EXHIBIT 99
RISK FACTORS
Algos operates in a rapidly changing environment that involves a number of
risks that may significantly affect Algos' results, some of which are beyond
Algos' control. The following discussion highlights some of these risks, and
others are discussed elsewhere in other documents filed by Algos with the
Securities and Exchange Commission.
IF WE ARE UNABLE TO DEVELOP A MARKETABLE PRODUCT FROM WHICH WE CAN DERIVE
REVENUES, WE ARE UNLIKELY TO ACHIEVE PROFITABILITY.
We have no revenues from product sales and no history of commercial
manufacturing or marketing. To date, substantially all of our funding has been
provided by contributions of capital made by our founders, sales of our stock
and payments received under a license agreement with McNeil Consumer Products
Company with whom we are working to develop an over-the-counter pain reliever.
As a result, we have experienced losses since our inception and losses are
continuing and are expected to continue.
We have a limited history upon which you may base an evaluation of our
likely performance and there is a risk that we will not be able to develop a
marketable product and/or achieve profitability. Algos' prospects must be
considered in light of the potential problems, expenses, complications and
delays encountered in connection with the formation of a new business and the
development of new pharmaceutical products, including obtaining the necessary
regulatory approvals, the utilization of unproven technology, and the
competitive market environment in which Algos plans to operate.
IF WE ARE UNABLE TO ADEQUATELY DEMONSTRATE THE SAFETY AND EFFECTIVENESS OF OUR
PRODUCTS IN HUMANS, WE MAY NOT BE ABLE TO PROCURE NECESSARY REGULATORY APPROVALS
TO BRING OUR PRODUCTS TO MARKET.
In order to receive regulatory approval to sell our products, Algos must
demonstrate that our potential products are safe and effective in humans. 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. Therefore, there is a risk that we may fail to adequately
demonstrate the safety and efficacy of our products which could delay or prevent
regulatory approval of our products and prevent them from being sold.
On August 2, 1999, Algos received a "not approvable" letter from the U.S.
Food and Drug Administration (FDA) regarding its New Drug Application (NDA) for
MorphiDex. FDA approval of an NDA is required for Algos to sell MorphiDex in the
United States. "Not Approvable" letters are issued by the FDA for various
reasons and outline deficiencies that must be corrected prior to NDA approval.
In its letter to Algos, the FDA raised issues specifically related to the
adequacy of clinical trials, Algos' preclinical animal toxicology models and a
high-dose pharmacokinetic study. There is no assurance Algos will be able to
sufficiently address the issues raised by the FDA in the MorphiDex'r' "not
approval" letter. If the FDA requires Algos to perform further preclinical or
clinical work, the potential approval of MorphiDex could be substantially
delayed or may not occur at all There is no assurance the FDA will grant an
approval of the MorphiDex'r' NDA as a result of the Algos response to the "not
approvable" letter.
The speed with which we complete our clinical trials is dependent upon,
among other factors, the ability to locate and enroll suitable patients at
acceptable facilities. Accordingly, delays in planned
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patient enrollment in Algos' current trials or future clinical trials may result
in increased costs, program delays, or both, which may delay the ability of
Algos to begin generating revenues.
We currently do not have regulatory approval to sell any products. The FDA
and comparable agencies in foreign countries impose substantial requirements on
the introduction of 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 and varies
substantially based upon the type, complexity, and novelty of the pharmaceutical
products. There can be no assurance that if clinical trials are completed for a
given product, Algos will be able to submit a New Drug Application for such
product or that any such application will be reviewed and approved by the FDA in
a timely manner, or at all. 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, which may reduce the size of the potential market for any Algos
product. See "Business--Government Regulation" in Algos' 1998 Annual Report on
Form 10-K/A.
IF ALGOS PRODUCTS ARE NOT ACCEPTED BY THE MARKET, ALGOS WILL NOT BE ABLE TO
ACHIEVE PROFITABILITY.
Even if regulatory approvals are obtained and Algos products prove to be
superior to alternative products on the market, uncertainty exists as to Algos'
ability, or the length of time required, to achieve market acceptance of Algos
products. A number of factors may limit the market acceptance of Algos products,
including:
the availability of alternative products with greater name and brand
recognition than Algos products,
the price of Algos 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 Algos.
Furthermore, some of the Algos products contain opioid ingredients that may
require stringent record-keeping obligations, strict storage requirements, and
other limitations on such products' availability that could limit the
distribution and commercial usage of such products. In light of these factors,
there is a significant risk that Algos will not be able to gain market
acceptance for its products which may prevent us from achieving profitability.
