AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 27, 2003
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
ADERIS PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 2834 54-1749283
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</Table>
85 MAIN STREET
HOPKINTON, MASSACHUSETTS 01748
(Address, including zip code, and telephone number,
including area code, of the registrant's principal executive offices)
---------------------
PETER G. SAVAS
CHIEF EXECUTIVE OFFICER AND PRESIDENT
ADERIS PHARMACEUTICALS, INC.
85 MAIN STREET
HOPKINTON, MASSACHUSETTS 01748
(508) 497-2300
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
COPIES TO:
<Table>
ALAN W. PETTIS, ESQ. ALEJANDRO E. CAMACHO, ESQ.
JEEVAN B. GORE, ESQ. CLIFFORD CHANCE US LLP
LATHAM & WATKINS LLP 200 PARK AVENUE
650 TOWN CENTER DRIVE, SUITE 2000 NEW YORK, NEW YORK 10166
COSTA MESA, CALIFORNIA 92626 (212) 878-8000
(714) 540-1235
</Table>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ---------------
If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
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- ----------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED PRICE(1)(2) FEE(2)
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Common Stock, $0.001 par value.............................. $75,000,000 $6,067.50
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</Table>
(1) Includes shares that the Underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated pursuant to Rule 457(o) under the Securities Act of 1933, as
amended, solely for the purpose of computing the amount of the registration
fee.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to Completion, dated August 27, 2003
PROSPECTUS
Shares
(ADERIS LOGO)
Common Stock
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This is the initial public offering of shares of our common stock. No public
market currently exists for our common stock.
We have applied to list our shares of common stock for quotation on The Nasdaq
National Market under the symbol "ADPX." We anticipate that the initial public
offering price will be between $ and $ per share.
Investing in our shares involves risks. See "Risk Factors" beginning on page 6.
<Table>
<Caption>
PER SHARE TOTAL
--------- --------
Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to Aderis Pharmaceuticals (before expenses)........ $ $
</Table>
We have granted the underwriters a 30-day option to purchase up to
additional shares of common stock at the public offering price less the
underwriting discount to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Lehman Brothers, on behalf of the underwriters, expects to deliver the shares on
or about , 2003.
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LEHMAN BROTHERS CIBC WORLD MARKETS
U.S. BANCORP PIPER JAFFRAY
, 2003
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Prospectus Summary.................... 1
The Offering.......................... 4
Summary Financial Data................ 5
Risk Factors.......................... 6
Special Note Regarding Forward-Looking
Statements.......................... 18
Use of Proceeds....................... 18
Dividend Policy....................... 18
Capitalization........................ 19
Dilution.............................. 20
Selected Financial Data............... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 33
</Table>
<Table>
<Caption>
PAGE
----
Scientific Advisory Board............. 45
Management............................ 46
Principal Stockholders................ 57
Description of Capital Stock.......... 60
Shares Eligible for Future Sale....... 63
Underwriting.......................... 64
Notice to Canadian Residents.......... 68
Legal Matters......................... 70
Experts............................... 70
Change in Independent Auditors........ 70
Where You Can Find More Information... 70
Index to Financial Statements......... F-1
</Table>
---------------------
Through and including , 2003 (the 25th day after the date of this
prospectus), all dealers that buy, sell or trade in our common stock, whether or
not participating in this offering, are required to deliver a prospectus. This
prospectus delivery requirement is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of our common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of shares of our common stock.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. You
should read the entire prospectus carefully, especially the risks of investing
in our common stock, which we discuss under "Risk Factors," and our consolidated
financial statements and related notes.
OVERVIEW
We are a biopharmaceutical company engaged in developing small molecule
drugs to treat central nervous system, cardiovascular and inflammatory
conditions. We currently have four product candidates in development for six
indications. Rotigotine CDS, our lead product candidate, is being developed by
Schwarz Pharma AG. Rotigotine CDS is completing Phase III clinical trials for
the treatment of Parkinson's disease and is in a Phase IIb clinical trial for
Restless Legs Syndrome. King Pharmaceuticals Research and Development, Inc., a
subsidiary of King Pharmaceuticals, Inc., has completed Phase II clinical trials
with binodenoson as a pharmacologic stress agent for cardiac imaging and is
expected to start Phase III clinical trials in the fourth quarter of 2003. King
is also developing MRE-0094 as a treatment for chronic diabetic foot ulcers. The
intravenous dosage form of selodenoson is being developed by Fujisawa
Healthcare, Inc. Intravenous selodenoson is in Phase II clinical trials for
heart rate control in atrial fibrillation and has demonstrated slowing of heart
rate. We retain rights to the intravenous formulation outside the United States
and Canada and the worldwide rights to the oral formulations of selodenoson. We
have completed a Phase I clinical trial for an oral dosage form of selodenoson.
We focus on small molecule drug candidates that act to selectively modify
the activity of certain receptors, such as receptors for adenosine and dopamine.
By targeting receptor subtypes responsible for specific effects, our goal is to
produce therapeutic results while minimizing side effects. To limit stimulation
of receptor subtypes in other tissues, we have developed molecules to target
tissues where receptor subtypes may be sensitive to lower levels of drugs. In
addition, to avoid side effects, we have designed molecules that may not enter
certain organs. Small molecule medications are more easily formulated, have
greater potential for absorption and utilization by the body, are more
efficiently manufactured than large molecule therapies and generally offer
greater dosing flexibility so that patients can comply with prescribed dosing
schedules.
OUR PRODUCT CANDIDATES
We currently have four product candidates in development for six
indications.
- Rotigotine CDS, our most advanced product candidate, is being developed
by Schwarz Pharma. Rotigotine is a proprietary dopamine receptor agonist
formulated in a once-daily transdermal patch. Rotigotine CDS is
completing Phase III clinical trials as both a first-line treatment of
early stage and a combination therapy for late stage Parkinson's disease.
Parkinson's disease is an age-related, neurodegenerative disorder that
affects approximately one million people in the United States.
Approximately $2 billion is spent annually on drug therapy worldwide to
treat this disease. Rotigotine CDS is designed to provide a constant
blood level of the drug over a 24-hour period, thereby minimizing daily
symptoms and side effects. We have licensed to Schwarz Pharma the
worldwide development and commercialization rights to rotigotine CDS for
Parkinson's disease. Rotigotine was administered to approximately 1,000
patients and healthy subjects before it entered Phase III clinical
trials. Schwarz Pharma performed a randomized, double-blind, placebo-
controlled, Phase IIb clinical trial in early stage Parkinson's disease
patients that demonstrated a statistically significant improvement in
patient's symptoms compared to placebo (p-value at two highest doses
<0.0001). Schwarz Pharma also performed a Phase II clinical trial in 310
late stage patients. The primary endpoint of this trial measured the
reduction in patient "off" time. Although this trial demonstrated a
reduction in "off" time compared to baseline, the results were not
statistically significant compared to placebo as a result of an
unexpectedly large placebo effect. Schwarz Pharma plans to enroll
approximately 1,200 patients with early stage and late stage Parkinson's
disease into pivotal Phase III clinical trials using the same primary
endpoints used in the Phase II clinical trials. Two of these trials have
been completed. The initial results from the Phase III clinical trials
are expected to be released in the first quarter of 2004. Schwarz Pharma
has announced that it intends to submit a new drug application, or NDA,
for rotigotine CDS by the end of 2004.
1
- Rotigotine CDS is also being developed in lower-dose transdermal patches
which are currently in a Phase IIb clinical trial for the treatment of
Restless Legs Syndrome. Restless Legs Syndrome is a common neurologic
movement disorder in which patients suffer an almost irresistible urge to
move their legs that often results in sleep disturbances. Studies
reported by the American Academy of Family Physicians have indicated that
up to 15% of the population in the United States may have Restless Legs
Syndrome. There are currently no medications approved for the treatment
of Restless Legs Syndrome in the United States. A once-daily transdermal
medication may provide continuous therapeutic blood levels of the drug
and symptomatic relief throughout the night and into the daytime. We have
licensed to Schwarz Pharma the worldwide development and
commercialization rights to rotigotine CDS for Restless Legs Syndrome. A
Phase II safety and efficacy pilot trial performed in Europe was
completed in April 2002 and revealed a statistically significant
improvement in symptoms (p-value = 0.04). Schwarz Pharma is currently
conducting a randomized, placebo-controlled, dose-ranging Phase IIb trial
in Europe under a US investigational new drug application, or IND.
Schwarz Pharma expects the results of this trial will be available in the
third quarter of 2004.
- Binodenoson is an adenosine A(2A) agonist that is being developed by
King. King has completed Phase II clinical trials and is expected to
begin Phase III clinical trials during the fourth quarter of 2003.
Binodenoson is being developed as an alternative to exercise prior to
cardiac perfusion imaging for the diagnosis of coronary artery disease.
Many patients cannot perform the level of exercise necessary for an
adequate diagnostic test and require a pharmacologic stress agent in lieu
of exercise. We estimate that approximately 2.6 million cardiac perfusion
imaging procedures are performed annually in the United States using a
pharmacologic stress agent. Binodenoson is designed to minimize the side
effects associated with the most commonly used agents, adenosine and
dipyridamole. Binodenoson is formulated to be dosed as an injection for
ease of administration rather than the continuous infusion with an
intravenous pump required with adenosine and dipyridamole. We have
licensed to King the worldwide development and commercialization rights
to binodenoson as a pharmacologic stress agent. Binodenoson has been
administered to 440 patients and healthy volunteers in six clinical
trials. King completed a multi-center, single-blind, two-arm crossover
Phase IIb clinical trial in patients who received pharmacologic stress
tests with both adenosine and binodenoson. Results from the trial
indicated that binodenoson was comparable to adenosine for detecting the
extent of coronary disease. In addition, this clinical trial demonstrated
that binodenoson had fewer and less severe side effects than adenosine
with a statistically significant p-value of <0.01 in each case. King
intends to initiate Phase III clinical trials in the fourth quarter of
2003 in the United States and internationally.
- Selodenoson is currently being developed in intravenous and oral
formulations for the treatment of atrial fibrillation. The intravenous
dosage form of selodenoson, an adenosine A(1) agonist, is being developed
by Fujisawa Healthcare. Intravenous selodenoson is in Phase II clinical
trials for heart rate control in atrial fibrillation and has demonstrated
slowing of heart rate. An oral formulation of selodenoson has completed a
Phase I clinical trial. In addition to the clinical trials discussed
below, clinical trials are ongoing to evaluate the side effects from A(1)
receptor stimulation on other parts of the body. Selodenoson is designed
to control heart rate in atrial fibrillation by slowing conduction
through the atrioventricular node. Atrial fibrillation is the most common
sustained cardiac arrhythmia, or abnormal heart rhythm, and currently
affects approximately two million people in the United States.
Selodenoson is being developed as both an intravenous formulation for
acute rate control and as a modified release oral formulation for chronic
rate control. We have licensed to Fujisawa Healthcare the rights to
develop and commercialize the intravenous formulation of selodenoson in
the United States and Canada. We retain rights to develop and
commercialize the intravenous formulation in all other countries and
worldwide rights for all oral formulations. We and Fujisawa Healthcare
have performed a total of 11 Phase I and Phase II clinical trials in
which a total of 453 patients and healthy volunteers received
selodenoson. One of these Phase II clinical trials examined the effect on
heart rate of infusions of escalating doses of selodenoson in patients
with atrial fibrillation. The data from this trial demonstrated a
statistically significant decrease (p-value < 0.05) in heart rate
compared to baseline in patients who received the drug, but there was no
change from baseline in patients who received
2
placebo. This data has been accepted to be presented at the American
Heart Association's Scientific Sessions in November 2003. Two more of
these Phase II clinical trials have been completed and we anticipate the
release of these results in early 2004.
- MRE-0094 is an adenosine A(2A) agonist formulated as a topical treatment
currently in development for the treatment of chronic diabetic foot
ulcers. Approximately 15% of the estimated 16 million diabetics in the
United States develop foot ulcers. It is estimated that of the more than
50,000 annual amputations of a lower extremity in diabetics, 85% result
from foot ulcers. MRE-0094 appears to promote wound healing. King filed
an investigational new drug application, or IND, in May 2002 for
MRE-0094. We have licensed to King the worldwide development and
commercialization rights for MRE-0094.
We believe there may be additional therapeutic indications for our
portfolio of product candidates. None of our product candidates have been
approved by the Food and Drug Administration or European regulators for
commercialization. We have a history of operating losses and, as of June 30,
2003, we had an accumulated deficit of approximately $44.8 million. In addition,
we are dependent upon third parties, especially our collaborators, for the
successful commercialization of our clinical product candidates.
We are at an early stage of development and face significant challenges in
achieving our business objectives, including successful completion of clinical
trials, obtaining regulatory approvals, market acceptance of our products and
competition from companies with greater resources.
OUR BUSINESS STRATEGY
We intend to develop and commercialize therapies for central nervous
system, cardiovascular and inflammatory conditions. To achieve this objective,
we intend to concentrate on the following key strategies:
- continue to invest to support our corporate collaborators in their
development and commercialization of our advanced product candidates;
- expand our product candidate portfolio by acquiring or in-licensing
product candidates and programs that are 18-24 months from human clinical
trials;
- retain development responsibility for and marketing rights to selected
drug candidates through late stage development to maximize product value;
and
- maintain balanced in-house expertise and capabilities in synthetic
chemistry, pharmacology and key elements of clinical development while
outsourcing routine drug development activities.
CORPORATE INFORMATION
We were incorporated as Discovery Therapeutics, Inc. in Delaware in 1994
and changed our name to Aderis Pharmaceuticals, Inc. in January 2002. Our
principal executive offices are located at 85 Main Street, Hopkinton,
Massachusetts 01748, and our telephone number is (508) 497-2300. References in
this prospectus to "Aderis," "we," "our" and "us" refer to Aderis
Pharmaceuticals, Inc. Our web site is located at www.aderis.com. Information
contained in our web site is not incorporated by reference into and does not
form any part of this prospectus.
3
THE OFFERING
Common stock being offered.... shares
Common stock to be outstanding
after the offering............ shares
Use of proceeds............... We intend to use the net proceeds from the
offering for research and development
activities, including clinical trials,
acquisition of products and new technologies,
working capital and other general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National
Market symbol................. ADPX
The number of shares of common stock outstanding after this offering is
based on shares outstanding on , 2003 and excludes:
- 2,125,697 shares of common stock issuable upon exercise of options
outstanding under our 1995 stock option plan and our 2001 incentive award
plan with a weighted average price of $0.73 per share;
- 225,060 shares of common stock issuable upon exercise of warrants with a
weighted average price of $3.64 per share; and
- up to 531,287 additional shares of common stock reserved for issuance
under our 1995 stock option plan and 2001 incentive award plan.
Unless otherwise indicated, all information in this prospectus has been
adjusted to reflect:
- an initial public offering price of $ per share, the midpoint of the
estimated offering price range;
- the conversion of all outstanding shares of our preferred stock into
common stock upon the closing of this offering;
- the filing of our amended and restated certificate of incorporation
immediately following the closing of this offering;
- no exercise by the underwriters of their over-allotment option; and
- the issuance of 366,851 shares of common stock to the former shareholders
of Renalogics, Inc. upon the closing of this offering.
4
SUMMARY FINANCIAL DATA
The following table sets forth certain of our summary financial data. The
data presented below have been derived from our audited and unaudited interim
consolidated financial statements included elsewhere in this prospectus.
You should read this information together with the consolidated financial
statements and the notes to those statements appearing elsewhere in this
prospectus and the information under "Selected Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
STATEMENTS OF OPERATIONS DATA
<Table>
<Caption>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------- -----------------
2000 2001 2002 2002 2003
------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues............................. $ 2,967 $ 5,829 $ 3,153 $ 1,500 $ 847
Costs and expenses................... 8,160 17,800 18,283 8,969 6,924
Operating loss....................... (5,193) (11,971) (15,130) (7,469) (6,077)
Net loss............................. $(4,943) $(11,081) $(14,437) $(7,106) $(5,773)
Net loss per common share, basic and
diluted(1)......................... $ (1.87) $ (3.97) $ (3.87) $ (1.95) $ (1.49)
Shares used in computing net loss per
common share, basic and
diluted(1)......................... 2,638 2,790 3,729 3,644 3,879
</Table>
BALANCE SHEET DATA
<Table>
<Caption>
AS OF JUNE 30, 2003
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED(2)
-------- --------------
(IN THOUSANDS)
Cash and cash equivalents................................... $ 3,584
Marketable securities....................................... 22,703
Working capital............................................. 25,724
Total assets................................................ 27,706
Convertible preferred stock................................. 56,215
Deferred stock compensation................................. (3,226)
Total stockholders' deficit................................. (29,732)
</Table>
- ---------------
(1) Net loss per common share and the shares used to compute net loss per common
share do not give effect to the conversion of the outstanding convertible
preferred stock, the issuance of 366,851 shares of common stock issuable to
the former shareholders of Renalogics or other common stock equivalents.
(2) The pro forma as adjusted balance sheet data give effect to the conversion
of all outstanding convertible preferred stock into 10,941,993 shares of
common stock and the issuance of 366,851 shares of common stock issuable to
the former shareholders of Renalogics and a $4.2 million increase in our
accumulated deficit resulting from a charge to operations for the value,
assumed to be $11.36 per share, of the shares to be issued to the former
shareholders of Renalogics. The pro forma as adjusted balance sheet data
also reflect the sale of shares of common stock at an assumed
initial offering price of $ per share, after deducting the underwriting
discounts, commissions and estimated offering expenses.
5
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the risks described below with all of the other information
included in this prospectus before making an investment decision. If any of the
possible adverse events described below actually occurs, our business, results
of operations or financial condition would likely suffer. In such an event, the
market price of our common stock could decline and you could lose all or part of
your investment.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT, AND WE MAY NOT
ACHIEVE OR MAINTAIN PROFITABILITY IN THE FUTURE.
Since we were founded in 1994, we have engaged primarily in organizational
and research and development efforts. We have incurred operating losses in all
but two years since our inception, and we may never achieve sustained
profitability. The net loss for each of the fiscal years ended December 31,
2000, 2001 and 2002 was $4.9 million, $11.1 million and $14.4 million,
respectively. The net loss for the six months ended June 30, 2003 was $5.8
million. As of June 30, 2003, we had an accumulated deficit of $44.8 million.
Our losses have resulted principally from costs incurred in connection with our
research and development activities and from general and administrative costs
associated with our operations.
We have not commercially launched any products to date and do not expect to
do so in the near future. Our ability to generate revenue from product sales or
to achieve profitability is dependent on our ability, alone or with our
corporate collaborators, to successfully and in a timely manner design, develop,
manufacture and commercialize our product candidates. Our revenues to date have
been generated principally from license fees and milestone payments from our
drug compounds. We expect that our costs will continue to exceed our revenues on
an annual basis for the foreseeable future. We may never achieve profitability.
Even if we do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis.
OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY, AND ANY FAILURE TO MEET FINANCIAL
EXPECTATIONS MAY DISAPPOINT SECURITIES ANALYSTS OR INVESTORS AND RESULT IN A
DECLINE IN OUR STOCK PRICE, CAUSING INVESTOR LOSSES.
Our operating results have fluctuated in the past and are likely to do so
in the future. These fluctuations could cause our stock price to decline. Some
of the factors that could cause our operating results to fluctuate include:
- the demand for our drug candidates;
- the expiration or termination of agreements with collaborators, which may
not be renewed or replaced;
- general and industry-specific economic conditions, which may affect our
collaborators' and our research and development expenditures on our
out-licensed drug candidates;
- the inability of our collaborators and us to complete non-clinical and
clinical studies in a timely manner that result in a failure or delay in
receiving the required regulatory approvals to commercialize our drug
candidates;
- the timing of the introduction and market acceptance of new drug
candidates by us or competing companies;
- the timing and willingness of our collaborators to invest the resources
necessary to commercialize our drug candidates;
- the timing of receipts of milestone payments from our collaborators;
6
- our ability to control our costs; and
- the timing of regulatory approvals, if any.
