FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
(Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter period ended January 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
COMMISSION FILE NUMBER 1-10615
EMISPHERE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3306985
-------- (I.R.S. Employer
(State or jurisdiction of Identification Number)
incorporation or organization)
15 SKYLINE DRIVE 10532
HAWTHORNE, NEW YORK -----
------------------- (Zip Code)
(Address of principal executive offices)
(914) 347-2220
--------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be files by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
Registrant was required to file such reports) and (2) has been subject to
such filing requirements for at least the past 90 days. Yes X No
----- ----
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the Registrant's common stock, $.01 par value,
outstanding as of March 7, 1997 was: 9,520,066
EMISPHERE TECHNOLOGIES, INC.
TABLE OF CONTENTS
January 31, 1997
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: PAGE
---------------------- ----
Condensed Balance Sheets 3
Condensed Statements of Operations 4
Condensed Statement of Stockholders' Equity 5
Condensed Statements of Cash Flows 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of
-----------------------------------------
Financial Condition and Results of Operations 9
---------------------------------------------
PART II. OTHER INFORMATION
Item 5. Other Information 12
-----------------
Item 6. Exhibits and Reports on Form 8-K 12
--------------------------------
2
EMISPHERE TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
July 31. January 31.
Assets: 1996 1997
------------ ------------
Current assets:
Cash and cash equivalents $ 11,904,674 $ 4,915,989
Marketable securities 6,332,817 10,952,096
Receivable due from Elan-Emisphere Venture 880,743
Prepaid expenses and other current assets 289,769 494,349
------------ ------------
Total current assets 18,527,260 17,243,177
Equipment and leasehold improvements, at cost, net of
accumulated depreciation and amortization 1,450,862 1,417,615
Other assets 61,243 61,243
------------ ------------
Total assets $ 20,039,365 $ 18,722,035
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 191,038 $ 198,839
Accrued compensation 211,826 226,317
Accrued professional fees 263,000 159,500
Accrued expenses 61,923 80,054
------------ ------------
Total current liabilities 727,787 664,710
Investment deficiency in Elan-Emisphere Venture 1,287,547
Deferred lease liability 44,823 39,682
------------ ------------
Total liabilities 772,610 1,991,939
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized,
none issued and outstanding
Common stock, $.01 par value; 20,000,000 shares authorized;
9,450,760 shares issued (9,407,260 outstanding) at July 31,
1996; 9,550,614 shares issued (9,507,114 outstanding) at
January 31, 1997 94,508 95,506
Additional paid-in capital 62,129,161 62,987,604
Accumulated deficit (42,735,810) (46,170,848)
Net unrealized (loss) gain on marketable securities (28,291) 10,647
------------ ------------
19,459,568 16,922,909
Less, common stock held in treasury, at cost; 43,500 shares (192,813) (192,813)
------------ ------------
Total stockholders' equity 19,266,755 16,730,096
------------ ------------
Total liabilities and stockholders' equity $ 20,039,365 $ 18,722,035
============ ============
See accompanying notes to financial statements. The July 31, 1996 Condensed
Balance Sheet data was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
3
EMISPHERE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months ended For the six months ended
January 31, January 31,
------------------------ --------------------------
1996 1997 1996 1997
---------- ----------- ----------- -----------
Contract revenues $3,033,333 $ 535,066 $ 3,033,333 $ 2,529,516
---------- ------------ ------------ ------------
Costs and expenses:
Research and development 1,500,466 1,864,530 2,883,875 3,526,077
Loss in Elan-Emisphere Venture 305,611 1,297,545
General and administrative expenses 610,827 1,044,706 1,226,727 1,648,351
---------- ------------ ------------ ------------
Total operating expenses 2,111,293 3,214,847 4,110,602 6,471,973
---------- ------------ ------------ ------------
Operating (loss) income 922,040 (2,679,781) (1,077,269) (3,942,457)
---------- ------------ ------------ ------------
Other income:
Investment income 234,490 251,100 294,608 507,419
---------- ------------ ------------ ------------
Net income (loss) $1,156,530 $(2,428,681) $ (782,661) $(3,435,038)
========== ============ ============ ============
Net income (loss) per share $ 0.14 $ (0.26) $ (0.10) $ (0.36)
========== ============ ============ ============