OUR SUBSTANTIAL RELIANCE ON THE CAPITAL MARKETS IN ORDER TO MEET OUR FINANCIAL
REQUIREMENTS MAY BE DILUTIVE OF THE VALUE OF ALGOS COMMON STOCK AND MAY IMPEDE
OUR ABILITY TO DEVELOP AND COMMERCIALIZE OUR PRODUCTS.
As a development stage company, Algos requires substantial amounts of
funding for its research and product development programs, operating expenses,
regulatory approvals, and sales and marketing expenses, and no assurance can be
given that development and commercialization costs will not exceed the amounts
budgeted for such purposes. Because we do not currently generate any revenues
from product sales, we are dependent on our existing cash and our ability to
raise additional capital in order to fund our operations until we can begin
marketing our products. Any material delay in the marketing of MorphiDex'r' or
any of our other products may require us to raise additional capital. Algos has
limited financial resources and its substantial reliance on the capital markets
to satisfy its financial requirements
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may dilute the value of Algos common stock. Conversely, if Algos is unable to
obtain sufficient funds through the financial markets or through collaborative
or other arrangements on a timely basis, there is a risk that Algos may be
required to delay, scale back, or eliminate certain of its research, development
or commercialization programs or to make arrangements with third parties to
develop or commercialize products or technologies that Algos would otherwise
seek to develop or commercialize itself. In the event this occurs, Algos may not
be able to independently develop or commercialize any or all of its products.
IF ALGOS IS UNABLE TO SUCCESSFULLY MARKET AND SELL OUR PRODUCTS, WE MAY BE
FORCED TO LICENSE OUR PRODUCTS TO OTHERS WHICH WILL HAVE AN ADVERSE EFFECT ON
ALGOS' PROFITABILITY.
Algos intends to market and sell some or all of its products, if
successfully developed and approved, through a direct sales force in the United
States. However, Algos currently has limited marketing and sales staff, and has
yet to establish any product distribution channels. If we are unable to develop
a sales force with technical expertise or to establish appropriate distribution
channels, we may be forced to license products we have developed to third
parties instead of directly marketing them which may reduce our profitability.
IF ALGOS IS UNABLE TO ACQUIRE SUFFICIENT SUPPLIES FROM THIRD PARTIES, THEN
ALGOS' ABILITY TO DELIVER OUR PRODUCTS TO THE MARKET MAY BE IMPEDED.
Algos currently uses, and expects to continue to use, outside contractors
to manufacture drug supplies for its clinical trials. In addition, Algos
currently intends to use outside contractors to manufacture products approved
for sale, if any. There is no assurance that Algos will be able to obtain its
requested amounts of drugs from these contractors or that supplies will not be
interrupted due to FDA and/or Drug Enforcement Agency, the DEA, regulatory
requirements or other reasons. If Algos cannot obtain a sufficient supply of
ingredients or supplies are interrupted, this may have a material adverse effect
on our ability to develop and commercialize our products and our reputation in
the marketplace.
For instance, Algos currently uses a single contract manufacturer for
supplies of its most developmentally advanced product, MorphiDex'r', 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 opioid ingredients as components of
certain Algos products is subject to quota restrictions imposed and administered
by the DEA. Accordingly, there is a risk that Algos will be unable to obtain its
requested quantities of opioid ingredients which could be detrimental to Algos'
ability to bring its products to market.
IF ALGOS IS UNABLE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL, WE MAY NOT BE ABLE
TO MAINTAIN OUR COMPETITIVE POSITION.
Because of the specialized scientific nature of Algos' business, we are
highly dependent upon our 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 Algos' ability to develop and deliver
our products to market in a competitive manner. While Algos has consulting
agreements with certain key individuals and institutions and has employment
agreements with certain key executives, there can be no assurance that Algos
will be successful in retaining such personnel or their services under existing
agreements. The loss of John Lyle, Algos' Chief Executive Officer, could have a
material adverse effect on Algos because of the loss of Mr. Lyle's expertise and
because we would need to expend time and financial resources to seek a new Chief
Executive Officer which would materially slow our efforts to develop and
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commercialize our products. Algos currently maintains a $6.0 million life
insurance policy on Mr. Lyle. There is intense competition for qualified
personnel in the areas of Algos' activities, and there can be no assurance that
Algos will be able to continue to attract and retain the qualified personnel
necessary for the development of its business.
IF WE ARE UNABLE TO PATENT OUR TECHNOLOGY OR ARE FOUND TO HAVE VIOLATED OR
INFRINGED ON THE PATENTS OF OTHERS, THIS WOULD ADVERSELY AFFECT OUR ABILITY TO
GENERATE REVENUES AND WE MAY NOT BE ABLE TO RECEIVE AN APPROPRIATE RETURN ON OUR
INVESTMENT.