If our revenues decline in a quarter, whether due to a delay in recognizing
expected revenues or otherwise, our earnings will decline because many of our
expenses are relatively fixed. In particular, our research and development and
general and administrative expenses are not directly affected by variations in
revenue.
Due to fluctuations in our revenues and operating expenses, we believe that
period-to-period comparisons of our results of operations are not a good
indication of our future performance. It is possible that in some future quarter
or quarters, our operating results will be below the expectations of securities
analysts or investors. In that case, our stock price could fluctuate
significantly or decline.
WE ARE AT AN EARLY STAGE OF DEVELOPMENT AND WE DO NOT HAVE, AND MAY NEVER
DEVELOP, ANY COMMERCIAL DRUGS OR OTHER PRODUCTS THAT GENERATE REVENUES.
We are a biopharmaceutical company at an early stage of development, and we
do not have any commercial products. Our drug candidates will require
significant additional development, clinical trials, regulatory clearances and
additional investment before they can be commercialized. Our product development
efforts may not lead to commercial drugs, either because the drug candidates
fail to be safe and effective in clinical trials or because we have inadequate
financial or other resources to pursue our drug candidates through the clinical
trial process. We do not expect to be able to market any of our existing drug
candidates for a number of years, if at all. If we are unable to develop any
commercial drugs, or if such development is delayed, we will be unable to
generate product revenues.
WE ARE DEPENDENT ON THE SUCCESSFUL OUTCOME OF THE CLINICAL TRIALS FOR OUR MOST
ADVANCED DRUG CANDIDATES, ROTIGOTINE CDS, BINODENOSON AND SELODENOSON.
Our business prospects will depend on our ability and the ability of our
collaborators to complete patient enrollment in clinical trials, to obtain
satisfactory results, to obtain required regulatory approvals and to
successfully commercialize rotigotine CDS, binodenoson and selodenoson. Many
factors affect patient enrollment, including the size of the patient population,
the proximity of patients to clinical sites and the eligibility criteria for the
trial. Delays in patient enrollment in the trials may result in increased costs,
program delays, or both, which could slow down our product development and
approval process. If clinical trials for these drug candidates are not completed
or conducted as planned, or if any of these drug candidates do not prove to be
safe and effective or do not receive required regulatory approvals, the
commercialization of these drug candidates would be delayed or prevented and,
accordingly, our ability to generate revenue and achieve profitability would be
materially harmed which would likely cause a sharp drop in our stock price.
IF WE DO NOT UPDATE AND ENHANCE OUR TECHNOLOGIES, THEY WILL BECOME OBSOLETE.
The biopharmaceutical market is characterized by rapid technological
change, and our future success will depend on our ability to update and enhance
our technologies. Because our technology platform is designed to integrate many
technologies, it may be difficult for us to stay abreast of the rapid change in
each of the areas encompassed within our technology platform. If we fail to stay
at the forefront of technological change we will be unable to compete
effectively. Our technologies may be rendered obsolete by advances in existing
technological approaches or the development of different approaches by one or
more of our current or future competitors.
THE REGULATORY APPROVAL PROCESS IS EXPENSIVE, TIME CONSUMING, UNCERTAIN AND MAY
PREVENT US FROM OBTAINING REQUIRED APPROVALS FOR THE COMMERCIALIZATION OF SOME
OF OUR DRUG CANDIDATES.
The research, testing, manufacturing and marketing of drug candidates are
subject to extensive regulation by numerous regulatory authorities in the United
States and other countries. In addition, countries other than the United States
have complex and technical regulatory requirements that differ from country to
country.
7
Failure to comply with the regulatory requirements of the FDA and other
applicable foreign and US regulatory requirements may subject a company to
administrative or judicially imposed sanctions. These include:
- warning letters;
- civil penalties;
- criminal penalties;
- injunctions;
- product seizure or detention;
- product recalls;
- total or partial suspension of production; and
- FDA refusal to approve pending new drug applications, or NDAs, or
supplements to approved NDAs.
Our drug candidates are in the pre-clinical and clinical stages of
development and have not received required regulatory clearance from the FDA or
any other foreign or US regulatory body to be commercially marketed and sold.
The regulatory clearance process typically takes many years and is extremely
expensive. Despite the time and expense exerted, regulatory clearance is never
guaranteed.
The number of pre-clinical studies and clinical trials that will be
required for FDA approval varies depending on the drug candidate, the disease or
condition that the drug candidate is in development for and regulations
applicable to any particular drug candidate.
The FDA can delay, limit or deny approval of a drug for many reasons,
including:
- a drug candidate may not be safe or effective;
- FDA officials may interpret data from pre-clinical testing and clinical
trials in different ways than we and our collaborators interpret it;
- the FDA might not approve our manufacturing processes or facilities, or
the processes or facilities of our collaborators; or
- the FDA may change its approval policies or adopt new regulations.
Even if we receive FDA and other regulatory approvals, our drug candidates
may later exhibit adverse effects that limit or prevent their widespread use or
that force us to withdraw products derived from those drug candidates from the
market. If we fail to obtain regulatory clearance for our current or future drug
candidates, we will be unable to market and sell any products and therefore may
never be able to generate product revenues or be profitable.
WE DO NOT HAVE ACCESS TO OR CONTROL OVER CORRESPONDENCE, REPORTS AND OTHER
RELATED DOCUMENTATION BETWEEN OUR COLLABORATORS AND THE FDA OR OTHER REGULATORY
AGENCIES AND ACCORDINGLY WE WOULD NOT NECESSARILY BE AWARE OF NEGATIVE
DEVELOPMENTS IN THE REGULATORY PROCESS FOR OUR DRUG CANDIDATES.
Our collaborative agreements do not provide us with the right to review or
control correspondence, reports and other related documentation between our
corporate collaborators and the FDA and corresponding foreign regulatory
authorities. Accordingly, we would not necessarily be aware of negative
developments in the regulatory process for our drug candidates. These could
include developments that could delay, limit or prevent approval of our drug
candidates. If we fail to obtain regulatory clearance for any of our current or
future drug candidates, we will be unable to market and sell such products and
therefore may never be able to generate product revenues or be profitable.
8
IF WE RECEIVE REGULATORY APPROVAL, WE WILL ALSO BE SUBJECT TO ONGOING FDA
OBLIGATIONS AND CONTINUED REGULATORY REVIEW, SUCH AS CONTINUED SAFETY REPORTING
REQUIREMENTS, AND WE MAY ALSO BE SUBJECT TO ADDITIONAL FDA POST-MARKETING
OBLIGATIONS.
Any regulatory approvals that we receive for our drug candidates may also
be subject to limitations on the indicated uses for which the drug candidate may
be marketed or contain requirements for potentially costly post-marketing
follow-up studies. In addition, we or our third-party manufacturers will be
required to adhere to federal regulations setting forth current good
manufacturing practices, known as cGMP. The regulations require that our drug
candidates are manufactured and our records maintained in a prescribed manner
with respect to manufacturing, testing and quality control activities.
Furthermore, we or our third party manufacturers must pass a pre-approval
inspection of manufacturing facilities by the FDA and foreign authorities before
obtaining marketing approval, and will be subject to periodic inspection by the
FDA and corresponding foreign regulatory authorities under reciprocal agreements
with the FDA. Such inspections may result in compliance issues that could
prevent or delay marketing approval, or require the expenditure of money or
other resources to correct.
OUR PRE-CLINICAL AND INITIAL CLINICAL TESTING RESULTS MAY NOT BE PREDICTIVE OF
FUTURE TRIAL RESULTS. IF SUBSEQUENT TRIAL RESULTS ARE NEGATIVE, WE MAY BE FORCED
TO STOP DEVELOPING DRUG CANDIDATES IMPORTANT TO OUR FUTURE.
The results of pre-clinical studies and initial clinical trials of our drug
candidates do not necessarily predict the results of later-stage clinical
trials. Drug candidates in later stages of clinical trials may fail to show the
desired safety and efficacy traits despite having progressed through initial
clinical testing. The data collected from clinical trials of our drug candidates
may not be sufficient to support FDA or other regulatory approval.
Administering any drug candidates we develop to humans may produce
undesirable side effects. These side effects could interrupt, delay or halt
clinical trials of our drug candidates and could result in the FDA or other
regulatory authorities denying approval of our drug candidates for any or all
targeted indications. The FDA, other regulatory authorities or we may suspend or
terminate clinical trials at any time. None of our drug candidates may be safe
for human use.
IF OUR COLLABORATORS DO NOT DEVOTE ADEQUATE RESOURCES TO THE DEVELOPMENT AND
COMMERCIALIZATION OF OUR LICENSED DRUG CANDIDATES, WE MAY NOT BE ABLE TO ACHIEVE
PROFITABILITY.
We have granted exclusive development, commercialization and marketing
rights to Schwarz Pharma for the development of rotigotine CDS, to King for
binodenoson and MRE-0094 and to Fujisawa Healthcare for the intravenous
formulation of selodenoson in the United States and Canada. These collaborators
are responsible for most, and in some cases all, aspects of these programs,
including conducting research and development, clinical trials, the regulatory
approval process and commercialization. Other than attendance at periodic joint
steering committee meetings, we have no ongoing obligations under our
collaborative arrangements. See "Business -- Corporate Collaborations" for
details on these collaborations.
We have limited or no control over the amount and timing of resources that
our collaborators dedicate to the development of our licensed drug candidates.
Our ability to generate royalties from our collaborators depends on our
collaborators' abilities to establish the safety and efficacy of our drug
candidates, obtain regulatory approvals and achieve market acceptance of
products developed from our drug candidates. If Schwarz Pharma, King or Fujisawa
Healthcare do not perform under our collaborative agreements, our potential for
revenue from the related drug candidates will be dramatically reduced. Schwarz
Pharma, King and Fujisawa Healthcare may terminate our collaborative agreements
on short notice and at their sole discretion.
9
WE ARE DEPENDENT ON OUR COLLABORATORS AND OUR FAILURE TO SUCCESSFULLY MANAGE OUR
EXISTING AND FUTURE COLLABORATIONS COULD PREVENT US FROM DEVELOPING AND
COMMERCIALIZING OUR DRUG CANDIDATES.
Our strategy depends upon the maintenance of our existing collaborations
and our formation of new collaborations. Several factors could harm our current
or future collaborations:
- collaborators may not pursue further development and commercialization of
compounds resulting from collaborations or may elect not to continue or
renew research and development programs;
- collaborators may delay clinical trials, underfund a clinical trial
program, stop a clinical trial or abandon a drug candidate, repeat or
conduct new clinical trials or require a new formulation of a drug
candidate for clinical testing;
- collaborators could independently develop, or develop with third parties,
products that could compete with our future products;
- the terms of our agreements with our current or future collaborators may
not be favorable to us;
- a collaborator with marketing and distribution rights to one or more
products may not commit enough resources to the marketing and
distribution of products developed from our drug candidates, limiting our
potential revenues from the commercialization of a product;
- disputes may arise delaying or terminating the research, development or
commercialization of our drug candidates, resulting in significant
litigation or arbitration, or causing collaborators to act in their own
self-interest and not in the interest of our stockholders; and
- collaborations may be terminated and, if terminated, we would experience
increased capital requirements if we elected to pursue further
development of the drug candidate.
In addition, there have been a significant number of recent business
combinations among large pharmaceutical companies that have resulted in a
reduced number of potential future collaborators. If business combinations
involving our collaborators were to occur, the effect could be to diminish,
terminate or cause delays in one or more of our product development programs.
IF WE FAIL TO MAINTAIN OUR EXISTING COLLABORATIVE RELATIONSHIPS OR IF WE DO NOT
FIND ADDITIONAL COLLABORATORS FOR OUR DRUG CANDIDATES, WE MAY HAVE TO REDUCE OR
DELAY OUR RATE OF PRODUCT DEVELOPMENT AND/OR INCREASE OUR EXPENDITURES.
Our strategy for developing, manufacturing and commercializing our drug
candidates includes entering into various relationships with pharmaceutical
companies to advance our programs and reduce our expenditures on each program.
We may not be able to negotiate additional collaborations on acceptable terms,
if at all. If we are not able to maintain our existing collaborative
relationships or establish additional collaborative arrangements, we may have to
reduce or delay further development of some of our programs and/or increase our
expenditures and undertake the development activities at our own expense. If we
elect to increase our capital expenditures to fund development programs on our
own, we will need to obtain additional capital, which may not be available on
acceptable terms or at all.
IF PHYSICIANS AND PATIENTS DO NOT ACCEPT OUR PRODUCTS, WE MAY BE UNABLE TO
GENERATE SIGNIFICANT REVENUE, IF ANY.
Even if our products obtain regulatory approval, our products, if any, may
not gain market acceptance among physicians, patients and the medical community,
which would limit our ability to generate revenue and would adversely affect our
results of operations. The degree of market acceptance of any product depends on
a number of factors, including:
- demonstration of clinical efficacy and safety;
- cost effectiveness;
- convenience and ease of administration;
10
- potential advantages over alternative treatment methods; and
- marketing and distribution support.
Physicians will not recommend our products until clinical data or other
factors demonstrate the safety and efficacy of our products as compared to other
treatments. In practice, competitors may be more effective in marketing their
drugs. Even if the clinical safety and efficacy of products developed from our
drug candidates is established, physicians may elect not to recommend these
products for a variety of factors, including the reimbursement policies of
government and third-party payors.
THE REIMBURSEMENT STATUS OF NEWLY APPROVED HEALTHCARE DRUGS IS UNCERTAIN AND
FAILURE TO OBTAIN ADEQUATE REIMBURSEMENT COULD LIMIT OUR ABILITY TO MARKET ANY
PRODUCTS WE MAY DEVELOP AND DECREASE OUR ABILITY TO GENERATE REVENUE.
There is significant uncertainty related to the reimbursement of newly
approved pharmaceutical products. Our ability and the ability of our
collaborators to commercialize products developed from our drug candidates in
both domestic and foreign markets will depend in part on the reimbursements, if
any, obtained from third-party payors such as government health administration
authorities, private health insurers, managed care programs and other
organizations. Third-party payors are increasingly attempting to contain
healthcare costs by limiting both coverage and the level of reimbursement of new
pharmaceutical products. Cost control initiatives could decrease the price that
we, or our collaborators, would receive for products developed from our drug
candidates and affect our ability to commercialize any products we may develop.
If third parties fail to provide reimbursement and adequate coverage for any
drugs, consumers and doctors may not choose to use products developed from our
drug candidates, and we may not realize an acceptable return on our investment
in product development.
WE MAY BE UNABLE TO RAISE ADDITIONAL CAPITAL OR GENERATE THE SIGNIFICANT
REVENUES NECESSARY TO EXPAND OUR OPERATIONS AND INVEST IN NEW PRODUCTS.
It might be necessary for us to raise additional capital over the next few
years to continue our research and development efforts and to commercialize our
products. We believe that the proceeds from this offering and projected revenues
from collaborations should be sufficient to fund our anticipated levels of
operations for the next 24 months. However, our business or operations may
change in a manner that would consume available resources more rapidly than
anticipated. We may not continue to receive payments under existing
collaborative arrangements and existing or potential future collaborations may
not be adequate to fund our operations. We may need additional funds sooner than
planned to meet operational needs and capital requirements for product
development and commercialization. Additional funds may not be available when
needed or on terms acceptable to us. If adequate funds are not available, we may
have to reduce substantially or eliminate expenditures for the development and
production of certain of our proposed products or obtain funds through
arrangements with our corporate collaborators that require us to relinquish
rights to certain of our technologies or products. Either of these alternatives
could have a material adverse effect on our business, operating results,
financial condition and future growth prospects.
OUR COMPETITORS MAY DEVELOP AND MARKET DRUGS THAT ARE LESS EXPENSIVE, MORE
EFFECTIVE, OR SAFER, WHICH MAY DIMINISH OR ELIMINATE THE COMMERCIAL SUCCESS OF
ANY PRODUCTS WE MAY COMMERCIALIZE.
The biopharmaceutical market is highly competitive. We are aware of other
companies that are developing products that may be competitive to ours. We
anticipate that we will face increased competition in the future as new
companies enter the market and advanced technologies emerge. Our competitors
may:
- adapt more quickly to new technologies and scientific advances;
- initiate or withstand substantial price competition more successfully
than we can;
- have greater success in recruiting skilled scientific workers from the
limited pool of available talent;
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- more effectively negotiate third-party licensing and collaboration
arrangements; and
- take advantage of acquisition or other opportunities more readily than we
can.
Almost all of the larger biopharmaceutical companies have developed, or are
attempting to develop, products that will compete with products that may be
developed from our drug candidates.
It is possible that our competitors will develop and market products that
are less expensive and more effective than our future products or that will
render our products obsolete. It is also possible that our competitors will
commercialize competing products before any products developed from our drug
candidates are marketed. We expect that the competition from other
biopharmaceutical companies, pharmaceutical companies, universities and public
and private research institutions will increase. Many of our competitors have
substantially greater financial, technical, research and other resources than we
do. We may not have the financial resources, technical expertise or marketing,
distribution or support capabilities to compete successfully. See
"Business -- Competition" for additional information.
IF WE ARE UNABLE TO EFFECTIVELY PROTECT OUR INTELLECTUAL PROPERTY, THIRD PARTIES
MAY USE OUR TECHNOLOGY, WHICH COULD IMPAIR OUR ABILITY TO COMPETE IN OUR
MARKETS.
Our continued success will depend significantly on our ability to obtain
and maintain meaningful patent protection for our drug candidates throughout the
world. We rely on patents to protect a significant part of our intellectual
property and to enhance our competitive position. However, our presently pending
and future patent applications may not issue as patents, and any patent issued
to us may be challenged, invalidated, held unenforceable or circumvented.
Furthermore, the claims in patents which have been issued to us, or which may be
issued to us in the future, may not be sufficiently broad to prevent third
parties from producing competing products. In addition, the laws of various
foreign countries in which we compete may not protect our intellectual property
to the same extent as do the laws of the United States. If we fail to obtain
adequate patent protection for our proprietary technology, our competitors may
produce competing products based on our technology, which would substantially
impair our ability to compete.
In addition to patent protection, we also rely on protection of trade
secrets, know-how and confidential and proprietary information. To maintain the
confidentiality of trade secrets and proprietary information, we generally seek
to enter into confidentiality agreements with our employees, consultants and
collaborators upon the commencement of a relationship with us. These agreements
require that all confidential information developed by the individual or made
known to the individual by us during the course of the individual's relationship
with us be kept confidential and not disclosed to third parties. These
agreements also provide that inventions conceived by the individual in the
course of rendering services to us shall be our exclusive property. However, we
may not obtain these agreements in all circumstances. In the event of
unauthorized use or disclosure of our trade secrets or proprietary information,
these agreements, even if obtained, may not provide meaningful protection for
our trade secrets or other confidential information. In addition, adequate
remedies may not exist in the event of unauthorized use or disclosure of this
information. The loss or exposure of our trade secrets and other proprietary
information would impair our competitive advantages and could have a material
adverse effect on our operating results, financial condition and future growth
prospects. Furthermore, others may have developed, or may develop in the future,
substantially similar or superior know-how and technology.
WE MAY BE INVOLVED IN LAWSUITS TO PROTECT OR ENFORCE OUR PATENTS WHICH COULD BE
EXPENSIVE AND TIME CONSUMING.
In order to protect or enforce our patent rights, we may initiate patent
litigation against third parties or we may be similarly sued by others. We may
also become subject to interference proceedings conducted in the patent and
trademark offices of various countries to determine the priority of inventions.
The defense and prosecution, if necessary, of intellectual property suits,
interference proceedings and related legal and administrative proceedings is
costly and diverts our technical and management personnel from their normal
responsibilities. We may not prevail in any of these suits. An adverse
determination of any litigation or
12
defense proceedings could put our patents at risk of being invalidated or
interpreted narrowly and could put our patent applications at risk of not being
issued.