Weighted average number of
shares outstanding 8,327,466 9,489,732 8,035,391 9,467,632
========== ============ ============ ============
See accompanying notes to the financial statements
4
EMISPHERE TECHNOLOGIES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
For the six months ended January 31, 1997
Additional
Common Stock Paid-in Accumulated
--------------------
Shares Amount Capital Deficit
--------- --------- ------------- ---------------
Balance, July 31, 1996 9,450,760 $ 94,508 $ 62,129,161 $ (42,735,810)
Sale of common stock under
employee stock purchase
plans and exercise of 99,854 998 858,443
options
Change in net unrealized
gain(loss) on marketable
securities
Net loss for the six months
ended January 31, 1997 (3,435,038)
--------- --------- ------------- ---------------
Balance, January 31, 1997 9,550,614 $ 95,506 $ 62,987,604 $ (46,170,848)
========= ========= ============= ===============
Net Unrealized
(Loss)Gain on Common Stock
Marketable Held In Treasury
Securities Shares Amount Total
------------ ------- ------------ -------------
Balance, July 31, 1996 $ (28,291) 43,500 $ (192,813) $ 19,266,755
Sale of common stock under
employee stock purchase
plans and exercise of
options 859,441
Change in net unrealized
gain(loss) on marketable
securities 38,938 38,938
Net loss for the six months
ended January 31, 1997 (3,435,038)
------------ ------- ------------ --------------
Balance, January 31, 1997 $ 10,647 43,500 $ (192,813) $ 16,730,096
============ ======= ============ ==============
See accompanying notes to financial statements
5
EMISPHERE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the six months ended
January 31,
--------------------------
1996 1997
------------ -------------
Cash flows from operating activities:
Net loss $ (782,661) $ (3,435,038)
------------ -------------
Adjustments to reconcile net loss to net cash (used in)
operating activities:
Loss in Elan-Emisphere Venture 1,297,545
Depreciation and amortization 270,629 204,100
Decrease in deferred lease liability (5,139) (5,141)
Realized gain on sale of marketable securities (10,182) (248)
Change in assets and liabilities:
Receivable due from Elan-Emisphere Venture (880,743)
Prepaid expenses and other current assets (110,638) (204,580)
Accounts payable and accrued expenses (250,921) (63,077)
Investment in Elan-Emisphere Venture (9,998)
------------ -------------
Total adjustments (106,251) 337,858
------------ -------------
Net cash (used in) operating activities (888,912) (3,097,180)
------------ -------------
Cash flows from investing activities:
Capital expenditures (71,699) (170,853)
Purchase of marketable securities (5,134,639) (8,447,406)
Proceeds from sales of marketable securities 2,618,323 3,867,313
------------ -------------
Net cash (used in) investing activities (2,588,015) (4,750,946)
------------ -------------
Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants to Elan
International Services ltd. 7,463,000
Proceeds from exercise of options and employee stock purchases 227,168 859,441
------------ -------------
Net cash provided by financing activities 7,690,168 859,441
------------ -------------
Net increase (decrease) in cash and cash equivalents 4,213,241 (6,988,685)
Cash and cash equivalents, beginning of period 2,226,156 11,904,674
------------ -------------
Cash and cash equivalents, end of period $ 6,439,397 $ 4,915,989
============ =============
See accompanying notes to financial statements
6
EMISPHERE TECHNOLOGIES, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
1. INTERIM FINANCIAL STATEMENTS:
The interim Condensed Statements of Operations for the three months and six
months ended January 31, 1996 and 1997 and Condensed Statements of Cash
Flows for the six months ended January 31, 1996 and 1997, and the
Condensed Balance Sheets as of July 31, 1996 and January 31, 1997, of
Emisphere Technologies, Inc. (the "Company"), have been prepared in
accordance with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all information and disclosures
necessary for a presentation of the Company's financial position, results
of operations and cash flows in conformity with generally accepted
accounting principles. In the opinion of management, these financial
statements reflect all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the Company's financial
position, results of operations and cash flows for such periods. The
results of operations for any interim period are not necessarily indicative
of the results for the full year. These financial statements should be
read in conjunction with the financial statements and notes thereto
contained in the Company`s Annual Report on Form 10-K for the fiscal year
ended July 31, 1996.