Algos' policy is to seek patent protection and enforce intellectual
property rights. However, no assurance can be given that any patents will be
allowed or will provide protection against competitive products or otherwise be
commercially viable. In this regard, the patent position of pharmaceutical
compounds and compositions is particularly uncertain. Because we are a
development stage company without brand name recognition for our products, our
ability to successfully patent and protect the technologies we are developing or
may develop in the future is especially crucial to our ability to generate
future revenues and maintain our competitive position. However, there is a risk
that Algos' pending patent applications may not be allowed, or if they are
allowed, that the scope of the claims allowed will be insufficient to protect
Algos products. Furthermore, even issued patents may later be modified or
revoked by the United States Patent and Trademark Office, the PTO, or in legal
proceedings. Any of these outcomes would reduce future revenues and the return
on any investment in Algos.
In addition, no assurance can be given as to whether Algos will be able to
avoid violating or infringing upon patents issued to others. If Algos were found
to be infringing on a patent held by another, Algos might have to seek a license
to use the patented technology. There can be no assurance that, if required,
Algos would be able to obtain such a license on terms acceptable to Algos, if at
all. If a legal action were to be brought against Algos or its licensors or
licensees, Algos could incur substantial costs in defending itself, and there
can be no assurance that such an action would be resolved in Algos' favor. If a
patent infringement dispute were to be resolved against Algos, Algos could be
subject to significant damages and the manufacture or sale of one or more of
Algos' technologies or proposed products, if developed, could be stopped.
IF THIRD-PARTY REIMBURSEMENT FOR OUR PRODUCTS IS UNAVAILABLE OR INADEQUATE, WE
MAY NOT BE ABLE TO REALIZE AN APPROPRIATE RETURN ON OUR INVESTMENT AND/OR THE
MARKET ACCEPTANCE OF OUR PRODUCTS COULD BE ADVERSELY AFFECTED.
Algos' 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. 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. Because we are developing a drug that may have higher costs than
generic alternatives that are currently available, there is a risk that insurers
will be unwilling to provide coverage for our product. If adequate coverage and
reimbursement levels are not provided by government and third-party payers for
uses of Algos products, the market acceptance of our products could be adversely
affected and/or Algos may not be able to establish and maintain price levels
sufficient for the realization of an appropriate return on our investment.
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IF ALGOS INCURS INDEMNIFICATION LIABILITY, OR A LIABILITY SUIT IS SUCCESSFULLY
PROSECUTED AGAINST US, WE MAY NOT HAVE SUFFICIENT FUNDS TO PAY THE RESULTING
DAMAGES.
Algos will be exposed to product liability claims and other potential
liability risks, which are inherent in the development, manufacturing, marketing
and other activities related to the development and commercialization of human
therapeutic products. In addition, Algos is contractually obligated under
certain of our agreements to indemnify certain individuals and/or institutions,
including licensors, directors and officers of the Company with whom we do
business. Algos' indemnification liability, as well as direct liability as
third parties, could expose Algos to substantial losses which would reduce
earnings and funds available for research and development activities.
Algos currently carries certain insurance for these indemnification
obligations and other potential liabilities. In addition, McNeil Consumer
Products Company is required by its license agreement to maintain product
liability insurance and may self-insure to cover its indemnification obligations
to Algos. However, there can be no assurance that Algos will be able to maintain
such insurance or purchase additional insurance on acceptable terms or that any
insurance obtained will provide adequate coverage against potential liabilities.
IF THE MCNEIL LICENSE AGREEMENT IS TERMINATED AND ALGOS DESIRES TO DEVELOP AND
COMMERCIALIZE ITS OVER-THE-COUNTER PRODUCTS, ALGOS MAY BE FORCED TO DO SO ITSELF
WHICH MAY REDUCE PROFITS.
We are relying on McNeil to commercialize products involving acetaminophen,
ibuprofen, and certain other over-the-counter pain relievers. Acetaminophen is
the active ingredient in Tylenol'r' and ibuprofen is the active ingredient in
Motrin'r', both of which are manufactured by McNeil. If the agreement with
McNeil is terminated, then in the event that we desire to develop and
commercialize our products, we may be forced to do so ourselves. Because Algos
does not have the same level of resources as McNeil, this may reduce any
potential future revenues we may otherwise generate.