Furthermore, because of the substantial amount of discovery required in
connection with intellectual property litigation, there is a risk that some of
our confidential information could be compromised by disclosure during this type
of litigation. In addition, during the course of this kind of litigation, there
could be public announcements of the results of hearings, motions or other
interim proceedings or developments. If securities analysts or investors
perceive these results to be negative, it could have a substantial adverse
effect on the trading price of our common stock.
OUR SUCCESS DEPENDS ON OUR ABILITY TO OPERATE WITHOUT INFRINGING OR
MISAPPROPRIATING THE PROPRIETARY RIGHTS OF OTHERS.
Our success depends on avoiding the infringement of other parties' patents
and proprietary rights as well as avoiding the breach of any licenses relating
to our technologies and products. Given that there may be patents of which we
are unaware, particularly in the United States where patent applications are
confidential, avoiding patent infringement may be difficult. Various third
parties hold patents which may relate to our technology, and we may be found to
infringe these or other patents or proprietary rights of third parties, either
with products we are currently developing or with new products which we may
develop in the future. If a third party holding rights under a patent
successfully asserts an infringement claim with respect to any of our current or
future products or drug candidates, we may be prevented from manufacturing or
marketing our infringing product in the country or countries covered by the
patent we infringe, unless we can obtain a license from the patent holder. We
may not be able to obtain the license on commercially reasonable terms, if at
all, especially if the patent holder is a competitor. In addition, even if we
can obtain the license, it may be non-exclusive, which will permit others to use
the same technology licensed to us. We also may be required to pay substantial
damages to the patent holder in the event of an infringement. Under some
circumstances in the United States, these damages could be triple the actual
damages the patent holder incurs. If we have supplied infringing products to
third parties for marketing or licensed third parties to manufacture, use or
market infringing products, we may be obligated to indemnify these third parties
for any damages they may be required to pay to the patent holder and for any
losses the third parties may sustain themselves as the result of lost sales or
damages paid to the patent holder. Any successful infringement action brought
against us may also adversely affect marketing of the infringing product in
other markets not covered by the infringement action, as well as our marketing
of other products based on similar technology. Furthermore, we may suffer
adverse consequences from a successful infringement action against us even if
the action is subsequently reversed on appeal, nullified through another action
or resolved by settlement with the patent holder. The damages or other remedies
awarded, if any, may be significant. As a result, any infringement action
against us would likely delay the regulatory approval process, harm our
competitive position, be very costly and require significant time and attention
of our key management and technical personnel.
THE FAILURE TO ATTRACT AND MAINTAIN SKILLED PERSONNEL COULD IMPAIR OUR PRODUCT
DEVELOPMENT AND COMMERCIALIZATION EFFORTS.
Our performance is substantially dependent on the performance of our senior
management and key scientific and technical personnel. We only carry key person
life insurance on Peter G. Savas, our chief executive officer and president. The
loss of the services of any member of our senior management, scientific or
technical staff may significantly delay or prevent the achievement of product
development and other business objectives and could have a material adverse
effect on our business, operating results and financial condition. We also rely
on consultants and advisors to assist us in formulating our research and
development strategy. All of our consultants and advisors are either
self-employed or employed by other organizations, and they may have other
commitments such as consulting or advisory contracts with other organizations
that may affect their ability to contribute to us. Our future success will also
depend on our ability to identify, recruit and retain additional qualified
scientific, technical and managerial personnel. There is currently a shortage of
skilled executives and intense competition for such personnel in the areas of
our activities, and we may be unable to continue to attract and retain personnel
with the advanced qualifications necessary for the
13
development of our business. The inability to attract and retain the necessary
scientific, technical and managerial personnel could limit or delay our product
development efforts which would adversely affect the growth of our business.
WE HAVE NO MANUFACTURING CAPACITY AND DEPEND ON THIRD PARTIES TO MANUFACTURE OUR
PRODUCTS.
We do not currently operate manufacturing facilities for clinical or
commercial production of our drug candidates under development. We have no
experience in manufacturing, and we currently lack resources and the capability
to manufacture any of our drug candidates on a clinical or commercial scale. As
a result, we are dependent on corporate collaborators, licensees or other third
parties for the manufacturing of clinical and commercial scale quantities of our
drug candidates. These third parties may not be successful in manufacturing our
drug candidates on a commercial scale. In addition, in the event of a natural
disaster, equipment failure, power failure, strike or other difficulty, we may
be unable to replace our third party manufacturers in a timely manner.
WE HAVE NO MARKETING OR SALES STAFF, AND IF WE ARE UNABLE TO ENTER INTO
COLLABORATIONS WITH MARKETING PARTNERS OR IF WE ARE UNABLE TO DEVELOP OUR OWN
SALES AND MARKETING CAPABILITY, WE MAY NOT BE SUCCESSFUL IN COMMERCIALIZING OUR
PRODUCTS.
We currently have no sales, marketing or distribution capability. As a
result, we will depend on collaborations with third parties which have
established distribution systems and direct sales forces. To the extent that we
enter into co-promotion or other licensing arrangements, our revenues will
depend upon the efforts of third parties, over which we may have little or no
control.
If we are unable to reach and maintain an agreement with one or more
pharmaceutical companies or collaborators, we may be required to market our
products directly. We may elect to establish our own specialized sales force and
marketing organization to market our products to physicians. In order to do
this, we would have to develop a marketing and sales force with technical
expertise and with supporting distribution capability. Developing a marketing
and sales force is expensive and time consuming and could delay a product
launch. We may not be able to develop this capacity, which would make us unable
to commercialize our products.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS AND MAY NOT BE ABLE TO OBTAIN
ADEQUATE INSURANCE.
Once we have commercially launched our products, we will face exposure to
product liability claims. We intend to secure limited product liability
insurance coverage, but may not be able to obtain such insurance on acceptable
terms with adequate coverage, or at reasonable costs. There is also a risk that
third parties that we have agreed to indemnify could incur liability.
Since we conduct clinical trials on humans, we face the risk that the use
of our drug candidates will result in adverse effects. These risks will exist
even for products developed from our drug candidates that may be cleared for
commercial sale. We cannot predict all of the possible harms or side effects
that may result and, therefore, the amount of insurance coverage we currently
hold may not be adequate to protect us from all liabilities. We may not have
sufficient resources to pay for any liabilities resulting from a claim beyond
the limit of, or excluded from, our insurance coverage.
OUR RESEARCH AND DEVELOPMENT OPERATIONS INVOLVE HAZARDOUS MATERIALS, WHICH COULD
SUBJECT US TO SIGNIFICANT LIABILITY.
Our research and development activities involve the controlled use of
hazardous materials, including hazardous chemicals and radioactive materials.
Accordingly, we are subject to federal, state and local laws governing the use,
handling and disposal of these materials. We may incur significant costs to
comply with additional environmental and health and safety regulations in the
future. Although we believe that our safety procedures for handling and
disposing of hazardous materials comply with regulatory requirements, we cannot
eliminate the risk of accidental contamination or injury from these materials.
In the event of an accident or
14
environmental discharge, we may be held liable for any resulting damages, which
may exceed our financial resources.
WE MAY ENCOUNTER DIFFICULTIES IN MANAGING OUR GROWTH, AND THESE DIFFICULTIES
COULD DISRUPT OUR OPERATIONS.
We expect to have significant growth in the number of our employees and the
scope of our operations. Recent growth has placed a significant strain on our
managerial, operational and financial resources. To manage our anticipated
future growth, we must continue to implement and improve our managerial,
operational and financial systems, to expand our facilities and to continue to
recruit and train additional qualified personnel. Due to our limited resources,
we may not be able to effectively manage the expansion of our operations or
recruit and train additional qualified personnel. The physical expansion of our
operations may lead to significant costs and may divert our management and
business development resources. Any inability to manage growth could delay the
execution of our business plans or disrupt our operations.
RISKS RELATED TO THIS OFFERING
IF THE OWNERSHIP OF OUR COMMON STOCK CONTINUES TO BE HIGHLY CONCENTRATED, IT MAY
PREVENT YOU AND OTHER STOCKHOLDERS FROM INFLUENCING SIGNIFICANT CORPORATE
DECISIONS AND MAY RESULT IN CONFLICTS OF INTEREST THAT COULD CAUSE OUR STOCK
PRICE TO DECLINE.
Following the completion of this offering, our executive officers,
directors and their affiliates will beneficially own or control approximately
percent of the outstanding shares of our common stock (after giving effect
to the conversion of all outstanding convertible preferred stock and the
exercise of all outstanding vested and unvested options and warrants).
Accordingly, our current executive officers, directors and their affiliates,
acting as a group, will have substantial control over the outcome of corporate
actions requiring stockholder approval, including the election of directors, any
merger, consolidation or sale of all or substantially all of our assets or any
other significant corporate transactions. These stockholders may also delay or
prevent a change of control of us, even if such a change of control would
benefit our other stockholders. The significant concentration of stock ownership
may adversely affect the trading price of our common stock due to investors'
perception that conflicts of interest may exist or arise. See "Management" and
"Principal Stockholders" for details on our capital stock ownership.
WE MAY INCUR INCREASED COSTS AS A RESULT OF RECENTLY ENACTED AND PROPOSED
CHANGES IN LAWS AND REGULATIONS.
Recently enacted and proposed changes in the laws and regulations affecting
public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and
rules proposed by the Securities and Exchange Commission and by the Nasdaq Stock
Market, could result in increased costs to us as we evaluate the implications of
any new rules and respond to their requirements. The new rules could make it
more difficult or more costly for us to obtain certain types of insurance,
including director and officer liability insurance, and we may be forced to
accept reduced policy limits and coverage or incur substantially higher costs to
obtain the same or similar coverage. The impact of these events could also make
it more difficult for us to attract and retain qualified persons to serve on our
board of directors, our board committees or as executive officers. We are
presently evaluating and monitoring developments with respect to new and
proposed rules and cannot predict or estimate the amount of the additional costs
we may incur or the timing of such costs.
MANAGEMENT MAY INVEST OR SPEND THE PROCEEDS OF THIS OFFERING IN WAYS IN WHICH
YOU MAY NOT AGREE AND IN WAYS THAT MAY NOT YIELD A RETURN TO OUR STOCKHOLDERS.
Management will retain broad discretion over the use of proceeds from this
offering. Stockholders may not deem such uses desirable, and our use of the
proceeds may not yield a significant return or any return at all for our
stockholders. Management intends to use a majority of the proceeds from this
offering for research and development, working capital and other general
corporate purposes, and potentially to finance future
15
acquisitions. Because of the number and variability of factors that determine
our use of the proceeds from this offering, our intended uses for the proceeds
of this offering may vary substantially from our currently planned uses. Pending
our use of the proceeds from this offering, we intend to invest the net proceeds
from this offering in interest-bearing securities of investment grade.
IF WE ENGAGE IN ANY ACQUISITION, WE WILL INCUR A VARIETY OF COSTS THAT COULD
ADVERSELY AFFECT OUR BUSINESS OPERATIONS, AND WE MAY NEVER REALIZE THE
ANTICIPATED BENEFITS OF THE ACQUISITION.
We currently have no commitments or agreements with respect to any material
acquisitions. However, if appropriate opportunities become available, we may
attempt to acquire businesses, technologies, services or products that we
believe are a strategic fit with our business. The process of integrating an
acquired business, technology or product may result in unforeseen operating
difficulties and expenditures and may require significant management attention
that would otherwise be unavailable for ongoing development of our existing
business. In addition, we may not be able to maintain the levels of operating
efficiency that any acquired company achieved or might have achieved separately.
Successful integration of the companies we acquire will depend upon our ability
to, among other things, eliminate redundancies and excess costs. As a result of
difficulties associated with combining operations, we may not be able to achieve
cost savings and other benefits that we might hope to achieve with acquisitions.
Future acquisitions could result in potentially dilutive issuances of equity
securities, the incurrence of debt and contingent liabilities or have an
undesirable impact on our consolidated financial statements. In addition, any
future acquisitions or business combinations might negatively impact our
business relations with a collaborator and could lead to a termination of our
agreement with such collaborator.
THE MARKET PRICE OF OUR COMMON STOCK MAY BE HIGHLY VOLATILE, AND YOU MAY NOT BE
ABLE TO RESELL YOUR SHARES AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.
There has not been a public market for our common stock. An active trading
market for our common stock may not develop following this offering. You may not
be able sell your shares quickly or at the market price if trading in our common
stock is not active. The initial public offering price for the shares will be
determined by negotiations between us and representatives of the underwriters
and may not be indicative of prices that will prevail in the trading market.
Please see "Underwriting" for more information regarding our arrangement with
the underwriters and the factors considered in setting the initial public
offering price.
The trading price of our common stock is likely to be highly volatile and
could be subject to wide fluctuations in price in response to various factors,
many of which are beyond our control, including:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations by us, our collaborators or
our competitors;
- new products or services introduced or announced by us or our
competitors;
- changes in financial estimates by securities analysts;
- conditions or trends in the biotechnology and pharmaceutical industries;
- changes in the market valuations of similar companies;
- announcements by us of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
- additions to or departures of our key personnel;
- disputes or other developments relating to proprietary rights, including
patents, litigation matters and our ability to obtain patent protection
for our technologies;
- the loss of a significant collaborator;
- developments concerning our collaborations; and
- sales of our common stock.
In addition, the stock market in general, the Nasdaq National Market and
the market for technology companies in particular, have experienced extreme
price and volume fluctuations that have often been
16
unrelated or disproportionate to the operating performance of those companies.
Further, there has been particular volatility in the market prices of securities
of biotechnology and life sciences companies. These broad market and industry
factors may seriously harm the market price of our common stock, regardless of
our operating performance. In the past, following periods of volatility in the
market, securities class-action litigation has often been instituted against
companies. Such litigation, if instituted against us, could result in
substantial costs and diversion of management's attention and resources.
NEW INVESTORS IN OUR COMMON STOCK WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL
DILUTION.
The offering price of our common stock will be substantially higher than
the net tangible book value per share of our existing capital stock. As a
result, purchasers of our common stock in this offering will incur immediate and
substantial dilution of $ in pro forma net tangible book value per
share of common stock, based on an assumed public offering price of $ per
share. Those purchasers will experience additional dilution upon the exercise of
outstanding stock options and warrants. See "Dilution" for a more detailed
discussion of the dilution new investors will incur in this offering.
THE LARGE NUMBER OF SHARES ELIGIBLE FOR SALE FOLLOWING THIS OFFERING MAY DEPRESS
THE MARKET PRICE OF OUR COMMON STOCK.
Once a trading market develops for our common stock, many of our
stockholders will have an opportunity to sell their common stock for the first
time. Sales of a substantial number of shares of common stock in the public
market, or the threat that substantial sales may occur, could cause the market
price of the common stock to decrease significantly. These factors could also
make it difficult for us to raise additional capital by selling stock. See
"Shares Eligible for Future Sale" for further details regarding the number of
shares eligible for sale in the public market after this offering.
On the day that is 181 days after the completion of this offering, lockup
agreements entered into by our directors, officers and certain of our
stockholders will expire. At that time, those persons will be able to sell an
aggregate of shares of our currently outstanding common stock pursuant
to Rule 144 or Rule 701 under the Securities Act of 1933, as amended. The
underwriters may also consent to the release of some or all of these shares for
sale prior to that time.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY MAKE AN
ACQUISITION OF US MORE DIFFICULT.
Anti-takeover provisions in our charter documents and Delaware law may make
an acquisition of us more difficult. These provisions:
- allow the authorized number of directors to be changed only by resolution
of our board of directors;
- require that stockholder actions must be effected at a duly called
stockholder meeting and prohibit stockholder action by written consent;
- authorize our board of directors to issue blank check preferred stock
without stockholder approval which, if issued, would increase the number
of outstanding shares of our capital stock;
- establish advance notice requirements for nominations to the board of
directors or for proposals that can be acted on at stockholder meetings;
and
- limit who may call stockholder meetings.
In addition, because we are incorporated in Delaware, we are governed by
the provisions of Section 203 of the Delaware General Corporation Law which may
prohibit large stockholders from consummating a merger with or acquisition of
us. These provisions may prevent a merger or acquisition that would be
attractive to stockholders and could limit the price that investors would be
willing to pay for our common stock in the future.
17
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. We have attempted to identify forward-looking statements by
terminology including "anticipates," "believes," "can," "continue," "could,"
"estimates," "expects," "intends," "may," "plans," "potential," "predicts,"
"should" or "will" or the negative of these terms or other comparable
terminology. These statements are only predictions and involve known and unknown
risks, uncertainties and other factors, including the risks outlined under "Risk
Factors," that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are not under any duty to update any
of the forward-looking statements after the date of this prospectus to conform
these statements to actual results, unless required by law.
USE OF PROCEEDS
Our net proceeds from the sale of shares of our common stock in this
offering are estimated to be $ million ($ million if the
underwriters' over-allotment option is exercised in full) assuming an initial
public offering price of $ per share and after deducting the underwriting
discounts and commissions and our estimated offering expenses. We intend to use
a significant portion of the proceeds of the offering to fund our research and
development activities, including clinical trials for product candidates for
which we retain product development and commercialization rights, acquisitions
of additional product candidates, businesses, technologies, services or products
that complement our business as well as working capital and other general
corporate purposes. Currently, we have no present understandings, commitments or
agreements to enter into any material acquisitions and investments.
We have not yet finalized the amount of net proceeds we will use
specifically for each of the foregoing purposes. The timing and amount of our
actual expenditures will depend on numerous factors, including the progress of
our research and development activities and clinical trials, the number and
breadth of our product development programs, our ability to establish and
maintain corporate collaborations, the nature, timing and amounts of any
acquisitions or investments, and the amount of cash, if any, generated by our
operations. Accordingly, our management will have significant flexibility in
applying the net proceeds of this offering. Until the funds are used as
described above, we intend to invest the proceeds of the offering in interest-
bearing, investment-grade securities. See "Risk Factors -- Management may invest
or spend the proceeds of this offering in ways in which you may not agree and in
ways that may not yield a return to our stockholders."
DIVIDEND POLICY
The payment of dividends is within the discretion of our board of
directors. Our ability to pay any future dividends will depend on our earnings,
operating and financial condition and projected capital requirements. We have
not declared or paid any cash dividends on our capital stock since inception. We
currently intend to retain future earnings, if any, to finance the expansion of
our business and do not anticipate paying any cash dividends in the foreseeable
future.
18
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2003:
- on an actual basis; and
- on a pro forma as adjusted basis reflecting (a) the conversion of all
outstanding shares of convertible preferred stock into 10,941,993 shares
of common stock, (b) the issuance of 366,851 shares of common stock
issuable upon the closing of the offering to the former shareholders of
Renalogics and a $4.2 million increase in our accumulated deficit
resulting from a charge to operations for the value (assumed to be $11.36
per share) of the shares to be issued to the former shareholders of
Renalogics and (c) the sale of the shares of common stock
offered by us at an assumed initial public offering price of $ per
share, less the underwriting discounts and commissions and estimated
offering expenses and the receipt of the net proceeds of the offering.
You should read this information in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and the notes relating to our financial statements
appearing elsewhere in this prospectus.
<Table>
<Caption>
AS OF JUNE 30, 2003
----------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
Convertible preferred stock, $0.001 par value
Authorized -- 7,000,000 shares (5,000,000 pro forma as
adjusted)
Issued and outstanding -- 6,599,186 shares actual and no
shares pro forma as adjusted........................... $ 56,215
--------
Stockholders' deficit:
Common stock, $0.001 par value
Authorized -- 50,000,000 shares
Issued and outstanding -- 3,879,088 shares actual and
shares pro forma as adjusted.................. 4
Additional paid-in capital.................................. 18,277
Deferred stock compensation................................. (3,226)
Other comprehensive income.................................. 11
Accumulated deficit......................................... (44,798)
--------
Total stockholders' deficit............................ (29,732)
--------
Total capitalization................................. $ 26,483
========
</Table>
The table above does not include:
- 1,081,697 shares of common stock issuable upon exercise of options
outstanding under our 1995 stock option plan with a weighted average
price of $0.50 per share;
- 1,044,000 shares of common stock issuable upon exercise of options
outstanding under our 2001 incentive award plan with a weighted average
price of $0.98 per share;
- 225,060 shares of common stock issuable upon exercise of warrants with a
weighted average price of $3.64 per share;
- up to 86,287 additional shares of common stock reserved for issuance
under our 1995 stock option plan;
- up to 445,000 additional shares of common stock reserved for issuance
under our 2001 incentive award plan; and
- shares of our common stock that may be purchased by the
underwriters to cover over-allotments.