2. ELAN-EMISPHERE VENTURE
During October 1996, the equally owned joint venture formed by the Company
and Elan Corporation plc (the "Elan-Emisphere Venture" or the "Venture")
commenced operations. The Company accounts for its investment in the
Venture in accordance with the equity method of accounting. Since the
Venture's inception (September 1996), the Company has contributed capital
to the Venture of approximately $10,000. For the three months ended
January 31, 1997, the Venture incurred a net loss of approximately
$611,000, and for the period from inception (September 1996) to January 31,
1997, $2,595,000. The Company's 50% share of such loss was approximately
$305,500 and $1,297,500, respectively.
Contract revenue from the Venture, with respect to services provided by the
Company to the Venture, is recognized as the related services are rendered.
Such revenue for the three months ended January 31, 1997 totaled
approximately $386,293 and for the period from inception (September 1996)
to January 31, 1997, $2,380,743.
Selected financial data of the Venture as of January 31, 1997 is as
follows:
Balance Sheet Data
Assets:
Cash $ 3,053,000
Other 12,000
-------------
$ 3,065,000
=============
Liabilities and Stockholders Deficit:
Accounts payable (1) 1,140,000
Subordinated debt 4,500,000
Stockholders' deficit (2,575,000)
-------------
$ 3,065,000
=============
(1) Includes $881,000 due the Company.
Statement of Operations Data
For the three Inception
months ended (September 1996)
January 31, 1997 to January 31, 1997
---------------- -------------------
Total Revenue $ 34,000 $ 45,000
Total expenses (2) 645,000 2,640,000
---------- -----------
Net loss $ 611,000 $ 2,595,000
========== ===========
(2) Includes $386,000 and $2,381,000 related to services performed by the
Company on behalf of the Venture for the three and six months ended January
31, 1997 respectively.
7
3. AGREEMENT WITH ELI LILLY AND COMPANY
During February 1997, the Company and Eli Lilly and Company ("Lilly")
entered into a strategic alliance (the "Lilly Strategic Alliance"). The
terms of the Lilly Strategic Alliance provide for Lilly to fund certain
research conducted by the Company on behalf of Lilly. Lilly has agreed to
fund this research for a period of 18 to 24 months. Lilly has a right to
license the Company's technology and should the Company's research be
successful, the Company would be entitled to receive fees, milestone
payments and royalties.
4. IMPACT OF THE FUTURE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARD
During February 1997, the Financial Accounting Standards Board issued
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128").