The license agreement dated June 26, 1996 with McNeil Consumer Products
Company extends until the later of the expiration of Algos' patent rights or ten
years from the date of execution, provided that the agreement is terminable:
by either party in the event of a breach by the other party upon 90
days notice or upon certain events of bankruptcy;
by McNeil Consumer Products Company, at any time upon 60 days notice;
and
by Algos upon certain other circumstances.
IF ALGOS' COMPETITORS SUCCEED IN DEVELOPING COMPETING TECHNOLOGIES MORE RAPIDLY
THAN ALGOS, THE PRODUCTS WE ARE DEVELOPING MAY BE RENDERED OBSOLETE WHICH WOULD
PREVENT US FROM SUCCESSFULLY COMPETING IN OUR TARGET MARKETS.
As a development stage company, Algos' success will largely depend upon its
ability to successfully achieve market share at the expense of existing and
established products in Algos' target markets. A number of pharmaceutical
companies are developing pain relief products. Many of Algos' competitors have a
significantly higher degree of brand name recognition and substantially more
financial resources than those of Algos. They also may have greater research and
development capacities, experience, recognition, and marketing, financial, and
managerial resources than Algos. Accordingly, if Algos'
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competitors succeed in developing competing technologies and obtaining FDA
approval for products more rapidly than Algos, Algos products or technologies
may be rendered non-competitive or obsolete, in which case we would be unable to
compete in our target market.
A THIRD PARTY MAY HAVE DIFFICULTY SUCCESSFULLY MOUNTING A TAKEOVER BID FOR
CONTROL OF ALGOS WHICH COULD PREVENT YOU FROM MAXIMIZING THE VALUE OF YOUR ALGOS
COMMON STOCK AND COULD MAKE YOUR INVESTMENT LESS LIQUID.
The ownership of Algos is concentrated, with a small group of stockholders,
directors, officers, and related investors owning approximately 40% of the
common stock. These stockholders, if they acted together, would have the ability
to influence significantly the election of Algos' directors as well as the
management and policies of Algos. This concentration of ownership may have the
effect of delaying or preventing a change of control of Algos. Certain other
provisions of Algos' Amended and Restated Certificate of Incorporation could
also have the effect of delaying or preventing changes of control or management
of Algos, which could adversely affect the market price and liquidity of our
common stock. In addition, Algos is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which prohibits Algos 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 Algos and could make
your investment less liquid.
IF WE, OUR CONTRACTORS, OR OTHER ENTITIES ARE UNABLE TO ADEQUATELY ADDRESS THE
POTENTIAL DISRUPTIONS TO COMPUTER SYSTEMS THAT MAY OCCUR DUE TO THE ADVENT OF
THE YEAR 2000, WE MAY NOT BE ABLE TO EFFECTIVELY MANUFACTURE, DEVELOP OR
COMMERCIALIZE OUR PRODUCTS.
A potential problem exists for all companies that rely on computers as the
year 2000 approaches. Computer software applications and systems that use only
the last two digits of a year to refer to a year may not properly recognize the
year 2000. This could cause a disruption of our operations, including, among
other things, a temporary inability to engage in normal business activities.
Because new development projects have not yet commenced and because we have not
completed our preparations for the commercialization and marketing of our
products, our assessment of our readiness with respect to the potential year
2000 computer problem is not complete.
For example, with respect to product development activities at Algos, if
certain data management and statistical applications do not function properly,
the analysis and reporting of study results could be delayed and the timing of
subsequent development activities and regulatory filings could be adversely
affected.
Algos may make significant additions to and changes in its existing
computer software applications and systems and/or the use of these systems in
anticipation of the possible commercialization of products. If Algos makes any
of these additions or changes, it would affect Algos' exposure to the potential
year 2000 computer problem since Algos would become more reliant on its computer
software applications and systems. If Algos commercializes products, it expects
to place significant dependence on the third parties' computer systems for
purchasing, production, customer order entry and invoicing, and other related
activities. A disruption in these systems could result in lost revenue from
inventory shortages, improper execution of customer orders, and/or delays in the
resolution and collection of outstanding invoices.
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As part of our manufacturing, development and commercialization efforts, we
will ask our outside vendors, manufacturers, suppliers and service providers
whether they and/or any additional information systems and software that we
acquire from them are year 2000 compliant. However, these parties may be unable
or unwilling to make assurances of their year 2000 compliance. And, even if we
do receive assurances of year 2000 compliance, the parties making the assurances
may not in fact be year 2000 compliant. In the event any of our outside vendors,
manufacturers, suppliers, and service providers are not year 2000 compliant, we
will likely be prevented from developing or commercializing some or all of our
products in a timely or efficient manner.