19
DILUTION
If you invest in our common stock, your interest will be diluted
immediately to the extent of the conversion of all shares of our convertible
preferred stock outstanding as of June 30, 2003 upon the closing of this
offering, the issuance of 366,851 shares of common stock to the shareholders of
Renalogics upon the closing of this offering and the difference between the
initial public offering price per share of our common stock and the net tangible
book value of our common stock immediately after completion of this offering.
Our net tangible book value per share is equal to the amount of our total
tangible assets (total assets less intangible assets) less total liabilities,
divided by the number of shares of our common stock outstanding as of June 30,
2003. Net tangible book value of our common stock as of June 30, 2003 was
approximately $26.5 million, or approximately $6.83 per common share. Assuming
the conversion of all shares of our convertible preferred stock outstanding as
of June 30, 2003 upon the closing of this offering, the issuance of 366,851
shares of common stock to the former shareholders of Renalogics upon the closing
of this offering and the sale of the shares of our common stock offered by this
prospectus at an assumed initial public offering price of $ per share and
after deducting underwriting discounts and the estimated offering expenses, our
pro forma net tangible book value as of June 30, 2003 would have been $
million, or $ per share of our common stock. This represents an immediate
increase in net tangible book value of $ per share to existing stockholders
and an immediate dilution in net tangible book value of $ per share to new
investors. The following table illustrates this dilution on a per share basis:
<Table>
Assumed initial public offering price per share............. $
Net tangible book value per share as of June 30, 2003....... $
Pro forma decrease in net tangible book value per share
attributable to conversion of convertible preferred
stock..................................................... $
Pro forma decrease in net tangible book value per share
attributable to the issuance of shares to former
Renalogics shareholders................................... $
Pro forma increase in net tangible book value attributable
to new investors.......................................... $
Pro forma net tangible book value per share after this
offering.................................................. $
Pro forma dilution per share to new investors............... $
</Table>
If the underwriters exercise their option to purchase additional shares in
this offering, our adjusted pro forma net tangible book value at June 30, 2003
would have been $ million, or $ per share, representing an immediate
increase in pro forma net tangible book value to our existing stockholders of
$ per share and an immediate dilution to new investors of $ per share.
The following table summarizes, on a pro forma basis as described above as
of June 30, 2003, the total number of shares of common stock purchased from us,
the total consideration paid to us and the average price per share paid by
existing stockholders and by new investors purchasing shares in this offering.
We have assumed an initial offering price of $ per share, and we have not
deducted estimated underwriting discounts and commissions and estimated offering
expenses in our calculations.
<Table>
<Caption>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- ------------------------ PRICE PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
---------- ---------- ----------- ---------- ----------
Existing stockholders........ 15,187,932(1) % $57,958,514 % $3.82
New investors................
Total...................... 100% 100%
</Table>
- ---------------
(1) Includes 3,879,088 shares of common stock outstanding, 10,941,993 shares of
common stock issuable upon the conversion of preferred stock outstanding and
366,851 shares of common stock to be issued to former Renalogics
shareholders.
The foregoing discussion and tables assume no exercise of any outstanding
stock options or warrants. The exercise of all options and warrants outstanding
as of June 30, 2003 having an exercise price less than
20
the offering price would increase the dilutive effect to new investors to $
per share, assuming the exercise by the underwriters of their over-allotment
option. See "Capitalization," "Management -- Employee Benefit Plans" and
"Description of Capital Stock."
If the underwriters exercise their over-allotment option in full, the
following will occur:
- the number of shares of our common stock held by existing stockholders
will decrease to approximately % of the total number of shares of
our common stock outstanding after this offering; and
- the number of shares of our common stock held by new investors will
increase to shares, or approximately % of the total number
of shares of our common stock outstanding after this offering.
21
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the related notes to
those statements included elsewhere in this prospectus. The statements of
operations data for the years ended December 31, 2000, 2001 and 2002 and the
balance sheet data as of December 31, 2001 and 2002 are derived from our audited
consolidated financial statements included elsewhere in this prospectus. The
statement of operations data for the years ended December 31, 1998 and 1999 and
the balance sheet data as of December 31, 1999 and 2000 are derived from our
audited consolidated financial statements not included in this prospectus. The
balance sheet data as of December 31, 1998 is derived from our unaudited
consolidated financial statements not included in this prospectus. The
statements of operations data for the six months ended June 30, 2002 and 2003
and the balance sheet data as of June 30, 2003 are derived from our unaudited
consolidated financial statements, which are included elsewhere in this
prospectus. In our opinion, these unaudited interim consolidated financial
statements include all adjustments, consisting of only normal recurring
adjustments that are necessary for a fair presentation of our financial position
and results of operations for those periods. Operating results for the six-month
period ended June 30, 2003 are not necessarily indicative of the results to be
expected for the fiscal year ending December 31, 2003.
<Table>
<Caption>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1998 1999 2000 2001 2002 2002 2003
------ ------ ------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA
Revenues.......................... $3,173 $6,851 $ 2,967 $ 5,829 $ 3,153 $ 1,500 $ 847
Costs and expenses................ 2,639 5,800 8,160 17,800 18,283 8,969 6,924
Operating income (loss)........... 534 1,051 (5,193) (11,971) (15,130) (7,469) (6,077)
Net income (loss)................. $ 79 $1,073 $(4,943) $(11,081) $(14,437) $(7,106) $(5,773)
====== ====== ======= ======== ======== ======= =======
Net income (loss) per common
share, basic(1)................. $ 0.04 $ 0.47 $ (1.87) $ (3.97) $ (3.87) $ (1.95) $ (1.49)
------ ------ ------- -------- -------- ------- -------
Net income (loss) per common
share, diluted(1)............... $ 0.02 $ 0.20 $ (1.87) $ (3.97) $ (3.87) $ (1.95) $ (1.49)
------ ------ ------- -------- -------- ------- -------
Shares used in computing net
income (loss) per common share,
basic(1)........................ 1,807 2,288 2,638 2,790 3,729 3,644 3,879
Shares used in computing net
income (loss) per common share,
diluted(1)...................... 4,010 5,369 2,638 2,790 3,729 3,644 3,879
</Table>
(1) Net loss per common share and shares used in computing net loss per common
share do not give effect to the conversion of the outstanding convertible
preferred stock or, from 1999 to the current period, the issuance of
366,851 shares of common stock issuable to the former shareholders of
Renalogics.
<Table>
<Caption>
AS OF DECEMBER 31, AS OF
-------------------------------------------------- JUNE 30,
1998 1999 2000 2001 2002 2003
------- ------- -------- -------- -------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA
Cash and cash equivalents............. $ 3,076 $ 1,640 $ 4,118 $ 42,821 $ 14,041 $ 3,584
Marketable securities................. -- -- -- -- 17,157 22,703
Working capital....................... (4,944) (563) 1,389 40,828 29,652 25,724
Total assets.......................... 4,098 3,074 4,175 43,462 32,769 27,706
Convertible preferred stock........... 4,257 8,325 13,809 56,215 56,215 56,215
Deferred stock compensation........... -- -- (965) (5,636) (2,244) (3,226)
Total stockholders' deficit........... (9,606) (7,654) (12,365) (14,899) (25,781) (29,732)
</Table>
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of the financial condition and
results of our operations in conjunction with the consolidated financial
statements and the notes to those statements included elsewhere in this
prospectus. The discussion in this prospectus contains forward-looking
statements that involve risks and uncertainties, such as statements of our
plans, objectives, expectations and intentions. The cautionary statements made
in this prospectus should be read as applying to all related forward-looking
statements wherever they appear in this prospectus. Our actual results could
differ materially from those discussed here. Factors that could cause or
contribute to these differences include those discussed in "Risk Factors," as
well as those discussed elsewhere. See "Risk Factors" and "Special Note
Regarding Forward-Looking Statements."
OVERVIEW
We were formed in 1994 and began operations by acquiring the pharmaceutical
research programs of Whitby Research, Inc., a wholly owned subsidiary of Ethyl
Corp. In 1999, we acquired Renalogics, Inc., a development stage company that
had funded two early stage research programs at Emory University.
We are a biopharmaceutical company engaged in developing small molecule
drugs to treat central nervous system, cardiovascular and inflammatory
conditions. We currently have four product candidates in development for six
indications. Rotigotine CDS, our lead product candidate, is being developed by
Schwarz Pharma. Rotigotine CDS is completing Phase III clinical trials for the
treatment of Parkinson's disease and is in a Phase IIb clinical trial for
Restless Legs Syndrome. King has completed Phase II clinical trials with
binodenoson as a pharmacologic stress agent for cardiac imaging and is expected
to start Phase III clinical trials in the fourth quarter of 2003. King is also
developing MRE-0094 as a treatment for chronic diabetic foot ulcers. The
intravenous dosage form of selodenoson is being developed by Fujisawa
Healthcare. Intravenous selodenoson is in Phase II clinical trials for heart
rate control in atrial fibrillation and has demonstrated slowing of heart rate.
We retain rights to the intravenous formulation outside the United States and
Canada and the worldwide rights to the oral formulations of selodenoson. We have
completed a Phase I clinical trial for an oral dosage form of selodenoson.
FINANCIAL OPERATIONS OVERVIEW
REVENUES
To date, our revenues have consisted primarily of license fees, milestone
payments and other fees pursuant to product license and development agreements
between us and our corporate collaborators. We have entered into agreements
pursuant to which we license development and commercialization rights to certain
of our compounds, for which we earn up-front license fees and on-going milestone
payments as our collaborators reach certain development milestones specified in
the contracts. Payments received under these agreements are non-refundable. Each
contract entitles us to participate on an on-going basis in joint management
committees and potentially provide fee-based development assistance to our
collaborators. As a result of this on-going involvement on our part, we
recognize total fixed and determinable contract revenues on a straight-line
basis over the estimated development period set forth in the contract, adjusted
from time to time for any delays or acceleration in development or clinical
trials of the compound. Most of our contracts can be canceled by our
collaborators, allowing our collaborators to avoid the payment of future fees.
Therefore, we do not recognize revenues before cash is received nor do we
recognize revenue in excess of cumulative cash collections. Any royalty payments
to us provided for in our contracts are recognized in the period in which they
are earned. Deferred revenues consist of payments received in advance of
revenues recognized under our development agreements. Revenues have varied and
will likely vary in the future from period to period due principally to the
timing of milestone payments and the progress towards attainment of development
milestones by our collaborators.
RESEARCH AND DEVELOPMENT
Research and development expenses, excluding stock-based compensation,
primarily consist of salaries and related expenses for personnel and consulting
services. Other research and development expenses include
23
fees paid to outside service providers for materials, manufacturing and clinical
trial design and management, fees paid to consultants, the costs of laboratory
supplies and materials, amortization of purchased technology and allocations of
other corporate costs. We charge all research and development expenses to
operations as they are incurred. Our research and development activities are
focused on pre-clinical testing and clinical development of small molecule drugs
to treat central nervous system diseases, cardiovascular diseases and
inflammatory conditions. Our activities include, but are not limited to:
- laboratory testing of a variety of molecules to determine their potential
utility in humans in treating the target disorders;
- pre-clinical testing of the molecules to assess their pharmacologic
activity and toxicity potential; and
- a series of clinical testing in healthy volunteers and patients to
determine the safety and efficacy of the drug candidates.
We are not directly compensated for our research and development
activities. We fund the costs of early development of our product candidates and
assess on an on-going basis:
- their medical and commercial potential;
- the medical and clinical risks of continued development; and
- the feasibility and advisability of entering into collaborative
agreements for continued development and commercialization of our drug
candidates.
Clinical development timelines, likelihood of success and total costs can
and do vary widely based in part on the targeted indication, whether therapy is
required to be acute or chronic and the inherent unpredictability of attracting
subjects to participate in the required clinical trials. We anticipate that we
will make determinations as to which research and development projects to pursue
and how much funding to direct to each project on an on-going basis in response
to the scientific and clinical success of each product candidate.
GENERAL AND ADMINISTRATIVE
General and administrative expenses, excluding stock-based compensation,
primarily consist of salaries and related expenses for personnel in business
development, administration, finance, accounting and human resources. Other
costs include facility costs and professional fees for legal and accounting
services.
STOCK-BASED COMPENSATION
Stock-based compensation expense, which is a non-cash charge, results from
stock option grants to our employees at exercise prices, which for financial
reporting purposes, are deemed below fair market value on the measurement
date -- generally being the date of grant. As a result, we have recorded
deferred compensation expense, which represents, in the case of employees, the
difference between the option exercise price and the deemed fair market value of
our common stock. Stock-based compensation expense also is recorded for stock
option grants to non-employees and represents the fair value of the options
granted, computed using the Black-Scholes option-pricing model. Deferred
compensation expense on fixed awards is amortized as a charge to operations over
the vesting period of the equity award grant, which is typically four years,
subject to forfeiture during the vesting period. Stock-based compensation
expense on equity awards issued to non-employees is charged to operations over
the service period, which is usually the vesting period, and is adjusted for
changes in the fair values of the equity instruments.
ROYALTY EXPENSE
Royalty expense consists of charges related to our in-licensing of the
compounds and related technologies for our product candidates. These charges are
typically incurred under our various agreements for purchased and in-licensed
technology when we receive payments from our product candidates which
incorporate technology covered under such agreements. These charges are computed
as a percentage of the
24
license fees, milestone payments and on-going royalties, if any, received by us
related to our product candidates. The amounts and terms of these obligations
vary by product candidate.
WRITE-OFFS OF PURCHASED TECHNOLOGY
Write-offs of purchased technology consist of a charge related to the
impairment of the value of technology purchased in connection with our
acquisition of Renalogics. This technology consisted of a license agreement from
Emory University. This agreement was renewed yearly and, at the time of
acquisition, we believed there was value to the underlying technology. During
December 2000, we reevaluated the commercial potential of the licensing
agreement with Emory University and concluded that we would not pursue the
further commercialization of this technology. Accordingly, we terminated our
licensing agreement with Emory University and wrote off the remaining $724,242
of unamortized value of the purchased technology due to its impairment. Due to
the impairment of this purchased technology, we will expense the fair market
value of the additional 366,851 shares to be issued to the former Renalogics
shareholders upon the successful closing of our proposed initial public
offering.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities
and expenses. On an on-going basis, we evaluate our estimates and judgments,
including those related to revenue recognition, fair valuation of stock related
to stock-based compensation and income taxes. We based our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
REVENUE RECOGNITION
We have entered into collaborative agreements with pharmaceutical companies
under which we receive non-refundable license fees, milestone payments and other
fees. Payments received are initially deferred from revenue and subsequently
recognized in our statement of operations when earned. We must make significant
estimates in determining the development period and periodically review these
estimates, based on joint management committees and other information shared by
our collaborators with us. We generally recognize total fixed and determinable
contract revenues on a straight-line basis over the estimated development period
as set forth in the contracts, adjusted from time to time for any delays or
acceleration in the development of the product. Because most of our contracts
can be canceled by our collaborators, we do not recognize revenues before cash
is received nor do we recognize revenues in excess of cumulative cash
collections. For example, a delay or acceleration of the development period by
our collaborators may result in the reversal of revenue previously recognized or
the acceleration of revenue previously deferred. It is difficult to estimate the
impact of the adjustments on the results of our operations because, in each
case, the amount of cash received would be a limiting factor in determining the
adjustment.
STOCK-BASED COMPENSATION
We have elected to follow APB Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations, in accounting for our stock-based
compensation plans, rather than the alternative fair value accounting method
provided for under SFAS No. 123, "Accounting for Stock-Based Compensation."
Accordingly, we have recorded stock-based compensation expense for stock options
issued to employees in fixed amounts with exercise prices that are, for
financial reporting purposes, deemed to be below fair market value on the
measurement date -- generally being the date of grant. In the notes to our
consolidated financial statements, we provide pro forma disclosures in
accordance with SFAS No. 123 and related pronouncements.
25
We account for transactions in which services are received in exchange for
equity instruments based on the fair value of such services received from
non-employees or of the equity instruments issued, whichever is more reliably
measured, in accordance with SFAS No. 123 and EITF Issue No. 96-18, "Accounting
for Equity Instruments that Are Issued to Other than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services." The two factors which most
affect charges or credits to operations related to stock-based compensation are
the estimated fair market value of the common stock underlying stock options for
which stock-based compensation is recorded and the estimated volatility of such
fair market value.
Accounting for equity instruments granted by us under APB No. 25, SFAS No.
123 and EITF No. 96-18 requires fair value estimates of the equity instrument
granted or sold. If our estimates of the fair value of these equity instruments
are too high or too low, it would have the effect of overstating or understating
expenses. When equity instruments are granted in exchange for the receipt of
goods or services and the value of those goods or services can be readily
estimated, we use the value of such goods or services to determine the fair
value of the equity instruments. When equity instruments are granted or sold in
exchange for the receipt of goods or services and the value of those goods or
services cannot be readily estimated, as is true in connection with most stock
options and warrants granted to employees or non-employees, we estimate the fair
value of the equity instruments based upon consideration of factors which we
deem to be relevant at the time using cost, market and/or income approaches to
such valuations. Because shares of our common stock have not been publicly
traded, market factors historically considered in valuing stock and stock option
grants include comparative values of public companies discounted for the risk
and limited liquidity provided for in the shares we are issuing, pricing of
private sales of our convertible preferred stock, prior valuations of stock
grants and the effect of events that have occurred between the time of such
grants, economic trends, perspective provided by investment banks and the
comparative rights and preferences of the security being granted compared to the
rights and preferences of our other outstanding equity. As a result of these
factors, some of which are subjective, changes in our estimates of fair market
value and volatility could have a significant effect on the determination of
stock-based compensation.
In 2000, 2001, 2002 and 2003, we granted options to employees at exercise
prices which, for financial reporting purposes, were deemed to be below fair
market value on the dates of grant. As a result, we recorded deferred
compensation related to these grants for the difference between the deemed fair
market value and the exercise price. We are amortizing this deferred
compensation as a charge to operations over the vesting periods of the options.
In 2000, 2001, 2002 and 2003, we also granted options to non-employees for which
we recorded stock-based compensation in the statements of operations based on
the fair market value of these options, as determined using the Black-Scholes
model, over the service period, which is usually the vesting period. As
discussed above, these stock-based compensation charges will fluctuate based
primarily on the volatility and fair market value of our common stock.
In connection with the grant of stock options to employees, we recorded
deferred compensation totaling $1.1 million for the year ended December 31,
2000, $10.8 million during the year ended December 31, 2001, $35,300 during the
year ended December 31, 2002, and $2.3 million for the six months ended June 30,
2003, representing the difference between the exercise price and the deemed fair
market value of our common stock for financial reporting purposes on the date
those options were granted. This amount is initially recorded as a component of
stockholders' equity and is being charged against income over the vesting period
of the individual options. We recorded stock compensation expense related to
employee options of $0.1 million for the year ended December 31, 2000, $6.1
million for the year ended December 31, 2001, $3.0 million for the year ended
December 31, 2002, and $1.3 million for the six months ended June 30, 2003. At
June 30, 2003, we had a total of $3.2 million remaining to be amortized over the
vesting periods of the employee stock options.