SFAS 128 will require the Company to replace the current presentation of
"primary" per share data with " basic" and "diluted" per share data. Since
the impact of outstanding common stock equivalents on per share data is
antidilutive, the future adoption of SFAS 128 will not have a material
impact on the Company's per share data. SFAS 128 will be adopted by the
Company for periods ending after December 15 1997.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements under the caption "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" and elsewhere in
this report on Form 10-Q constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance, or achievements expressed or implied by such forward-
looking statements. Such factors include, among others, the following:
uncertainties related to future test results and viability of the Company's
product candidates, which are in the early stages of development; the need to
obtain regulatory approval for the Company's product candidates; the Company's
dependence on partnerships with pharmaceutical and other companies to develop,
manufacture and commercialize products using the Company's drug delivery
technologies; the Company's dependence on the success of its joint venture with
Elan Corporation plc ("Elan") for the development and commercialization of an
oral heparin product and its strategic alliance with Eli Lilly and Company
("Lilly") for the development and commercialization of certain of Lilly's
therapeutic proteins; the risk of technological obsolescence and risks
associated with the Company's highly competitive industry; the Company's
dependence on patents and proprietary rights; the Company's absence of
profitable operations and need for additional capital; the Company's dependence
on others to manufacture the Company's chemical compounds; the risk of product
liability and policy limits of product liability insurance; potential liability
for human clinical trials; the Company's dependence on key personnel and the
quality, judgment and strategic decisions of management and other personnel;
uncertain availability of third-party reimbursement for commercial medical
products; general business and economic conditions; and other factors referenced
in the Company's report on Form 10-K for the fiscal year ended July 31, 1996.
GENERAL
Emisphere is a drug delivery company focused on the discovery and
application of proprietary synthetic chemical compounds that enable the oral
delivery of therapeutic macromolecules and other compounds that are not
currently deliverable by oral means. Since its inception in 1986, the Company
has devoted substantially all of its efforts and resources to research and
development conducted on its own behalf and through collaborations with
corporate partners and academic research institutions. The Company has had no
product sales to date. The major sources of the Company's working capital have
been proceeds from its initial public offering in 1989, a second public offering
in February 1993, private equity financing, the latest of which occurred with an
affiliate of Elan in October 1995, reimbursement of expenses and other payments
from corporate partners, the registered sale of one million shares of Common
Stock to two institutional investors in April 1996, and income earned on the
investment of available funds. The Company's operations are not significantly
affected by inflation or seasonality.
On February 27, 1997, the Company and Lilly announced that they entered
into a strategic alliance (the "Lilly Strategic Alliance") to utilize
Emisphere's technologies for the improved delivery of certain Lilly therapeutic
proteins with a focus on oral delivery. The major therapeutic focus of the
collaboration is in the area of endocrinology, including growth disorders.
Initially, Lilly is committing limited funds to the Company for research on
delivery of two proteins. The Lilly Strategic Alliance contemplates that Lilly
may ultimately exercise options to license the applicable carriers and market
the products utilizing the combined technologies. If the options are exercised,
the Company may receive from Lilly milestone and other payments aggregating,
together with initial funding, up to $60 million, as well as future royalty
payments. The Lilly Strategic Alliance also contemplates that the Company could
receive further payments for other delivery applications if the focus of the
Lilly Strategic Alliance is expanded beyond the two specified therapeutic
proteins or to non-oral applications.
RESULTS OF OPERATIONS
The Company has since its inception generated significant losses from
operations. The Company does not expect to achieve profitability in the
foreseeable future. Profitability will ultimately depend on the Company's
ability, either alone or in conjunction with third parties, to develop and
commercialize products utilizing the Company's technology. There can be no
assurance that the development will be completed or if completed, any regulatory
agency will approve the final product. Even if final products are developed and
approved, there is no assurance that sales will be sufficient to achieve
profitability. If development of such products is not achieved or approval not
granted, the Company's prospects will be materially affected.
The ability of the Company to reduce its operating losses in the near term
will be dependent upon, among other things, its ability to attract new
pharmaceutical and other companies who are willing to provide funding to the
Company for a portion of the Company's research and development with respect to
specific projects. While the Company is constantly engaged in discussions with
pharmaceutical
9
and other companies, there can be no assurance that the Company will enter into
any additional agreements or that the agreements will provide research and
development revenues to the Company.
THREE MONTHS ENDED JANUARY 31, 1997 VS. THREE MONTHS ENDED JANUARY 31, 1996:
For the three months ended January 31, 1997, the Company recognized $535,000 of
research and development revenue compared to $3,033,000 for the three months
ended January 31, 1996. Research and development revenue for the three months
ending January 31, 1997 consisted of the recognition of revenues from the Elan-
Emisphere Joint Venture of approximately $386,000 and payments from two
pharmaceutical companies for which the Company performed feasibility studies.
