA and DEA regulatory
requirements or other reasons. Such a reduction or interruption could have a
material adverse effect on the Company's development and commercialization
activities. The Company currently uses a single contract manufacturer for
supplies of its most developmentally advanced product, MorphiDex'TM' and
suppliers of raw materials are limited. The regulatory qualification of
additional suppliers and/or manufacturers may require significant time and
expense. In addition, the acquisition of narcotics as components of certain of
the Company's products is subject to quota restrictions imposed and administered
by DEA. There is no assurance that the Company will be able to obtain its
requested quantities of such narcotics.
Dependence on Qualified Personnel
Because of the specialized scientific nature of the Company's business,
the Company is highly dependent upon its ability to attract and retain qualified
scientific and technical personnel. The loss of significant scientific and
technical personnel or the failure to recruit additional key scientific and
technical personnel could have a material adverse effect on the Company. While
the Company has consulting agreements with certain key individuals and
institutions and has employment agreements with its key executives, there can be
no assurance that the Company will be successful in retaining such personnel or
their services under existing agreements. The loss of John Lyle, the Company's
Chief Executive Officer, could have a material adverse effect on the Company.
The Company currently maintains a $6.0 million life insurance policy on Mr.
Lyle. There is intense competition for qualified personnel in the areas of the
Company's activities, and there can be no assurance that the Company will be
able to continue to attract and retain the qualified personnel necessary for the
development of its business.
Uncertain Ability to Protect Proprietary Technology
The Company's success, competitive position and amount of potential
future income will depend in part on its ability to obtain patent protection
relating to the technologies, processes and products it is developing and may
develop in the future. The Company's policy is to seek patent protection and
enforce intellectual property rights. No assurance can be given that any patent
issued or licensed to the Company will provide protection against competitive
products or otherwise be commercially viable. In this regard, the patent
position of pharmaceutical compounds
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and compositions is particularly uncertain. Even issued patents may later be
modified or revoked by the PTO or in legal proceedings. Moreover, the Company
believes that obtaining foreign patents may be more difficult than obtaining
domestic patents because of differences in patent laws, and accordingly, its
patent position may be stronger in the U.S. than abroad. In addition, foreign
patents may be more difficult to protect and/or the remedies available may be
less extensive than in the U.S. Patent applications in the U.S. are maintained
in secrecy until patents issue and, since publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries. The
Company cannot be certain that it was the first creator of the inventions
covered by pending patent applications or the first to file patent applications
on such inventions. No assurance can be given that any of the Company's pending
patent applications will be allowed, or if allowed, whether the scope of the
claims allowed will be sufficient to protect the Company's products.
The Company also expects to rely upon trade secrets, know-how,
continuing technological innovations and licensing opportunities to develop and
maintain its competitive position. There can be no assurance that others will
not independently develop substantially equivalent proprietary information or be
issued patents that may prevent the sale of the Company's products or know-how
or require licensing and the payment of significant fees or royalties by the
Company in order to produce its products. Moreover, there can be no assurance
that the Company's technology does not infringe upon any valid claims of patents
owned by others. If the Company were found to be infringing on a patent held by
another, the Company might have to seek a license to use the patented
technology. There can be no assurance that, if required, the Company would be
able to obtain such a license on terms acceptable to the Company, if at all. If
a legal action were to be brought against the Company or its licensors, the
Company could incur substantial costs in defending itself, and there can be no
assurance that such an action would be resolved in the Company's favor. If such
a dispute were to be resolved against the Company, the Company could be subject
to significant damages and the testing, manufacture or sale of one or more of
the Company's technologies or proposed products, if developed, could be
enjoined.
No assurance can be given as to the degree of protection any patents will
afford, whether patents will be issued or whether the Company will be able to
avoid violating or infringing upon patents issued to others. Despite the use of
confidentiality agreements and non-compete agreements, which themselves may be
of limited effectiveness, it may be difficult for the Company to protect its
trade secrets. See "Risk Factors -- Dependence on Qualified Personnel."
Uncertain Availability of Health Care Reimbursement
The Company's ability to commercialize its pain management products may
depend in part on the extent to which reimbursement for the costs of such
products will be available from government health administration authorities,
private health insurers and others. There can be no assurance that third-party
insurance coverage will be
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adequate for the Company to establish and maintain price levels sufficient for
realization of an appropriate return on its investment. Government, private
insurers and other third-party payers are increasingly attempting to contain
health care costs by limiting both coverage and the level of reimbursement for
new products approved for marketing by the FDA and by refusing, in some cases,
to provide any coverage for uses of approved products for indications for which
the FDA has not granted marketing approval. If adequate coverage and
reimbursement levels are not provided by government and third-party payers for
uses of the Company's products, the market acceptance of these products could be
adversely affected.