26
We expect to record stock-based compensation expense for options granted to
employees through June 30, 2003, assuming no forfeitures, as follows:
<Table>
<Caption>
YEAR AMOUNT
- ---- ----------
Six-Month Period Ending December 31, 2003................... $ 868,000
2004........................................................ 1,218,000
2005........................................................ 748,000
2006........................................................ 391,000
2007........................................................ 1,000
</Table>
In addition to the above charges, we recorded non-cash compensation
totaling $0.1 million for the year ended December 31, 2000, $1.2 million during
the year ended December 31, 2001, $0.2 million during the year ended December
31, 2002, and $0.5 million during the six months ended June 30, 2003. These
charges primarily relate to the acceleration of vesting of certain options and
restricted stock granted to board members and employees. The remainder of this
charge relates to the charge for options previously granted to non-employees for
which we are recording the charge over the vesting period of the underlying
options.
INCOME TAXES
As part of the process of preparing our consolidated financial statements
we are required to estimate our federal and state income taxes. This process
involves us estimating our actual current tax exposure together with assessing
temporary differences resulting from differing treatments of items for tax and
accounting purposes. These differences resulted in net deferred tax assets as of
December 31, 2002, amounting to $16.8 million. We have recorded a full valuation
allowance as an offset against these net deferred tax assets due to the
uncertainty surrounding the timing of the realization of the tax benefit. In the
event that we determine in the future that we will be able to realize all or a
portion of our net deferred tax benefit, an adjustment to the deferred tax
valuation allowance would increase net income in the period in which such a
determination is made. The Tax Reform Act of 1986 contains provisions that may
limit the utilization of net operating loss carryforwards and credits available
to be used in any given year in the event of significant changes in ownership
interest, as defined therein.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Revenues
Revenues for the six months ended June 30, 2003 decreased $0.7 million, or
44%, to $0.8 million from $1.5 million for the six months ended June 30, 2002.
The decrease is due to no milestone payments received from our collaborators
during the six month period ended June 30, 2003. The revenues reported at June
30, 2003 reflects the amortization of a milestone payment under our
collaborative arrangement with Fujisawa Healthcare received in the fourth
quarter of 2002 and deferred pursuant to our revenue recognition policy.
Research and Development Expenses
Research and development expenses for the six months ended June 30, 2003
decreased $2.2 million, or 46%, to $2.6 million from $4.7 million for the six
months ended June 30, 2002. The decrease is primarily due to a reduction in
expenses as a result of the completion of our Phase II clinical trials for the
intravenous dosage form of selodenoson in December 2002 as well as the
termination of our research efforts on two alternate dosage forms of selodenoson
and the decreased spending on our early stage research programs. As part of our
plan to reduce our expenditures in early stage research, we reduced our research
and development workforce by six employees during June 2003 and recorded a
severance charge to research and development of approximately $135,000 during
the six months ended June 30, 2003 for this reduction in workforce.
During the six months ended June 30, 2003, we estimate that we spent
approximately 33% of our total research and development expenses on our
selodenoson program for atrial fibrillation compared to 65% for
27
the six months ended June 30, 2002. This decrease is due to the completion of
our Phase II intravenous study for selodenoson in December 2002 and the
termination of our research efforts on two alternate dosage forms. During the
six months ended June 30, 2003, we estimate that we spent 67% of our total
research and development expenses on other early stage research efforts compared
to 31% for the six months ended June 30, 2002. During the six months ended June
30, 2002, we spent 4% of our total research and development costs on two of our
discontinued programs. We allocate expenses to each development program based on
actual outsourced costs for the program and an allocation of internal salaries
and support costs based on the estimate of time spent on each program. We expect
research and development expenses to increase in the future as more of our drug
candidates progress into clinical trials.
General and Administrative Expenses
General and administrative expenses increased approximately $0.2 million,
or 9%, to $2.5 million for the six months ended June 30, 2003 from $2.3 million
for the six months ended June 30, 2002. This increase is primarily attributable
to the continued development of the administrative infrastructure necessary to
enable us to continue to expand our operations, support our accelerated
development efforts and facilitate the additional reporting and regulatory
requirements associated with a public company. It is expected that general and
administrative expenses will continue to trend upwards as we expand our
management staff and make further investment in information technology resources
to support our growth.
Stock-Based Compensation
Stock-based compensation decreased approximately $0.1 million, or 4%, to
$1.8 million for the six months ended June 30, 2003 from $1.9 million for the
six months ended June 30, 2002. The change in stock-based compensation expense
in the six months ended June 30, 2003 is primarily attributable to $0.5 million
related to the grants of stock options to our officers, directors and other
employees during the six months ended June 30, 2003, which for financial
reporting purposes, was deemed to be below the fair market value of our common
stock, and $0.3 million related to the acceleration of stock option vesting
during the six months ended June 30, 2003 for stock options granted to certain
employees, offset by a decrease in the amortization of deferred compensation
related to 2001 option grants.
Net Interest Income
Net interest income decreased approximately $0.1 million, or 17%, to $0.3
million for the six months ended June 30, 2003 from $0.4 million for the six
months ended June 30, 2002. This decrease is attributable to a decrease in
interest rates as well as a decrease in cash balances due to operating expenses
which were not offset by receipts of milestone payments or any other cash
receipts.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Revenues
Revenues for the year ended December 31, 2002 decreased by $2.7 million, or
46%, to $3.1 million from $5.8 million for the year ended December 31, 2001.
This decrease is attributable to the amortization in 2001 of a major milestone
payment received in 2001 from Schwarz Pharma due to the initiation of a Phase
III clinical trial for rotigotine CDS. Due to the timing of the development work
performed, this amount was fully recognized in 2001 pursuant to our revenue
recognition policy. In 2002, we received a smaller milestone payment from this
same collaborator, which was then fully amortized into revenue pursuant to our
revenue recognition policy.
Research and Development Expenses
Research and development expenses increased by $2.1 million, or 35%, for
the year ended December 31, 2002 to $8.1 million from $6.0 million for the year
ended December 31, 2001. This increase is attributable to $2.4 million in
increased spending on non-clinical testing, $0.1 million in recruiting costs
related to the search for a Vice President of Research and Development and $0.5
million of salary-related expenses
28
associated with the addition of our chief medical officer in 2001 and three
other research and development employees, for which full year salaries were paid
to these employees during 2002. These increases were partially offset by a
decrease in clinical testing costs of $1.1 million. The increase in non-clinical
testing expenses is primarily due to pre-clinical testing and toxicology work
performed on selodenoson for atrial fibrillation. Clinical testing costs
decreased in 2002 from 2001 due to the termination of our research efforts on
two of our programs.
During the year ended December 31, 2002, we estimate that we spent
approximately 62% of our total research and development expenses on our
selodenoson program for atrial fibrillation. We estimate that we spent
approximately 4% on our program for congestive heart failure. The remaining 34%
of our total research and development expense was spent on other early stage
research efforts. Allocations of expenses to each development program are based
on actual outsourced costs for the program and an allocation of internal
salaries and support costs based on the estimate of time spent on each program.
We expect research and development expenses to continue to increase in the
future as more of our drug candidates progress into clinical trials.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2002
increased by $2.9 million, or 74%, to $6.8 million from $3.9 million for the
year ended December 31, 2001. This increase is attributable to our investment in
the administrative infrastructure necessary to enable us to expand our
operations, support our development efforts and facilitate the additional
reporting and regulatory requirements associated with a public company. The
increase is primarily composed of $1.8 million in costs incurred during the
third quarter of 2002 related to our then contemplated initial public offering
which began in January 2002 and terminated in August 2002, $0.2 million in
increased salary and related expenses associated with the additions of a senior
director of business development, director of corporate communications and
controller, a full year of expenses associated with our addition of the chief
financial officer position, $0.6 million related to investor relations and $0.1
million of increased travel related expenses offset by a reduction in outside
accounting services of $0.2 million. Included in general and administrative
expenses during the year ended December 31, 2002 were the legal costs incurred
in connection with the defense of two lawsuits brought against us. Both claims
were settled during the year ended December 31, 2002 at an aggregate cost of
approximately $180,000.
Royalty Expense
Royalty expense for the year ended December 31, 2002 decreased $0.5
million, or 85%, to $0.1 million from $0.6 million for the year ended December
31, 2001. This decrease is due to not receiving any milestone payments from our
collaborators in 2002 that would have resulted in royalty payments by us to our
licensor.
Stock-Based Compensation
Stock-based compensation for the year ended December 31, 2002 decreased
$4.0 million, or 56%, to $3.2 million from $7.2 million for the year ended
December 31, 2001. This decrease is primarily a result of a 2001 charge of $4.2
million for immediately vested stock option grants to our board of directors. In
connection with the grants of stock options to employees and non-employees, we
recorded deferred compensation of $35,300 in 2002 and $10.8 million in 2001,
which is being recognized as stock-based compensation expense over the vesting
life of these options. These deferred amounts are subject to adjustment for
forfeiture over their respective vesting periods.
Net Interest Income
Net interest income for the year ended December 31, 2002 decreased $0.2
million, or 22%, to $0.7 million from $0.9 million for the year ended December
31, 2001. This decrease is attributable to reduced yields on marketable
securities resulting from lower average interest rates and to lower average cash
and cash equivalents and marketable securities balances during 2002.
29
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Revenues
Revenues for the year ended December 31, 2001 increased $2.9 million, or
96%, to $5.8 million from $3.0 million for the year ended December 31, 2000. The
increase is primarily attributable to a milestone payment received from Schwarz
Pharma due to their initiation of the Phase III clinical testing of rotigotine
CDS. Due to the timing of the development work performed, this amount was fully
recognized in 2001 pursuant to our revenue recognition policy.
Research and Development Expenses
Research and development expenses for the year ended December 31, 2001
increased $0.9 million, or 17%, to $6.0 million from $5.1 million for the year
ended December 31, 2000. The increase is attributable to approximately $1.0
million in increased spending on clinical testing, $1.0 million of non-clinical
testing costs and $0.9 million of expenses associated with increased staffing
and the addition of a chief medical officer in 2001. The increases were offset
by reductions of $0.5 million in amortization of capitalized technology costs
associated with the acquisition of Renalogics and approximately $1.5 million of
costs related to license fees paid for acquired technology, which were fully
expensed by December 31, 2000. During the year ended December 31, 2001, we
estimate that we spent approximately 47% of our total research and development
expenses on our program for atrial fibrillation. We estimate that we spent
approximately 16% on our program for congestive heart failure and approximately
17% on our program for treating kidney disease, a program we abandoned at the
end of 2001. The remaining 20% of our total research and development expense was
spent on other early stage research efforts.
General and Administrative Expenses
General and administrative expenses increased approximately $1.9 million,
or 92%, to $3.9 million for the year ended December 31, 2001 from $2.0 million
for the year ended December 31, 2000. This increase is attributable to our
investment in the development of the administrative infrastructure necessary to
enable us to expand our operations, support our development efforts and
facilitate the additional reporting and regulatory requirements of a public
company. The increase is primarily composed of $0.7 million of accounting and
legal costs incurred to expand accounting control systems, implement new revenue
recognition rules for prior years and to prepare for a public offering, $0.6
million in increased salary expense associated with the additions of a new chief
executive officer and chief commercial officer, $0.2 million related to investor
relations and $0.2 million of increased travel related expenses offset by a
reduction in consulting expenses of $0.2 million.
Royalty Expense
Royalty expense for the year ended December 31, 2001 increased $0.6 million
to $0.6 million for the year ended December 31, 2001. The increase is due
primarily to receiving milestone payments from Schwarz Pharma in December 2001
that resulted in royalty payments by us to our licensors.
Stock-Based Compensation
Stock-based compensation for the year ended December 31, 2001 increased
approximately $7.0 million to $7.2 million from $0.2 million for the year ended
December 31, 2000. This increase is attributable to a charge in 2001 for $6.1
million of stock compensation in connection with the grant of stock options to
our officers, directors and other employees, $0.7 million in connection with
accelerated vesting of options for certain former members of our board of
directors, $0.2 million related to the cashless exercise of options by a former
member of management and $0.2 million related to option grants to non-employees.
In connection with the grants of stock options to employees and non-employees,
we recorded a deferred compensation charge of $10.8 million in 2001 and $1.1
million in 2000, which is being recognized as stock-based compensation expense
over the vesting life of those options. The deferred amounts are subject to
adjustment for forfeiture over their respective vesting periods.
30
Net Interest Income
Net interest income for the year ended December 31, 2001 increased
approximately $0.7 million, or 260%, to $0.9 million for the year ended December
31, 2001 from $0.2 million for the year ended December 31, 2000. This increase
is attributable to increased cash balances resulting from approximately $44.8
million in proceeds from the sale of Series D preferred stock in 2001.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through
private placements of our common stock and preferred stock, as well as payments
we received under licensing agreements and loans. As of June 30, 2003, we had
raised aggregate net proceeds from loans and the sale of our common stock and
preferred stock of $56.7 million. In addition, through June 30, 2003, we
received $22.5 million from license fees, milestone payments and consulting
fees.
Cash and cash equivalents were $3.6 million and marketable securities were
$22.7 million at June 30, 2003 compared to $14.0 million and $17.2 million at
December 31, 2002, respectively. The decrease in cash balances at June 30, 2003
resulted primarily from operating expenses for the six-month period related to
research and development activities.
Net cash used for operating activities was $4.8 million for the six months
ended June 30, 2003, primarily due to a net loss of $5.8 million, a decrease in
accounts payable and accrued expenses of $0.3 million and a decrease in deferred
revenue of $0.8 million. These uses of cash and realization of revenue were
partially offset by non-cash charges for stock-based compensation expense of
$1.8 million.
Net cash used for operating activities was $11.4 million for the year ended
December 31, 2002. Net cash used by operating activities during this period
resulted from a net loss of $14.4 million, a decrease of $1.0 million in accrued
expenses and other current liabilities, and a $0.6 million increase in prepaid
expenses. These uses of cash were partially offset by increases in accounts
payable of $0.4 million and deferred revenues of $0.8 million and non-cash
charges for stock-based compensation expense of $3.2 million.
Net cash used for investing activities was $5.7 million and $17.7 million
for the six months ended June 30, 2003 and for the year ended December 31, 2002,
respectively, primarily due to the net purchases of marketable securities of
$5.5 million and $17.1 million, respectively.
Net cash provided by financing activities was $0.0 million and $0.3 million
for the six months ended June 30, 2003 and for the year ended December 31, 2002,
respectively. During 2002, the net cash provided by financing activities was due
to the proceeds received from common stock option exercises during the year.
The following table summarizes our contractual obligations at June 30, 2003
and the effects such obligations are expected to have on our liquidity and cash
flows in future periods.
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
--------------------------------------------------------
JULY - 2004 2006
CONTRACTUAL OBLIGATIONS TOTAL DECEMBER 2003 THROUGH 2005 THROUGH 2007 THEREAFTER
- ----------------------- -------- ------------- ------------ ------------ ----------
Operating lease obligations....... $206,000 $85,000 $116,000 $5,000 $--
======== ======= ======== ====== ==
</Table>
We expect to continue to incur substantial operating losses. Our future
capital requirements are difficult to forecast and will depend on many factors,
including:
- cash requirements of any potential acquisitions;
- scientific progress in our research and development programs;
- the size and complexity of these programs;
- the scope and results of pre-clinical studies and clinical trials;
- our ability to establish and maintain corporate partnerships;
- the time and costs involved in obtaining regulatory approvals;
31
- the costs involved in filing, prosecuting and enforcing patent claims;
- the cost of manufacturing pre-clinical and clinical material;
- competing technological and market developments; and
- other factors not within our control.
Although we currently have no specifically identified material commitments
for capital expenditures, we anticipate that implementing our strategy will
require substantial increases in our capital expenditures and other capital
commitments.
Considering our current spending levels on our existing programs and a
likely future increase in activity on these programs, estimates of future staff
growth and related spending and the estimated capital requirements of potential
in-licensing activity and future acquisitions, we believe that existing capital
resources together with the net proceeds of this offering should be sufficient
to fund our operations for at least the next 24 months.
Until we can generate sufficient cash from our operations to sustain our
business, which we do not expect for the foreseeable future, we expect to
finance future cash needs through private and public financings, including
equity financings. We cannot be certain that additional funding will be
available when needed or on favorable terms. If funding is not available, we may
need to delay or curtail our development and commercialization activities to a
significant extent.
We cannot estimate the completion dates and costs of our current internal
research and development programs due to inherent uncertainties in outcomes of
clinical trials and regulatory approvals of our product candidates. We cannot be
certain that we will be able to successfully complete our research and
development projects or successfully find collaboration or distribution partners
for our product candidates. Our failure to complete our research and development
projects could have a material adverse effect on our financial position or
results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURE REGARDING MARKET RISK
As of June 30, 2003, we had cash and cash equivalents of $3.6 million
consisting of cash and highly liquid investments and marketable securities of
$22.7 million, consisting primarily of corporate bonds and government
obligations. Our exposure to market risk relates to the increase or decrease in
the amount of interest income we can earn on our investment portfolio and on the
increase or decrease in the amount of any interest expense we must pay with
respect to any outstanding debt instruments. As of June 30, 2003, we had no
long-term debt. We do not plan to invest in derivative financial instruments. A
hypothetical increase or decrease in market interest rates by 10% from the
market interest rates at June 30, 2003 would cause the interest generated by and
the fair value of these investments to change by an immaterial amount.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the Emerging Issues Task Force ("EITF") reached consensus
on EITF Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables," that the provisions of EITF Issue No. 00-21 should be used to
determine when a revenue arrangement for multiple deliverables should be divided
into separate units of accounting and, if separation is appropriate, how the
arrangement consideration should be allocated to the identified accounting
units. The provisions of EITF Issue No. 00-21 are effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. We
will evaluate multiple elements in accordance with this EITF Issue for new
arrangements into which we enter.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes how a company classifies and measures certain financial instruments
with characteristics of both liabilities and equity, including redeemable
preferred stock. This statement is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise effective at the beginning of
the interim period commencing July 1, 2003, except for mandatorily redeemable
financial instruments of nonpublic companies. We have not yet determined the
impact of this statement on our financial statements.
32
BUSINESS
OVERVIEW
We are a biopharmaceutical company engaged in developing small molecule
drugs to treat central nervous system, cardiovascular and inflammatory
conditions. We currently have four product candidates in development for six
indications. Rotigotine CDS, our lead product candidate, is being developed by
Schwarz Pharma. Rotigotine CDS is completing Phase III clinical trials for the
treatment of Parkinson's disease and is in a Phase IIb clinical trial for
Restless Legs Syndrome. King has completed Phase II clinical trials with
binodenoson as a pharmacologic stress agent for cardiac imaging and is expected
to start Phase III clinical trials in the fourth quarter of 2003. King is also
developing MRE-0094 as a treatment for chronic diabetic foot ulcers. The
intravenous dosage form of selodenoson is being developed by Fujisawa
Healthcare. Intravenous selodenoson is in Phase II clinical trials for heart
rate control in atrial fibrillation and has demonstrated slowing of heart rate.
We retain rights to the intravenous formulation outside the United States and
Canada and the worldwide rights to the oral formulations of selodenoson. We have
completed a Phase I clinical trial for an oral dosage form of selodenoson.
We focus on small molecule drug candidates that act to selectively modify
the activity of certain receptors, such as those receptors for the signal
molecules adenosine and dopamine. By targeting receptor subtypes responsible for
specific effects, our goal is to produce therapeutic results while minimizing
side effects. To limit stimulation of receptor subtypes in other tissues, we
have developed molecules to target tissues where receptor subtypes may be
sensitive to lower levels of drugs. In addition, to avoid side effects, we have
designed molecules that may not enter certain organs. Small molecule medications
are more easily formulated, have greater potential for absorption and
utilization by the body, are more efficiently manufactured than large molecule
therapies and generally offer greater dosing flexibility so that patients can
comply with prescribed dosing schedules.
CLINICAL DEVELOPMENT PROGRAMS
The following table describes our product candidates and the indications
they address.