For the three months ending January 31, 1996 revenue consisted of the
recognition of payments under the Company's agreements with Elan ($3,000,000)
and Pasteur Merieux ("Pasteur"). The recognition of the revenue from Elan was
for work Emisphere performed on the development of an oral Heparin USP
formulation prior to entering into the Elan-Emisphere Venture. Revenue
recognized from Pasteur was a payment for Emisphere's completion of a defined
milestone as called for in its feasibility agreement with Pasteur.
Total operating expenses for the three months ended January 31, 1997, increased
by $1,104,000, or 52%, as compared to the three months ended January 31, 1996.
The details of this increase are as follows:
Research and development costs increased by approximately $364,000, or 24%, in
the three months ended January 31, 1997, as compared to the three months ended
January 31, 1996. This increase is mainly attributable to increased personnel
and related expenses associated with the Company's development of an oral
heparin formulation. The Company also experienced an increase in funding of
outside consultants and universities engaged to conduct studies to help advance
the Company's scientific research efforts. The Company believes that this level
of research and development spending will continue for the foreseeable future
and may increase if operations are expanded.
The increase of $306,000 in the loss in Elan-Emisphere Venture represents the
Company's pro-rata portion of the Venture's loss for the period. No loss was
experienced in the comparable period as the Venture did not commence operations
until September 1996.
General and administrative expenses increased by approximately $434,000, or 71%,
in the three months ended January 31, 1997, as compared to the three months
ended January 31, 1996. This increase is primarily the result of increased
legal and professional fees incurred in connection with the finalization of the
Elan-Emisphere Venture and the agreement with Lilly. This was partially offset
by a decrease in payments made to an outside consultant who assisted the Company
in discussions and negotiations with pharmaceutical companies.
The Company's other income in the three months ended January 31, 1997 increased
by approximately $17,000, or 7%, as compared to the three months ended January
31, 1996. The increase was primarily due to better returns on the Company's
larger investment portfolio.
Based on the above factors, the Company's net loss for the second quarter of
fiscal 1997 totaled $2,429,000, as compared to $1,157,000 net income for the
1996 fiscal quarter.
SIX MONTHS ENDED JANUARY 31, 1997 VS. SIX MONTHS ENDED JANUARY 31, 1996:
For the six months ended January 31, 1997, the Company recognized $2,530,000 of
research and development revenue compared to $3,033,000 for the six months ended
January 31, 1996. Research and development revenue for the six months ending
January 31, 1997 consisted of $2,381,000 from the Elan-Emisphere Venture in
connection with the development of an oral formulation of heparin and $149,000
from two pharmaceutical companies for which the Company performed feasibility
studies. Research and development revenue for the six months ending January 31,
1996 consisted of recognition of payments under the Company's agreements with
Elan ($3,000,000) and Pasteur. The recognition of the revenue from Elan was for
work Emisphere performed on the development of an oral formulation of heparin
prior to entering into the strategic alliance with Elan. Revenue recognized from
Pasteur was a payment for Emisphere's completion of a defined milestone as
called for in its feasibility agreement with Pasteur.
Total operating expenses for the six month period ended January 31, 1997,
increased by approximately $2,361,000, or 57%, as compared to the six month
period ended January 31, 1996. The details of this increase are as follows:
10
Research and development costs increased by approximately $642,000, or 22%, for
the six months ended January 31, 1997, as compared to the six months ended
January 31, 1996. This increase is mainly attributable to increased personnel
and related expenses associated with the Company's development of an oral
heparin formulation. The Company also experienced an increase in funding of
outside consultants and universities engaged to conduct studies to help advance
the Company's scientific research efforts. The Company believes that this level
of research and development spending will continue for the foreseeable future
and may increase if operations are expanded.