No Product Liability Insurance
The Company will be exposed to potential product liability risks, which
are inherent in the testing, manufacturing and marketing of human therapeutic
products. The Company is contractually obligated under certain of its license
agreements to indemnify the individuals and/or institutions from whom it has
licensed the technology against claims relating to the manufacture and sale of
the products to be sold by the Company. McNeil, however, has agreed to indemnify
the Company for third party claims or suits resulting from the manufacture, use
or sale of the products pursuant to the McNeil License Agreement. The Company's
indemnification liability, as well as direct liability to consumers for any
defects in the products sold, could expose the Company to substantial risk and
losses. The Company currently carries liability insurance for its clinical trial
activities but does not have product liability insurance covering commercial use
of its products. The Company plans to purchase such product liability insurance
as it deems appropriate prior to marketing its products. McNeil is required by
the McNeil License Agreement to maintain product liability insurance and may
self-insure to cover its indemnification obligations to the Company. However,
there can be no assurance that the Company will be able to obtain or maintain
such insurance on acceptable terms or that any insurance obtained will provide
adequate coverage against potential liabilities.
Certain Risks Associated With the McNeil License Agreement
The McNeil License Agreement extends until the later of the expiration of
the Company's patent rights or ten years from the date of execution, provided
that the McNeil License Agreement is terminable: (i) by either party in the
event of a 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 upon certain other 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, if any, 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 the 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.
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Competition and Technological Changes, Uncertainty and Obsolescence
The Company's success will depend, in part, upon its ability to
successfully achieve market share at the expense of existing and established
products in the Company's target markets. The Company's products will be
competing directly with the products of companies that are well-established and
which may have a significantly higher degree of brand and name recognition and
substantially more financial resources than those of the Company. The Company is
also in competition with other pharmaceutical companies, hospitals, research
organizations, individual scientists and non-profit organizations engaged in the
development of new pain management pharmaceuticals. Many of these companies and
entities have greater research and development capacities, experience,
recognition and marketing, financial and managerial resources than the Company
and represent significant competition for the Company. Also, the Company's
competitors may succeed in developing competing technologies and obtaining FDA
approval for products more rapidly than the Company. There can be no assurance
that developments by others will not render the Company's products or
technologies non-competitive or obsolete.
Concentration of Ownership
As of April 1998, the Company's directors and officers beneficially own
approximately 28% of the Company's Common Stock. In addition, the Company's
largest stockholder, Unifina AG, and related investors control approximately 11%
of the Common Stock. As a result, these stockholders, if they acted together,
would have the ability to influence significantly the election of the Company's
directors as well as the management and policies of the Company. This
concentration of ownership may have the effect of delaying or preventing a
change of control of the Company.
Possible Volatility of Stock Price
The stock market has from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. The market price of the Company's Common Stock may prove
to be highly volatile from a variety of variable influences. Announcements of
technological innovations, regulatory matters or new commercial products by the
Company or its competitors, developments or disputes concerning patent or
proprietary rights, publicity regarding actual or potential clinical results
relating to products under development by the Company or its competitors,
regulatory developments in both the U.S. and foreign countries, public concern
as to the safety of pharmaceutical products, economic and other external
factors, as well as period-to-period fluctuations in financial results, may have
a significant impact on the market price of the Company's Common Stock. The
timing and amount of the Company's development and commercialization
expenditures are subject to significant uncertainties; operating results for any
accounting period may not be indicative of expected results for future periods.
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Absence of Dividends
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain earnings, if any, to support its
growth strategy and does not anticipate paying cash dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including the Company's financial condition, operating results, current and
anticipated cash needs and plans for expansion.
Effect of Anti-Takeover Provisions
The Company's Amended and Restated Certificate of Incorporation provides
for a classified Board of Directors and that members of the Board of Directors
may be removed only for cause upon the affirmative vote of holders of at least a
majority of the shares of capital stock of the Company entitled to vote. The
Company's Amended and Restated Certificate of Incorporation requires that any
action required or permitted to be taken by stockholders of the Company must be
effected at a duly called annual or special meeting of stockholders and may not
be effected by any consent in writing, and will require reasonable advance
notice by a stockholder of a proposal or director nomination which such
stockholder desires to present at any annual or special meeting of stockholders.
Special meetings of stockholders may be called only by the Chief Executive
Officer or, if none, the President of the Company or by the Board of Directors.
In addition, the Board of Directors has the authority, without further action by
the stockholders, to fix the rights and preferences of, and issue shares of,
Preferred Stock. The Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which prohibits the Company
from engaging in a 'business combination' with an 'interested stockholder' for a
period of three years after the date of the transaction in which the person
first becomes an 'interested stockholder,' unless the business combination is
approved in a prescribed manner. The application of these provisions could have
the effect of delaying or preventing a change of control of the Company. Certain
other provisions of the Company's Amended and Restated Certificate of
Incorporation could also have the effect of delaying or preventing changes of
control or management of the Company, which could adversely affect the market
price of the Common Stock.
Forward Looking Statements
This Report contains "forward-looking" statements, within the meaning
of Section 27A of Securities Act of 1993, 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
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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; uncertainty of market acceptance of new products; impact of
competitive products and pricing; product development; changes in laws and
regulations; customer demand; possible future litigation; and the availability
of future financing. Readers should evaluate any statement in light of these
important factors.
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