<Table>
<Caption>
WORLDWIDE
DEVELOPMENT
PRODUCT CANDIDATE INDICATION DOSAGE FORM CLINICAL STAGE AND MARKETING RIGHTS
- ----------------- ------------------------ ----------------- ----------------- --------------------
Rotigotine CDS Parkinson's disease Transdermal patch Phase III Schwarz Pharma(1)
(dopamine agonist
patch)
Rotigotine CDS Restless Legs Syndrome Transdermal patch Phase IIb Schwarz Pharma(1)
(dopamine agonist
patch)
Binodenoson Pharmacologic stress Intravenous Phase II complete King
(adenosine A(2A) agent for cardiac
agonist) imaging
Selodenoson Acute atrial Intravenous Phase II Fujisawa Healthcare/
(adenosine A(1) fibrillation rate Aderis(2)
agonist) control
Selodenoson Chronic atrial Oral Phase I Aderis
(adenosine A(1) fibrillation rate
agonist) control
MRE-0094 Diabetic foot ulcers Topical IND filed King
(adenosine A(2A)
agonist)
</Table>
- ---------------
(1) Schwarz Pharma has sub-licensed its development and commercialization rights
for Japan to Otsuka Pharmaceutical Co.
(2) Fujisawa Healthcare has the exclusive US and Canadian rights to the
intravenous formulation of selodenoson. We retain rights to the intravenous
formulation in all other countries and have worldwide rights to the oral
formulations of selodenoson.
None of our product candidates have been approved for marketing by the FDA
or similar European regulatory agencies. Some of our product candidates are at
an early stage of clinical development and we cannot assure you that any of our
product candidates will be approved.
33
OUR PRODUCT CANDIDATES
ROTIGOTINE CDS. ONCE-DAILY TRANSDERMAL PATCH FOR TREATMENT OF PARKINSON'S
DISEASE
Rotigotine CDS, our most advanced product candidate, is being developed by
Schwarz Pharma. Rotigotine is a proprietary dopamine receptor agonist formulated
in a once-daily transdermal patch. Rotigotine CDS is completing Phase III
clinical trials as both a first-line treatment of early stage and a combination
therapy for late stage Parkinson's disease. We believe rotigotine, because of
its potency and ability to penetrate the skin, is the only dopamine agonist
which has been effectively formulated as a transdermal patch for the treatment
of Parkinson's disease. We have licensed to Schwarz Pharma the worldwide
development and commercialization rights to rotigotine CDS for Parkinson's
disease. Schwarz Pharma has sub-licensed its rights for Japan to Otsuka
Pharmaceutical Co.
Market Overview
Parkinson's disease is an age-related, neurodegenerative disorder with an
average age of onset of 60 years. According to the Parkinson's Disease
Foundation, approximately one million people in the United States have the
disease, and 60,000 new cases are reported each year. We believe that the
incidence and prevalence of the disease may increase as a result of the aging of
the population. Approximately $2 billion is spent annually on drug therapy
worldwide to treat this disease.
Parkinson's disease is defined by the presence of shaking, marked muscle
stiffness and difficulty initiating body movements. Many of these symptoms
appear to be due to the degeneration of a part of the brain called the
substantia nigra. The substantia nigra produces dopamine which is necessary for
normal movement. Patients with Parkinson's disease are unable to produce
sufficient amounts of dopamine but still respond to dopamine receptor
stimulation. Thus, many pharmacologic therapies for Parkinson's disease focus on
activating dopamine receptors.
Patients cannot be treated directly with dopamine because it does not enter
the brain. In the late 1960's, the introduction of levodopa, commonly referred
to as L-dopa, represented a significant advance in the treatment of this disease
by providing clinical benefit to most patients. L-dopa is converted by the body
into dopamine, in both the brain and periphery, leading to improvement in motor
function. However, L-dopa has a number of shortcomings. L-dopa is converted to
dopamine in the same nerve cells that are degenerating, limiting its usefulness.
L-dopa must also be combined with an agent that blocks its breakdown to dopamine
outside the brain in order to increase the blood levels of L-dopa that reach the
brain. Because it has a short chemical half-life, the patient must take multiple
doses daily. In addition, data suggest that long-term treatment with L-dopa is
often associated with the development of uncontrolled body movement problems.
The National Parkinson Foundation indicates that as many as half of all
Parkinson's disease patients treated with L-dopa for over five years will
experience uncontrolled body movement problems.
When patients are experiencing Parkinson's symptoms, they are described as
being "off", and when medication relieves those symptoms, they are described as
being "on." For example, because the blood levels of the current medications may
not last all night, patients wake up "off" in the morning and are functionally
limited until the morning dose of their medication reaches therapeutic blood
levels. Patients can fluctuate from being "on" to being "off" in a very rapid
and unpredictable manner, making treatment by oral dose adjustment difficult.
An alternate approach is to give the patient a substitute compound for
dopamine which acts like dopamine by directly stimulating the dopamine
receptors. These agents are called dopamine agonists and have shown significant
clinical success. Recent data suggest that it is preferable to employ dopamine
agonists as initial therapy to reduce the risk of the development of motor
complications associated with L-dopa therapy. Despite their clinical success,
early generations of dopamine agonists suffered from significant limitations.
First generation dopamine agonists were derived from ergotamine. These dopamine
agonists, such as pergolide, can cause serious fibrosis, including scarring of
heart valves. Second generation dopamine agonists, not derived from ergotamine,
do not cause these specific side effects but are limited by their oral route of
administration. Oral agents produce an uneven pattern of drug release into the
blood stream, causing patients to experience fluctuations in symptoms. The
optimum range of therapeutic drug levels in Parkinson's disease
34
patients is very narrow. Recent studies have shown success in treating the
complications of L-dopa therapy by giving continuous infusions that provide
optimal therapeutic blood levels of dopamine agonists. Patients benefit from
dosage forms of dopamine agonists that result in a continuous, 24-hour delivery
within the optimal therapeutic blood level range. However, we believe that
sustained-release oral formulations currently in development may not fully
address the limitations of oral therapy.
Our Product Candidate
We developed and clinically tested rotigotine as a small molecule, dopamine
agonist formulated in a first generation transdermal patch. Schwarz Pharma
subsequently improved the transdermal patch to deliver a constant dose of the
drug over a 24-hour period. We believe Schwarz Pharma's formulation, rotigotine
CDS, minimizes daily symptoms and side effects. Unlike currently available
therapies, we believe rotigotine CDS will allow patients to wake up with minimal
symptoms. In addition, it may be easier for patients to use a once-daily
transdermal patch rather than an oral medication regimen requiring dosing
multiple times a day. Since rotigotine CDS is not derived from ergotamine, it
should not have the fibrosis or scarring side effects associated with first
generation, ergotamine-based dopamine agonists.
Rotigotine was administered to approximately 1,000 patients and healthy
subjects before it entered Phase III clinical trials. In Phase I and Phase II
clinical trials, rotigotine CDS was generally safe and well tolerated. Schwarz
Pharma performed a randomized, double-blind, placebo-controlled, Phase IIb
clinical trial in 316 evaluable, early stage Parkinson's disease patients. The
primary endpoint was the Uniform Parkinson's Disease Rating Scale (UPDRS) which
measures symptoms of patients with Parkinson's disease. The UPDRS is a standard
scale used by regulatory agencies to approve therapies for early stage
Parkinson's disease patients. The trial randomized patients to placebo or one of
four doses of daily rotigotine CDS transdermal patches for a maximum of 12 weeks
of treatment. The three highest doses of rotigotine CDS demonstrated a
statistically significant improvement in patients' symptoms, with the two
highest doses having a p-value of <0.0001 compared to placebo. This was reported
at the American Academy of Neurology annual meeting in 2002.
Schwarz Pharma also performed a Phase II clinical trial in 310 late stage
patients. The primary endpoint of this trial measured the reduction in patient
"off" time, which is the endpoint regulatory agencies typically require for
approval of therapies for late stage patients. Although this trial demonstrated
a reduction in "off" time compared to baseline, the results were not
statistically significant compared to placebo as a result of an unexpectedly
large placebo effect.
Schwarz Pharma plans to enroll approximately 1,200 patients into pivotal
Phase III clinical trials using the same primary endpoints used in the Phase II
clinical trials. Two of these trials have been completed. The initial results
from the Phase III clinical trials are expected to be released in the first
quarter of 2004. Schwarz Pharma has announced that it intends to submit an NDA
for rotigotine CDS by the end of 2004.
ROTIGOTINE CDS. TRANSDERMAL PATCH FOR TREATMENT OF RESTLESS LEGS SYNDROME
Rotigotine CDS is also being developed in lower-dose transdermal patches
which are currently in a Phase IIb clinical trial for the treatment of Restless
Legs Syndrome. Restless Legs Syndrome is a common neurologic movement disorder
in which patients suffer an almost irresistible urge to move their legs that
often results in sleep disturbances. We have licensed to Schwarz Pharma the
worldwide development and commercialization rights to rotigotine CDS for
Restless Legs Syndrome. Schwarz Pharma has sub-licensed its development and
commercialization rights for Japan to Otsuka Pharmaceutical Co.
Market Overview
According to the National Institutes of Health, Restless Legs Syndrome is a
common, under-diagnosed neurologic movement disorder. The symptoms usually
involve the legs, but can also involve the arms. The symptoms typically include
unpleasant sensations that may be described as worms or bugs crawling under the
skin. The symptoms are generally worse in the evening and night, less severe in
the morning and improve with activity. The waking discomfort, chronic sleep
deprivation and stress often associated with Restless Legs
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Syndrome can adversely affect occupational activities, social activities and
family life. The American Academy of Family Physicians has reported that up to
15% of the population in the United States may have Restless Legs Syndrome.
Although the prevalence increases with age, approximately 30% to 40% of patients
with severe symptoms had their first symptoms before the age of 20.
There are currently no medications approved for the treatment of Restless
Legs Syndrome in the United States. Clinical trials have confirmed the utility
of dopamine agonists to treat Restless Legs Syndrome. Dopamine agonists, along
with other drugs, including opioids, benzodiazepine sedatives, anticonvulsants,
the antihypertensive clonidine and iron replacement, are often used "off label"
to treat Restless Legs Syndrome. However, currently utilized agents have
relatively short half-lives and must be administered orally, which often results
in the loss of therapeutic blood levels at night. L-dopa is effective, but,
according to the American Academy of Family Physicians, as many as 80% of
patients may develop worsening of symptoms from its chronic use.
Our Product Candidate
The dose of drug required for the treatment of Restless Legs Syndrome is
usually much lower than the dose required for the treatment of Parkinson's
disease. A once-daily transdermal medication such as rotigotine CDS may provide
continuous therapeutic blood levels of the drug and symptomatic relief
throughout the night and into the daytime. A multi-center, double-blind,
placebo-controlled, parallel-group Phase II safety and efficacy pilot trial was
performed in Europe. This trial enrolled 58 patients and compared three fixed
doses of rotigotine CDS to placebo using the International Restless Legs
Syndrome Study Group rating scale, a standard scale used to evaluate therapies
for Restless Legs Syndrome. Results from the trial demonstrated a statistically
significant improvement in Restless Legs Syndrome symptoms at the highest dose
(p-value=0.04). Schwarz Pharma commenced a multi-center, randomized,
placebo-controlled, dose-ranging Phase IIb trial in Europe under a US
investigational new drug application, or IND. Schwarz Pharma expects the results
of this trial will be available in the third quarter of 2004.
BINODENOSON. PHARMACOLOGIC STRESS AGENT FOR CARDIAC IMAGING
King is developing binodenoson, an adenosine A(2A) agonist, as an
alternative to exercise prior to cardiac perfusion imaging for the diagnosis of
coronary artery disease. King has completed Phase II clinical trials of
binodenoson and is expected to begin Phase III clinical trials during the fourth
quarter of 2003. Many patients cannot perform the level of exercise necessary
for an adequate diagnostic test and require a pharmacologic stress agent in lieu
of exercise. We have licensed to King the worldwide development and
commercialization rights to binodenoson as a pharmacologic stress agent for
cardiac imaging.
Market Overview
Cardiac stress tests aid in the diagnosis of heart disease. Generally,
during a cardiac stress test, the patient's physical condition and heart
function are monitored through an electrocardiogram. In addition, for many
patients, the physician needs to examine the flow of blood to the heart to
improve the usefulness of the test. Physicians use perfusion imaging cardiac
stress tests to provide an image of the blood flow to the various parts of the
heart. For the test to yield the best possible images, the patient's coronary
vessels must be fully dilated, generally through exercise, prior to injection of
the imaging agent. Many patients cannot perform the level of exercise necessary
for an adequate study and require a pharmacologic stress agent in lieu of
exercise. We estimate that there are approximately 2.6 million of these tests
performed annually in the United States using a pharmacologic stress agent.
Currently, in the United States, the most commonly used pharmacologic
stress agents for cardiac perfusion imaging are adenosine and dipyridamole.
These agents cause coronary blood vessel dilation by stimulating the adenosine
A(2A) receptor but may also cause side effects, such as severe slowing of the
heart rate and wheezing, through stimulation of the other adenosine receptor
subtypes. Both adenosine and dipyridamole must be given as a continuous infusion
with an intravenous pump.
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Our Product Candidate
Binodenoson is an adenosine A(2A) receptor agonist designed to be a
pharmacologic stress agent that minimizes adenosine-mediated side effects such
as slowing heart rate or wheezing. For ease of administration, binodenoson is
formulated to be dosed as an injection rather than the continuous infusion with
an intravenous pump required with adenosine and dipyridamole. Binodenoson begins
to work quickly and provides sustained coronary blood vessel dilation for a
sufficient amount of time to complete the diagnostic imaging.
King has completed six trials with binodenoson and has administered the
drug to 440 patients and healthy volunteers. King completed a multi-center,
single-blind, two-arm crossover Phase IIb clinical trial in 240 patients who
received pharmacologic stress tests with both adenosine and binodenoson. Results
from the trial indicated that binodenoson was comparable to adenosine for
detecting the extent of coronary disease. In addition, this clinical trial
demonstrated that binodenoson had fewer and less severe side effects than
adenosine, with a statistically significant p-value of < 0.01 for each of these
two measures. King intends to initiate its multi-center Phase III program in the
fourth quarter of 2003 in the United States and internationally.
SELODENOSON. TREATMENT FOR ACUTE AND CHRONIC HEART RATE CONTROL IN ATRIAL
FIBRILLATION
Selodenoson is an adenosine A(1) agonist that is currently being developed
in intravenous and oral formulations for heart rate control in atrial
fibrillation. The intravenous dosage form of selodenoson is being developed by
Fujisawa Healthcare. Intravenous selodenoson is in Phase II clinical trials for
heart rate control in atrial fibrillation and has demonstrated slowing of heart
rate. An oral formulation of selodenoson has completed a Phase I clinical trial.
In addition to the clinical trials discussed below, clinical trials are ongoing
to evaluate the effects of A(1) receptor stimulation on other parts of the body,
such as the kidney, because temporary, asymptomatic decreases in renal function
have been seen in clinical trials. Effects outside of the heart, if determined
to be other than transitory and reversible, could block development of the
compound or place limitations on the scope of patients able to use the product
candidate. We have licensed to Fujisawa Healthcare the rights to develop and
commercialize the intravenous formulation of selodenoson in the United States
and Canada. We retain rights to develop and commercialize the intravenous
formulation in all other countries and worldwide rights for all oral
formulations.
Market Overview
Arrhythmias are abnormal heart rhythms caused by aberrant conduction of
electrical impulses in the heart. Atrial fibrillation is the most common of the
sustained arrhythmias. Approximately two million people in the United States
suffer from atrial fibrillation. The incidence of atrial fibrillation is
increasing due to the aging of the population and the higher incidence and
longer survival of patients with predisposing underlying heart diseases, such as
congestive heart failure.
In atrial fibrillation, atrial electrical activity is chaotic, with
impulses originating at approximately 300 to 600 beats per minute. The
atrioventricular node, which transmits electrical impulses from the atria to the
ventricles, is unable to conduct this extremely fast rate. However, it can
conduct in the range of 120 to 180 beats per minute, a rate at which the pumping
of the ventricles is ineffective because there is inadequate time for the heart
to fill between beats. If this high rate persists, a deterioration of the
heart's pumping function could result. Controlling the rate by slowing
conduction through the atrioventricular node can improve cardiac function.
Many patients initially have intermittent episodes of atrial fibrillation
and ultimately end up in chronic, constant atrial fibrillation. Because the
heart pumps more efficiently in a normal rhythm, therapies have historically
focused on returning and maintaining patients to a normal heart rhythm. However,
current treatments to return patients to a normal heart rhythm have variable
initial and generally poor long-term success. Most patients return to atrial
fibrillation within one to two years. Several recently completed, large,
multi-center trials in patients who exhibit intermittent atrial fibrillation
have shown rate control to be as effective as rhythm control but with fewer
hospitalizations.
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Drugs commonly used to control heart rate during atrial fibrillation
include digoxin, amiodarone, beta blockers and calcium channel blockers. These
drugs have significant limitations. Digoxin has a slow onset when given
intravenously in the acute setting, provides poor heart rate control during
exercise and has a narrow range between therapeutic effect and toxicity.
Amiodarone is associated with potentially fatal pulmonary fibrosis and abnormal
thyroid function. Beta blockers and calcium channel blockers can cause
symptomatic low blood pressure before achieving adequate heart rate control. In
addition, calcium channel blockers can aggravate heart failure. Beta blockers
can acutely aggravate heart failure and cause wheezing. Thus, there appears to
be a significant need for drugs that control heart rate in atrial fibrillation
without these side effects.
Our Product Candidate
Selodenoson is a potent and selective adenosine A(1) agonist that, by
predominantly affecting the atrioventricular node of the heart, has the
potential to control heart rate without lowering blood pressure or decreasing
heart function. Selodenoson is formulated to overcome the clinical shortcomings
of current drugs. The molecule is orally bioavailable and can also be delivered
by intravenous injection.
We and Fujisawa Healthcare have performed a total of 11 Phase I and Phase
II clinical trials in which a total of 453 patients and healthy volunteers
received selodenoson. Two Phase I clinical trials involving a total of 117
patients were conducted in the electrophysiology laboratory to determine dosing
and safety of the intravenous formulation. Three Phase II dose-ranging clinical
trials have been completed involving 215 hospitalized patients with atrial
fibrillation. These patients were treated using multiple dosing regimens. One of
these clinical trials examined the effect on heart rate of 15 minute infusions
of six escalating doses of selodenoson in 63 patients with atrial fibrillation.
The data from this trial demonstrated a statistically significant decrease in
heart rate compared to baseline in patients who received the drug
(p-value<0.05), but there was no change from baseline in patients who received
placebo. Our data has been accepted for presentation at the American Heart
Association's Scientific Sessions in November 2003. The other two Phase II
clinical trials have been completed and we anticipate the release of these
results in early 2004.
Because adenosine A(1) receptors exist throughout the body, there is a risk
that stimulation of these receptors outside of the heart may cause side effects.
We believe that the therapeutic dose of selodenoson likely to be effective in
atrial fibrillation should be lower than the doses that will stimulate most
adenosine A(1) receptors elsewhere in the body. However, because of the normal
variability within the adenosine A(1) receptor system among individuals, there
may be effects outside of the heart in some patients. In our clinical trials of
selodenoson, we have observed renal effects in some patients such as temporary
creatinine elevations and reduction in urinary output. These effects have not
resulted in any clinical problems. We and Fujisawa Healthcare are further
investigating the renal effects of 24-hour intravenous infusions of selodenoson.
MRE-0094. TOPICAL TREATMENT FOR DIABETIC FOOT ULCERS
MRE-0094 is an adenosine A(2A) agonist in development for the treatment of
chronic diabetic foot ulcers. King filed an IND in May 2002 for MRE-0094. We
have licensed to King the worldwide development and commercialization rights for
MRE-0094.
Market Opportunity
Approximately 15% of the estimated 16 million diabetics in the United
States will develop foot ulcers. Between 14% and 25% of these patients will, as
a result of improper healing, require an amputation. It is estimated that of the
more than 50,000 annual amputations of a lower extremity in diabetics, 85%
result from foot ulcers.
Our Product Candidate
MRE-0094 is an adenosine A(2A) agonist formulated as a topical treatment
for chronic diabetic foot ulcers. Stimulation of the adenosine A(2A) receptor
may promote wound healing. We believe that a small molecule such
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as MRE-0094 offers significant cost and patient compliance advantages over
alternatives such as proteins or artificial skin.