The increase of $1,298,000 in the loss in Elan-Emisphere Venture represents the
Company's pro-rata portion of the Venture's loss for the period. No loss was
experienced in the comparable period as the Venture did not commence operations
until September 1996.
General and administrative expenses increased by approximately $422,000, or 34%,
for the six months ended January 31, 1997, as compared to the six months ended
January 31, 1996. This increase is attributable to an increase in legal and
professional fees incurred in connection with the finalization of the Elan-
Emisphere Venture and the agreement with Lilly. This was partially offset by a
decrease in payments made to an outside consultant who assisted the Company in
discussions and negotiations with pharmaceutical companies.
The Company's other income in the six months ended January 31, 1997 increased by
approximately $213,000, or 72%, compared to the six months ended January 31,
1996. This was primarily the result of a larger investment portfolio and better
returns. In addition, the Company realized losses of approximately $41,000 on
the sale of investment securities during the six months ended January 31, 1996,
whereas no losses were incurred during the six months ended January 31, 1997.
Based on the above factors, the Company sustained a net loss for the six months
ended January 31, 1997 of $3,435,000, as compared to a net loss of $783,000 for
the six months ended January 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 1997, the Company had working capital of approximately
$16,578,000 as compared with approximately $17,799,000 at July, 31, 1996. Cash
and cash equivalents and marketable securities were approximately $15,868,000 as
of January 31, 1997, as compared to approximately $18,237,000 at July 31, 1996.
The decrease in the Company's cash and cash equivalents and marketable
securities was primarily due to cash used to fund operations in the first half
of fiscal 1997, partially offset by the exercise of options and reimbursement
from the Elan-Emisphere Venture for certain development costs.
The Company expects to enter into a ten-year noncancelable lease for new
office and laboratory space commencing August 1997. The annual minimum rental is
anticipated to be approximately $1,300,000. Build-out cost for this space, net
of amounts to be paid by the landlord, are expected to total approximately
$3,000,000.
The Company expects to continue to incur substantial research and
development expenses associated with the development of the Company's oral drug
delivery system. As a result of the ongoing research and development efforts of
the Company, management believes that the Company will continue to incur
operating losses and that, potentially, such losses could increase. The Company
expects to need substantial resources to continue its research and development
efforts. In addition, the Company is obligated to fund one-half of the Elan-
Emisphere Venture's cash needs upon the Venture's request. Such funding is
expected to commence in the near future and is expected to total approximately
$2,000,000 during the next 12 months. The Company and Elan are sharing the
financial benefits and expense obligations of the Venture on a 50/50 basis. The
Company expects the research funding from Lilly to approximate the costs to be
incurred by the Company in connection with the development of the Lilly
therapeutic proteins. Under present operating assumptions, the Company expects
that cash, cash equivalents and marketable securities will be adequate to meet
its liquidity and capital requirements through the third quarter of fiscal 1998.
Thereafter, the Company would need to seek additional funds, primarily in the
public and private equity markets and, to the extent necessary and available,
through debt financing. The Company has no firm agreements with respect to any
additional financing and there can be no assurance that the Company would be
able to obtain adequate funds on acceptable terms. If adequate funds were not
available, the Company would be required to delay, scale back, or eliminate one
or more of its research or development programs, or obtain funds, if available,
through arrangements with collaborative partners or others that may require the
Company to relinquish rights to certain of its technologies, product candidates,
or products that the Company would not otherwise relinquish. The Company does
not maintain any credit lines with financial institutions.
11
ITEM 5. OTHER INFORMATION
-----------------
In February 1997, the Company and Lilly entered into a Research
Collaboration and Option Agreement (the "Lilly Agreement") to combine Lilly's
therapeutic protein and formulation capabilities with the Company's carrier
technologies.