RESEARCH AND DEVELOPMENT
We focus our research and development efforts on the development of novel
small molecule drugs that bind to and activate or block subtypes of receptors.
RECEPTOR PHARMACOLOGY
Cells communicate with each other by releasing signal molecules that
interact with special recognition sites called receptors. These receptors
mediate a variety of physiological effects through activation of various
pathways within the cells. Receptors for naturally occurring signal molecules,
such as adenosine or dopamine, exist in a variety of subtypes. The receptor
subtype distribution allows any individual signal molecule to mediate different
actions in different tissues. Our compounds target specific receptor subtypes to
maximize therapeutic effect while minimizing side effects caused by stimulating
other receptor subtypes.
Small molecule analogs of signal molecules that act at individual receptor
subtypes produce therapeutic effects while minimizing side effects that often
result from less selective compounds. Agonists stimulate the activity of
receptors while antagonists inhibit such activity. These receptor-subtype
selective drugs may exert a more potent therapeutic action than is possible with
naturally occurring molecules. In addition, in order to minimize side effects,
we target tissues where receptor subtypes are more responsive to stimulation so
that levels of compounds that stimulate the receptors in these tissues are less
likely to stimulate receptors elsewhere in the body. We also design our
molecules so they may not enter certain tissues, such as the brain, where their
activity could lead to undesirable side effects.
Our industry collaborators are presently investigating pre-clinical and
clinical development of our dopamine agonists and adenosine A(2A) and A(3)
agonists for additional therapeutic targets. Our agreements with these companies
provide us with a combination of milestone and royalty payments in the event the
compounds are successfully developed and launched for new indications. We are
currently developing staffing and task plans for pre-clinical and early-clinical
programs in adenosine-mediated conditions as well as inflammatory conditions
affecting the cardiovascular and renal systems. These programs are intended to
result in product candidates that are covered by our current patents or form the
basis of new patent applications. Our research and development expenses were
approximately $2.6 million, $4.7 million, $8.1 million, $6.0 million and $5.1
million for the six months ended June 30, 2003 and 2002, and the years ended
December 31, 2002, 2001 and 2000, respectively.
BUSINESS STRATEGY
We intend to develop and commercialize small molecule drugs that target
central nervous system, cardiovascular and inflammatory conditions. To achieve
this objective, we intend to concentrate on the following key strategies.
CONTINUE TO INVEST TO SUPPORT OUR CORPORATE COLLABORATORS IN THEIR DEVELOPMENT
AND COMMERCIALIZATION OF OUR ADVANCED PRODUCT CANDIDATES
The successful development and commercialization of our advanced product
candidates is our highest priority. Unlike some drug development companies at
our stage of development, we actively support our corporate collaborators in
their development and commercialization of our product candidates. In addition
to our on-going active involvement in the design and analysis of clinical
development programs, we assist in patient awareness efforts, market definition,
identification of key opinion leaders and similar initiatives, and we expect to
continue these activities in the future.
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EXPAND OUR PRODUCT CANDIDATE PORTFOLIO BY ACQUIRING OR IN-LICENSING PRODUCT
CANDIDATES AND PROGRAMS THAT ARE 18-24 MONTHS FROM CLINICAL TRIALS
We believe that we have demonstrated expertise in rapidly selecting and
advancing promising product candidates into human clinical trials. We attempt to
demonstrate proof of efficacy as rapidly as possible and, when appropriate,
terminate the development of product candidates not likely to succeed. We
believe that many new therapies for central nervous system, cardiovascular and
inflammatory conditions are likely to come from efforts now underway in an array
of biotechnology and pharmaceutical firms. However, many biotechnology firms do
not have the experience and human resources necessary to advance their programs,
making their programs potential acquisition candidates. Further, we believe that
a number of programs underway in pharmaceutical companies, although highly
attractive to us, will not be deemed to have sufficient revenue potential for
their pharmaceutical owners and may be out-licensed. Our strategy is to seek out
and acquire or in-license these programs and undertake their clinical
development.
RETAIN DEVELOPMENT RESPONSIBILITY FOR AND MARKETING RIGHTS TO SELECTED DRUG
CANDIDATES THROUGH LATE STAGE DEVELOPMENT TO MAXIMIZE PRODUCT VALUE
We believe that undertaking a larger portion of the cost and risks
associated with the clinical development of our drugs will position us to
negotiate more attractive out-licensing arrangements. On the other hand, we will
seek to form development collaborations earlier in the development process when
we believe that the development costs and resources required are too significant
for us to undertake alone.
MAINTAIN BALANCED IN-HOUSE EXPERTISE AND CAPABILITIES IN SYNTHETIC CHEMISTRY,
PHARMACOLOGY AND KEY ELEMENTS OF CLINICAL DEVELOPMENT WHILE OUTSOURCING
ROUTINE DRUG DEVELOPMENT ACTIVITIES
We intend to maintain our core scientific and management team to design and
manage pre-clinical and clinical development programs. We will, as necessitated
by our existing and in-licensed programs, expand our in-house capabilities in
synthetic chemistry, pharmacology, regulatory affairs, clinical trial management
and biostatistics. In addition, we outsource certain specific activities of drug
development such as manufacturing, formulation and packaging, non-clinical
toxicology and clinical site management.
CORPORATE COLLABORATIONS
Corporate collaborations are an integral part of our development and growth
strategy. We pursue alliances that allow us to:
- accelerate time to market for our drugs that address large markets that
we could not effectively reach with a sales force of our own;
- leverage our expertise in pre-clinical and clinical development of drugs
for central nervous system, cardiovascular and inflammatory conditions;
- provide us with novel molecules for indications of strategic importance
to us; and
- help to validate the technology underpinnings for our drugs.
See Note 13 to notes to the consolidated financial statements which
discusses significant customers and geographic revenues.
We have established the following collaborations:
SCHWARZ PHARMA -- ROTIGOTINE CDS
In July 1998, we entered into an Exclusive License Agreement with Schwarz
Pharma under which we granted them the exclusive, worldwide license to develop
and commercialize a family of dopamine agonists, including rotigotine CDS. The
agreement provides for us to receive license fees and milestone payments of up
to $20.0 million, of which we have received $10.5 million as of June 30, 2003,
along with royalty rates based on net sales of any products developed and
launched by Schwarz Pharma using our dopamine agonists
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during the term of the agreement. As long as Schwarz Pharma retains its license,
they are solely responsible for the costs of developing and marketing. Schwarz
Pharma has sub-licensed its development and commercialization rights for Japan
to Otsuka Pharmaceutical Co. Schwarz Pharma retains the right to terminate this
agreement upon 30 days written notice. Schwarz Pharma is a stockholder of
Aderis. See "Principal Stockholders."
KING -- BINODENOSON, MRE-0094
In August 1997, we entered into a Development and Commercialization
Agreement with Medco Research, which was subsequently acquired by King. Under
this agreement, we granted them the exclusive, worldwide license to develop and
commercialize our proprietary adenosine A(2A) agonists, including binodenoson.
We have also granted to King a right of first refusal to obtain a license for
any drug that we may develop using our proprietary adenosine A(2A) agonists. The
agreement provides for us to receive license and milestone payments of up to
$8.6 million, of which we have received $3.1 million as of June 30, 2003, along
with a royalty based on the net sales of any products developed from our
adenosine A(2A) agonists during the term of the agreement. As long as King
retains its license to binodenoson, they are solely responsible for the costs of
developing and marketing the drug but are under no obligation to do so. We
retain optional co-development and co-promotion rights in the United States for
therapeutic applications of many of our drug compounds, but not binodenoson and
MRE-0094, on a cost-shared basis. King retains the right to terminate this
agreement upon 30 days written notice.
FUJISAWA HEALTHCARE -- SELODENOSON
In July 1999, we entered into a Development and License Agreement with
Fujisawa Healthcare under which we granted them the exclusive license to develop
and commercialize the intravenous form of selodenoson in the United States and
Canada. We retain the rights for the intravenous formulation for selodenoson
outside the United States and Canada and worldwide rights for oral formulations.
The agreement provides for us to receive license fees and pre-commercial
regulatory milestone payments of up to $13.0 million, of which we have received
$5.0 million as of June 30, 2003, along with royalty payments based on net sales
of any products developed and launched by Fujisawa Healthcare using selodenoson
during the term of the agreement. As long as Fujisawa Healthcare retains its
license to selodenoson, they are solely responsible for the costs of developing
and marketing the drug. Fujisawa Healthcare retains the right to terminate this
agreement upon 30 days written notice.
INTELLECTUAL PROPERTY
Patents, trademarks and copyrights are central to the profitability of
pharmaceutical products, and our policy is to pursue intellectual property
protection aggressively for all our products. We own sixteen issued US patents
and have filed two US patent applications relating to compounds active at
adenosine and dopamine receptor subtypes. In addition, we and our collaborators
have filed patent applications in certain foreign jurisdictions (and in
appropriate cases have had foreign patents issued) for these technologies. We
have acquired options and licenses to patents relating to products in
pre-clinical research.
Rotigotine CDS is protected by patents and applications relating to a
method of using our dopamine receptor agonist in Parkinson's disease therapy,
the process for bulk manufacturing the dopamine receptor agonist, and the
transdermal patch used to deliver the dopamine receptor agonist. The US and
foreign patents related to the method of using our dopamine receptor agonist in
Parkinson's disease therapy were acquired from Whitby Research. The US patent
expires in 2006. The US patent related to the process for bulk manufacturing the
dopamine receptor agonist expires in 2020. The pending US patent application
relating to the transdermal patch used to deliver the dopamine receptor agonist
is co-owned by us and the contract manufacturer. The corresponding European
application has issued as a patent. All of our patents relating to the dopamine
agonist, the transdermal patch or use of dopamine agonist in man are licensed
exclusively to Schwarz Pharma worldwide.
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We and our partners have filed applications for patents relating to
compounds being developed in our adenosine receptor agonist and antagonist
programs. These include basic pharmaceutical composition of matter patents, and
in some cases method of use patents. An issued US patent related to our
adenosine A(1) receptor agonists, including selodenoson, expires in 2011, and
has been licensed to Fujisawa Healthcare. See "Corporate Collaborations."
Additional patent applications are pending related to pharmaceutical use and
multiple dosage forms. Issued US patents related to our adenosine A(2A) receptor
agonists, having expiration dates between 2010 and 2018, have been licensed to
King.
In May 2002, we entered into a patent license agreement with Can-Fite
Biopharma Ltd. under which we granted them the exclusive license to develop and
commercialize in the United States, France, Germany, Italy and the United
Kingdom one of our adenosine based compounds for specific clinical indications.
The agreement provides for us to receive a royalty based on the net sales of any
products developed using our compound in the licensed territory during the term
of the agreement. Can-Fite retains the right to terminate this agreement upon 60
days written notice.
SALES AND MARKETING
We currently have no sales, marketing or distribution capabilities and have
no immediate plans to establish such capabilities. We will make final decisions
about sales and marketing at a later date, but expect to depend in large part on
collaboration with third parties that have established distribution systems and
direct sales forces.
MANUFACTURING
We do not currently have manufacturing capabilities, nor do we intend to
develop manufacturing capabilities for any products in the near term. Under
existing agreements, our corporate collaborators have assumed manufacturing
responsibility for our most advanced product candidates.
For pre-clinical and initial clinical studies with our unpartnered product
candidates, we use contract manufacturers to prepare current good manufacturing
practices, or cGMP, drug substances. We support our contract manufacturers in
the development of synthesis strategies, analytical assays, and quality control
procedures.
COMPETITION
The pharmaceutical and biotechnology industries are intensely competitive,
and technological progress can be rapid. We compete with companies that develop
therapies for central nervous system diseases, cardiovascular diseases and
inflammatory conditions. Although we believe that our receptor subtype specific
drug candidates constitute new therapeutic classes of molecules, we anticipate
that each of the areas in which we are conducting research and development may
become the focus of intense competition. Many larger biotechnology and
pharmaceutical companies have developed, or are attempting to develop, products
that will compete with products that may be developed from our drug candidates.
Most of our competitors are larger than we are and have greater financial
resources, technical expertise or marketing and distribution capabilities. We
expect that we will face increased competition in the future as new companies
enter the market and advanced technologies become available. Any of our
competitors could broaden the scope of their drug products through acquisition,
collaboration or internal development to compete with us. Our competitors may
also develop new, more effective or affordable approaches or technologies that
compete with our drug candidates or render them obsolete.
GOVERNMENT REGULATION
Government authorities in the United States and other countries extensively
regulate the advertising, labeling, storage, record-keeping, safety, efficacy,
research, development, testing, manufacture, promotion, marketing and
distribution of drug products under the Federal Food, Drug and Cosmetic Act, or
FFDCA, in the United States and under comparable laws in most foreign countries.
Drugs are subject to rigorous
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regulation by the FDA in the United States and similar regulatory bodies in
other countries. The steps ordinarily required by the FDA before a new drug may
be marketed in the United States are similar to steps required in most other
countries and include:
- completion of pre-clinical laboratory tests, pre-clinical trials and
formulation studies;
- submission to the FDA of an investigational new drug application, or IND,
for a new drug or antibiotic, which must become effective before clinical
trials may begin;
- performance of adequate and well-controlled human clinical trials to
establish the safety and efficacy of the drug for each proposed
indication;
- the submission of a new drug application, or NDA, to the FDA; and
- FDA review and approval of the NDA before any commercial marketing, sale
or shipment of the drug.
Pre-clinical tests include laboratory evaluation of product chemistry
formulation and stability, as well as studies to evaluate toxicity. The results
of pre-clinical testing together with manufacturing information and analytical
data are submitted to the FDA as part of an IND application. The FDA requires a
30-day waiting period after the filing of each IND application before clinical
trials may begin, in order to ensure that human research subjects will not be
exposed to unreasonable health risks. At any time during this 30-day period or
at any time thereafter, the FDA may halt proposed or ongoing clinical trials, or
may authorize trials only on specified terms. The IND application process may
become extremely costly and substantially delay development of our products.
Moreover, positive results of pre-clinical tests will not necessarily indicate
positive results in clinical trials.
Clinical trials to support new drug applications are typically conducted in
three sequential phases that may overlap. These phases generally include the
following:
- Phase I: The drug is usually first introduced into healthy humans or, on
occasion, into patients, and is tested for safety, dosage tolerance,
absorption, distribution, excretion and metabolism.
- Phase II: The drug is introduced into a limited patient population to:
-- assess the efficacy of the drug in specific, targeted indications;
-- assess dosage tolerance and optimal dosage; and
-- identify possible adverse effects and safety risks.
- Phase III: These are commonly referred to as pivotal studies. If a
compound is found to have an acceptable safety profile and to be
potentially effective in Phase II clinical trials, new clinical trials
will be initiated to further demonstrate clinical efficacy, optimal
dosage and safety within an expanded and diverse patient population at
geographically dispersed clinical study sites.
Clinical testing must meet requirements for Institutional Review Board, or
IRB, oversight, informed consent and good clinical practices. The FDA, and the
IRB at each institution at which a clinical trial is being performed, may
suspend a clinical trial at any time for various reasons, including a belief
that the subjects are being exposed to an unacceptable health risk.
The results of product development, pre-clinical studies and clinical
studies are submitted to the FDA as part of a new drug application, or NDA. The
NDA also must contain extensive manufacturing information. Once the submission
has been accepted for filing, the FDA has 180 days to review the application and
respond to the applicant. The review process is often significantly extended by
FDA requests for additional information or clarification. The FDA may refer the
NDA to an advisory committee for review, evaluation and recommendation as to
whether the application should be approved, but the FDA is not bound by the
recommendation of an advisory committee. The FDA may deny or delay approval of
applications that do not meet applicable regulatory criteria or if the FDA
determines that the clinical data do not adequately establish the safety and
efficacy of the drug. Upon approval, a drug candidate may be marketed only in
those dosage forms and for those indications approved in the NDA. Once approved,
the FDA may withdraw the product
43
approval if compliance with pre- and post-market regulatory standards is not
maintained or if problems occur after the product reaches the marketplace. In
addition, the FDA may require post-marketing studies, referred to as Phase IV
studies, to monitor the effect of approved products, and may limit further
marketing of the product based on the results of these post-market studies. The
FDA has broad post-market regulatory and enforcement powers, including the
ability to levy fines and civil penalties, suspend or delay issuance of
approvals, seize or recall products, and withdraw approvals.
Satisfaction of FDA pre-market approval requirements for new drugs
typically takes several years and the actual time required may vary
substantially based upon the type, complexity and novelty of the product or
disease. Government regulation may delay or prevent marketing of potential
products for a considerable period of time and impose costly procedures upon our
activities. Success in early stage clinical trials does not assure success in
later stage clinical trials. Data obtained from clinical activities is not
always conclusive and may be susceptible to varying interpretations that could
delay, limit or prevent regulatory approval. Even if a product receives
regulatory approval, later discovery of previously unknown problems with a
product may result in restrictions on the product or even complete withdrawal of
the product from the market.
If regulatory approval of any of our products is granted, it will be
limited to certain disease states or conditions. The manufacturers of approved
products and their manufacturing facilities will be subject to continual review
and periodic inspections by the FDA and other authorities where applicable, and
must comply with ongoing regulatory requirements, including the FDA's cGMP
regulations. Failure to comply with the statutory and regulatory requirements
subjects the manufacturer to possible legal or regulatory action, such as
Warning Letters, suspension of manufacturing, seizure of product, voluntary
recall of a product injunctive action or possible civil penalties. Adverse
experiences with the product must be reported to the FDA and could result in the
imposition of market restriction through labeling changes or in product removal.
Product approvals may be withdrawn if compliance with regulatory requirements is
not maintained or if problems concerning safety or efficacy of the product occur
following approval. Because we intend to contract with third parties for
manufacturing of these products, our ability to control third party compliance
with FDA requirements will be limited to contractual remedies and rights of
inspection. Failure of third-party manufacturers to comply with cGMP or other
FDA requirements applicable to our products may result in legal or regulatory
action by the FDA.
With respect to post-market product advertising and promotion, the FDA
imposes a number of complex regulations on entities that advertise and promote
pharmaceuticals, which include, among others, standards and regulations for
direct-to-consumer advertising, off-label promotion, industry-sponsored
scientific and educational activities and promotional activities involving the
internet. The FDA has very broad enforcement authority under the Federal Food
Drug and Cosmetic Act, and failure to abide by these regulations can result in
penalties including the issuance of a warning letter directing us to correct
deviations from FDA standards, a requirement that future advertising and
promotional materials be pre-cleared by the FDA, and state and federal civil and
criminal investigations and prosecutions.
We are also subject to various laws and regulations regarding laboratory
practices, the experimental use of animals and the use and disposal of hazardous
or potentially hazardous substances in connection with our research. In each of
these areas, as above, the FDA and other regulatory authorities have broad
regulatory and enforcement powers, including the ability to levy fines and civil
penalties, suspend or delay issuance of approvals, seize or recall products, and
withdraw approvals, any one or more of which could have a material adverse
effect upon us. We are also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. We may incur significant costs to comply with
such laws and regulations now or in the future.
Outside the United States our ability to market our products will also
depend on receiving marketing authorizations from the appropriate regulatory
authorities. The foreign regulatory approval process includes all of the risks
associated with FDA approval described above. The requirements governing the
conduct of clinical trials and marketing authorization vary widely from country
to country. At present, foreign marketing authorizations are applied for at a
national level, although within the European Community, or EC,
44
registration procedures are available to companies wishing to market a product
to more than one EC member state. If the regulatory authority is satisfied that
adequate evidence of safety, quality and efficiency has been presented, a
marketing authorization will be granted.
LEGAL PROCEEDINGS
We may from time to time become a party to legal proceedings arising in the
ordinary course of business. We are not currently a party to any material legal
proceedings.