The Lilly Agreement provides initially for payments to the Company to fund
a research and development program (the "Program") to study the use of the
Company's technologies to develop oral and non-oral methods of delivering
formulations of two of Lilly's therapeutic proteins (the "Subject Proteins") in
the area of endocrinology, including growth disorders. The Lilly Agreement
represents the vehicle through which Lilly and the Company may together
develop and market orally deliverable products based on the Subject Proteins and
the Company's carrier technologies (the "Lilly Products"). The term of the
Program is 18 to 24 months. Any extensions must be approved by the
Company and Lilly. If Lilly decides to expand the scope of the Program, payments
will be increased.
Pursuant to the Lilly Agreement, the Company has granted to Lilly a series
of options (the "Options"), each to acquire an exclusive, worldwide license to
use the Company's technologies to develop one of the Lilly Products. Options
relating to the two of the Subject Proteins expire from one to two years from
the date of the Lilly Agreement, subject to certain extensions. Lilly's exercise
of the Options as to one of the Subject Proteins is mandatory upon satisfaction
of specified conditions. During the respective option periods, the Company has
agreed not to license its technologies to anyone other than Lilly for the
purpose of delivering the Subject Proteins.
Upon exercise of an Option, the Company and Lilly will enter into a license
agreement (each a "License Agreement") granting Lilly a license to use the
Company's technologies to develop Lilly Products to deliver the Subject Protein
by a particular route of delivery. The Lilly Agreement and the License
Agreements will provide for payments of initial fees and milestone payments of
up to $60 million in the aggregate, as well as royalty payments if a Lilly
Product to which the License Agreement relates is sold commercially. The License
Agreements will further provide that Lilly is obligated to seek to market the
Lilly Products and that the Company is obligated to provide a material portion
of the supply of carrier necessary for the production of any such Lily Products.
The Lilly Agreement further provides Lilly with a right of first refusal to
make an offer to enter into a license to use the Company's technologies for the
delivery of a limited number of other therapeutic proteins and peptides, or,
after the expiration of the option period, for the delivery of the Subject
Proteins (if not already licensed). The right of first refusal allows Lilly to
obtain the license if it exceeds a third-party offer by a specified premium. The
right of first refusal expires on February 26, 1998, subject to certain rights
to extend. The Lilly Agreement also contemplates the possibility of a continuing
relationship for the development of delivery systems for other therapeutic
proteins.
Under the Lilly Agreement, the Company will own all patents, patent
applications, and other proprietary expertise relating to its technologies that
it develops as well as any material Lilly improvements or additions to the
Company's technologies, and Lilly will own all patents, patent applications and
other proprietary expertise relating to the therapeutic uses of its proteins (to
the extent invented during the Program). If Lilly makes recommendations,
suggestions or has discussions with the Company that result in a material
addition to or improvement of the Company's technologies, then Lilly may, in
certain circumstances, obtain limited preferences with respect to licenses for
Emisphere technologies covering Lilly proteins or products not included in the
Lilly Products.
In addition, the Lilly Agreement includes a standstill provision pursuant
to which Lilly has agreed, with certain exceptions, not to acquire shares of the
Company's outstanding voting stock above a specified limit during a period
ending less than five years from the date of the Lilly Agreement.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
10.1 Research Collaboration and Option Agreement dated as of February 26,
1997 between Emisphere Technologies, Inc. and Eli Lilly and Company.
11.1 Statement of Computation of Per Share Data for the three months ended
January 31, 1996 and 1997
11.2 Statement of Computation of Per Share Data for the six months ended
January 31, 1996 and 1997
27.1 Financial Data Schedule
(b) Reports
No reports on Form 8-K were filed by the Registrant during the quarter
ended January 31, 1997.
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SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Emisphere Technologies, Inc.
Dated: March 13, 1997 /S/Michael M. Goldberg
----------------------
Michael M. Goldberg, M.D.
Chairman, and Chief Executive Officer
/S/Joseph D. Poveromo
---------------------
Joseph D. Poveromo, C.P.A.
Controller (Principal Financial
and Accounting Officer)
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