EMPLOYEES
As of June 30, 2003, we had 21 employees. Nine of our employees are engaged
in research and development, and all management and professional employees have
had substantial prior experience with pharmaceutical, biotechnology or medical
products companies. We believe our relations with our employees are good.
We are currently conducting a search for a Vice President of Research and
Development.
PROPERTY AND FACILITIES
We are currently leasing approximately 7,000 square feet of laboratory and
office space in Richmond, Virginia, which we occupy under a three-year lease,
expiring in November 2003. We are also currently leasing approximately 5,250
square feet of office space in Hopkinton, Massachusetts, which we occupy under
leases ending in November 2004. These leases are renewable at our option for an
additional three years upon written notice at least 120 days prior to the
expiration date of the lease. These facilities are adequate for our current
requirements.
SCIENTIFIC ADVISORY BOARD
We have established a group of scientists to advise us on scientific,
technical and commercialization issues. These advisors are leading scientists in
the areas of pharmacology, chemistry and biology. These advisors are:
<Table>
<Caption>
MEMBER AFFILIATION
- ------ -----------
Donald A. McAfee, Ph.D. ................. Chief Technical Officer of Aderis
Pharmaceuticals, Inc. and Chairman of
Scientific Advisory Board
Sir James W. Black, F.R.C.P., F.R.S.
Nobel Laureate......................... Professor of Analytical Pharmacology at
King's College Hospital Medical School,
London, England.
Paul Greengard, Ph.D. Nobel Laureate..... Victor Astor Professor at Rockefeller
University in New York City.
Joseph R. Bianchine, M.D., Ph.D.,
F.A.C.P., F.A.C.C.P. .................. Senior Scientific Advisor, Schwarz Pharma
AG.
Ray A. Olsson, M.D....................... Professor of Cardiovascular Research of
the College of Medicine, University of
South Florida.
Juha P. Kokko, M.D., Ph.D................ Associate Dean for Clinical Research,
Emory University.
</Table>
45
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information as of June 30, 2003,
about our executive officers and members of our board of directors, as well as
certain other key employees.
<Table>
<Caption>
NAME AGE POSITION
- ---- --- --------
Peter G. Savas.................................. 54 Chairman of the Board, Chief Executive
Officer and President
Donald A. McAfee, Ph.D. ........................ 61 Chief Technical Officer and Chairman
of Scientific Advisory Board
Kenneth L. Rice, Jr., J.D., M.B.A. ............. 49 Vice President, Chief Commercial
Officer, Chief Financial Officer and
Secretary
William S. Wheeler, M.D., FACC.................. 55 Vice President and Chief Medical
Officer
James V. Peck, Pharm.D. ........................ 52 Vice President of Research Operations
Noel J. Cusack, Ph.D. .......................... 62 Vice President and Chief Scientific
Officer
Gevork I. Minaskanian, Ph.D. ................... 55 Vice President of Synthetic Chemistry
Gary E. Frashier(1)(2).......................... 66 Lead Director
James M. Garvey(1).............................. 56 Director
Robert G. McNeil, Ph.D. ........................ 59 Director
Wayne I. Roe(2)................................. 52 Director
Michael J. Ross, Ph.D.(2)....................... 53 Director
</Table>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
PETER G. SAVAS, CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER AND
PRESIDENT. Mr. Savas joined us in 2000 as Chairman of the Board of Directors,
Chief Executive Officer and President. Before joining us, Mr. Savas served as
Chief Executive Officer, Chairman and President of Unisyn, Inc. from 1992 to
2000. Before joining Unisyn, Mr. Savas served as Senior Vice President of Zymark
Corporation and Genex Corporation. In 1984, Mr. Savas founded Xydex Corporation,
a company that in-licensed and commercialized separations technology that had
been developed overseas. Prior to founding Xydex, Mr. Savas held various
positions at Millipore Corporation and Bristol Laboratories. Mr. Savas holds a
Bachelor of Science degree from Syracuse University.
DONALD A. MCAFEE, PH.D., CHIEF TECHNICAL OFFICER AND CHAIRMAN OF SCIENTIFIC
ADVISORY BOARD. A co-founder of Aderis, Dr. McAfee has been a scientist and
manager for more than 35 years. Before organizing Aderis in 1994, Dr. McAfee
served for eight years as Vice President, Research at Whitby Research, Inc.,
managing the drug discovery programs. Prior to entering the pharmaceutical
industry, Dr. McAfee served as Chairman of the Division of Neurosciences at the
Beckman Research Institute (City of Hope) and held faculty appointments at the
Yale University School of Medicine and the University of Miami School of
Medicine. He has authored more than 100 articles and book chapters in
neuroscience and pharmacology. He is currently an adjunct professor at the
University of California, Irvine and at the Medical College of Virginia, and is
a frequent lecturer to the industry in drug discovery for the Pharmaceutical
Education and Research Institute. Dr. McAfee received his B.S. in Biology and
Chemistry from the University of Chicago and Portland State University. He
earned his Ph.D. in Physiology from the University of Oregon School of Medicine.
KENNETH L. RICE, JR., J.D., M.B.A., VICE PRESIDENT, CHIEF COMMERCIAL
OFFICER, CHIEF FINANCIAL OFFICER AND SECRETARY. Mr. Rice joined us in April
2001. Prior to joining us, Mr. Rice was Vice President, Chief Financial Officer,
Secretary, Treasurer and General Counsel of MacroChem Corporation, a drug
delivery company, from 1999 to 2001. Before joining MacroChem, Mr. Rice was Vice
President, Finance and
46
Administration, Chief Financial Officer and Secretary at Pentose
Pharmaceuticals, Inc. from 1998 to 1999. Mr. Rice held similar financial and
operating positions at Unisyn Technologies, Inc. from 1993 to 1998 and Zymark
Corporation from 1990 to 1993. Mr. Rice spent his early career at Millipore
Corporation where he attained the position of Corporate Tax Director. Mr. Rice
holds an L.L.M. in Taxation from Boston University Law School, a J.D. from
Suffolk Law School and an M.B.A. and B.S.B.A. from Babson College.
WILLIAM S. WHEELER, M.D., FACC, VICE PRESIDENT AND CHIEF MEDICAL
OFFICER. Dr. Wheeler, who joined us in April 2001, is board certified in
internal medicine and cardiovascular diseases and is a fellow of the American
College of Cardiology. Prior to joining us, Dr. Wheeler served as Vice President
of Cardiovascular/ Critical Care at Quintiles Inc., a contract research
organization that performs clinical trials for the pharmaceutical industry, from
1999 to 2001. Prior to joining Quintiles, Dr. Wheeler managed a private practice
in Interventional Cardiology while serving as Chief of Cardiology and member of
the board of directors at Cardinal Healthcare, a multi-specialty internal
medicine practice, from 1996 to 1999. Previously, Dr. Wheeler served as
Associate Medical Director in the Cardiovascular Section at Burroughs Wellcome
Co. where he conducted global trials in acute coronary syndrome and heart
failure. Before entering the pharmaceutical industry, Dr. Wheeler held numerous
positions at East Carolina University School of Medicine. Dr. Wheeler received
his cardiology training at Cedars-Sinai Medical Center in Los Angeles,
California. Dr. Wheeler completed his Internal Medicine Residency at Los Angeles
County/University of Southern California Medical Center (LAC/USC). He earned his
M.D. from the University of California, Los Angeles and his B.S. in Zoology from
California State College, Long Beach, California.
JAMES V. PECK, PHARM.D., VICE PRESIDENT OF RESEARCH OPERATIONS. A
co-founder of Aderis, Dr. Peck has served as Vice President, Operations, since
our inception. From 1972 until our inception, he served as Director of Chemistry
at Whitby Research, Inc. (formerly Nelson Research and Development). Dr. Peck
received his B.S. in chemistry from the University of California. He earned his
Pharm.D. from the University of Southern California. He is a licensed pharmacist
in both California and Virginia, and is an inventor on more than three dozen
patents and patent applications.
NOEL J. CUSACK, PH.D., VICE PRESIDENT AND CHIEF SCIENTIFIC OFFICER. A
co-founder of Aderis, Dr. Cusack has served as Vice President, and Chief
Scientific Officer since our inception. From 1988 until our inception, he served
as Director of Pharmacology at Whitby Research, Inc. Previously, he held
academic appointments at Cambridge University and King's College, London. He is
the author of numerous articles on the chemistry and pharmacology of adenine
derivatives. Dr. Cusack is currently an adjunct professor at the University of
California at Irvine, and a frequent lecturer in pharmacology for the
Pharmaceutical Education and Research Institute. Dr. Cusack received his B.Sc.
and M.Sc. from the University of Auckland, New Zealand, and his Ph.D. from the
University of Bradford, U.K.
GEVORK I. MINASKANIAN, PH.D., VICE PRESIDENT OF SYNTHETIC CHEMISTRY. A
co-founder of Aderis, Dr. Minaskanian leads our chemistry program. From 1981
until our inception, he served as Scientist and Principal Research Scientist at
Whitby Research, Inc. (formerly Nelson Research and Development), and is the
inventor of more than three dozen patents and publications. Dr. Minaskanian is
also an adjunct professor of Chemistry at Virginia Commonwealth University. He
received his B.S. in Chemistry from The National University of Tehran, Iran. Dr.
Minaskanian earned his Ph.D. from Texas Tech University.
GARY E. FRASHIER. Mr. Frashier was elected a director in August 2001, and
our Lead Director in January 2003, by our board of directors. Mr. Frashier is
currently President and Principal of Management Associates, a healthcare and
management consulting group. From 1990 to 2000, Mr. Frashier served as Chairman
of the board of directors, Chief Executive Officer and President of OSI
Pharmaceuticals. Mr. Frashier has over 30 years executive management experience
in pharmaceutical, biotechnology and scientific instrument companies including
Waters Associates, Millipore Corporation and Genex Corporation. Mr. Frashier is
currently Chairman of the board of directors of Merrimack Pharmaceuticals and
serves on the board of directors of Maxim Pharmaceuticals, Inex Pharmaceuticals
Corporation and several private biopharmaceutical companies. Mr. Frashier holds
a B.S. in Chemical Engineering from Texas Technological University, where he was
honored as a Distinguished Engineer and an M.S. in Management from M.I.T., where
he was named a Sloan Fellow.
47
JAMES M. GARVEY. Mr. Garvey was elected a director in September 2001 by
our board of directors. Mr. Garvey currently serves as the Chief Executive
Officer and Managing Partner of Schroder Ventures Life Sciences, a private
venture capital firm with $900 million under management. He has served in this
capacity since May 1995. Prior to joining Schroder Ventures, Mr. Garvey was
Director of the $600 million Venture Capital Division of Allstate Corp. He has
served on several public and private healthcare boards in the United States and
Europe. Mr. Garvey received a BSE degree from Northern Illinois University in
1969.
ROBERT G. MCNEIL, PH.D. Dr. McNeil has been a director since our
inception. Dr. McNeil is the General Partner and Founding Member of Sanderling
Venture Partners, a biomedical fund which was established in 1979. He was a
founder, Chief Executive Officer and Chairman of CoCensys, the Chief Executive
Officer and Chairman of Acea, and the Chairman of Peregrine Pharmaceuticals. Dr.
McNeil earned his Ph.D. in molecular biology, biochemistry and genetics from the
University of California, Irvine.
WAYNE I. ROE. Mr. Roe was elected a director in August 2001 by our board
of directors. Mr. Roe currently serves as a director of Aradigm Corporation and
Ista Pharmaceuticals, Inc. and several private companies in the life sciences
field. From October 1999 until November 2000, Mr. Roe was Senior Vice President
of United Therapeutics Corporation, a pharmaceutical manufacturer. From March
1996 until March 1999, he was Chairman of Covance Health Economics and Outcomes
Services, Inc., a contract research and developmental services company to the
medical technology marketplace. From June 1988 to March 1996, Mr. Roe was the
President of Health Technology Associates, a pharmaceutical industry consulting
firm. Mr. Roe received a B.A. from Union College, an M.A. from the State
University of New York at Albany and an M.A. from the University of Maryland.
MICHAEL J. ROSS, PH.D. Dr. Ross was elected a director in September 2001
by our board of directors. Dr. Ross currently serves as a general partner of
Schroder Ventures Life Sciences, a private venture capital firm. Dr. Ross was
previously a managing partner of Didyma LLC, a management consulting firm
specializing in management of startup companies from 1999 to 2001. From 1996 to
1999, he was President and Chief Executive Officer of MetaXen LLC, a company
which was recently sold to Exelixis Pharmaceuticals Inc. From 1990 to 1996, Dr.
Ross was with the Arris Pharmaceutical Corp., now Celera Genomics Inc., a
biotechnology company, as Chief Scientific Officer, President and Chief
Executive Officer. Prior to that, Dr. Ross worked at Genentech for 13 years
where he served as Vice President of Development and Vice President of Medicinal
and Biomolecular Chemistry. Dr. Ross has served on a number of boards of
directors and been involved in a number of biotech/pharmaceutical partnerships.
Dr. Ross received his A.B. from Dartmouth College, his Ph.D. from The California
Institute of Technology and completed his post-doctoral studies at Harvard
University.
BOARD COMPOSITION
Our bylaws require our board of directors to consist of one or more
members. We currently have six authorized directors. At each annual meeting of
stockholders, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the next
annual meeting following election or special meeting held in lieu thereof and
until their successors are duly elected and qualified. Executive officers are
elected by and serve at the direction of our board of directors.
BOARD COMMITTEES
AUDIT COMMITTEE
The audit committee consists of Messrs. Frashier and Roe and Dr. Ross, all
of whom are outside directors. The audit committee recommends engagement of our
independent auditors, approves the services performed by such auditors and
reviews and evaluates our accounting policies and its systems of internal
accounting controls.
48
COMPENSATION COMMITTEE
The compensation committee consists of Messrs. Frashier and Garvey, both of
whom are outside directors. The compensation committee administers our 1995
stock option plan and 2001 incentive award plan and is authorized by the board
of directors to make recommendations with respect to matters of compensation,
including the compensation of our executive officers.
COMPENSATION COMMITTEE INTERLOCKS
The members of the compensation committee of our board of directors are
currently Messrs. Frashier and Garvey. No member of our board of directors or of
our compensation committee serves as a member of the board of directors or
compensation committee of an entity that has one or more executive officers
serving as members of our board of directors or compensation committee.
DIRECTOR COMPENSATION
Our lead director currently receives an annual fee of $50,000 for his
services as a director. Our non-employee directors unaffiliated with holders of
our preferred stock receive an annual cash fee of $25,000 for their services as
directors. No other directors receive fees for their services as directors. We
reimburse our directors for expenses incurred in connection with attending board
and committee meetings. Our board has the discretion to grant stock options to
all directors.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
Our amended and restated certificate of incorporation includes a provision
that eliminates the personal liability of our directors for monetary damages to
the fullest extent permitted by law. Our bylaws provide that we will indemnify
our directors and executive officers and may indemnify our other officers,
employees and other agents to the fullest extent permitted by Delaware law.
Under current Delaware law, a director's liability to us or our stockholders may
not be limited:
- to any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or involving intentional
misconduct;
- for knowing violations of law;
- for any transaction from which the director derived an improper personal
benefit;
- for improper transactions between the director and us; and
- for improper distributions to stockholders and loans to directors and
officers.
We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, indemnify our directors and executive officers
for certain expenses, including attorneys' fees, judgments, fines and settlement
amounts incurred by any such person in any action or proceeding, including any
action by us arising out of such person's services as our director or executive
officer, any of our subsidiaries or any other company or enterprise to which the
person provides services at our request. We believe that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers. Currently, there is no pending litigation or proceeding
involving any of our directors, executive officers or employees for which
indemnification is sought, nor are we aware of any threatened litigation that
may result in claims for indemnification.
We currently have directors' and officers' liability insurance.
49
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid to our chief executive officer and our other four most highly compensated
officers whose annual salary and bonus exceeded $100,000 for services rendered
in all capacities to us during the year ended December 31, 2002.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG-TERM
COMPENSATION
AWARDS
------------
2002 COMPENSATION SHARES
------------------ UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
- --------------------------- -------- ------- ------------
Peter G. Savas...................................... $350,000 $40,000 --
Chief Executive Officer and President
Donald A. McAfee, Ph.D. ............................ 271,856 50,000 --
Chief Technical Officer and Chairman of Scientific
Advisory Board
William S. Wheeler, M.D., FACC...................... 260,000 50,000 --
Vice President and Chief Medical Officer
Kenneth L. Rice, Jr., J.D., M.B.A. ................. 224,700 52,000 --
Vice President, Chief Commercial Officer, Chief
Financial Officer and Secretary
James V. Peck, Pharm.D. ............................ 190,496 26,250 --
Vice President -- Research Operations
</Table>
In accordance with the rules of the Commission, the compensation described
in this table does not include medical, group life insurance or other benefits
received by the named executive officers that are available generally to all of
our salaried employees and certain perquisites and other personal benefits
received by the named executive officers, which do not exceed the lesser of
$50,000 or 10% of any such officer's salary and bonus disclosed in this table.
OPTION GRANTS IN LAST FISCAL YEAR
There were no options granted to officers during the year ended December
31, 2002.
50
FISCAL YEAR-END OPTION VALUES
The following table sets forth, as to the named officers, certain
information concerning the number and value of unexercised options held by each
of the named executive officers at December 31, 2002.
The information regarding the value of unexercised in-the-money options is
based on a value of $
per share, the assumed initial public offering price, minus the per share
exercise price, multiplied by the number of shares underlying the option.
<Table>
<Caption>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES DECEMBER 31, 2002 DECEMBER 31, 2002
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
Peter G. Savas................. -- -- 227,019 433,412
Chief Executive Officer and
President
Donald A. McAfee, Ph.D. ....... -- -- 14,867 12,892
Chief Technical Officer and
Chairman of Scientific
Advisory Board
William S. Wheeler, M.D. ...... -- -- 79,920 126,330
Vice President and Chief
Medical Officer
Kenneth L. Rice, Jr., J.D.,
M.B.A. ...................... -- -- 79,920 126,330
Vice President, Chief
Commercial Officer, Chief
Financial Officer and
Secretary
James V. Peck, Pharm.D......... -- -- 9,528 5,074
Vice President -- Research
Operations
</Table>
EMPLOYMENT AGREEMENTS
Each of Messrs. Rice and Savas and Dr. Wheeler entered into an employment
agreement with us dated as of January 2, 2002. Each of the agreements extend
through January 1, 2004 and will automatically be extended for successive one
year periods thereafter unless a notice to terminate the agreement is delivered
by either party not less than 30 days prior to the end of such period.
Under each agreement, the executive receives a stated annual base salary,
which is reviewed annually by our compensation committee, and is eligible to
participate in our discretionary bonus program. Each agreement provides for our
board of directors to determine, on an annual basis, the amount of each
executive's bonus, if any.
Each of these employment agreements provides that upon termination of
employment, either by us without cause or by the executive for good reason:
- each executive will be entitled to an amount equal to (a) his monthly
base salary multiplied by the greater of (i) the remaining number of
months under the employment agreement and (ii) 12 and (b) the average
annual bonus received over the last 24 months;
- each executive will have the right to continue to participate in our
health, life and long-term disability benefits plans for the greater of
(a) the amount of time remaining under the agreement or (b) one year
after the date of termination; and
- any unvested stock options and any restricted stock held by the executive
will continue to vest for a period of one year.
51
Each employment agreement also provides that for a period of one year after
the termination of the executive's employment for any reason, the executive will
not engage in activities similar to those engaged in during the two years
immediately preceding their termination or render similar services to any direct
competitor of ours without our prior written consent.
EMPLOYEE BENEFIT PLANS
1995 STOCK OPTION PLAN
Purpose
Our board of directors adopted the 1995 Stock Option Plan on March 29, 1995
and our stockholders approved it on March 29, 1995. The stock option plan
provides for grants of incentive stock options, as defined in Section 422 of the
Internal Revenue Code of 1986, to our employees, as well as non-qualified stock
options to our employees, directors and consultants. The stock option plan is
intended to facilitate the retention of current employees, consultants or
directors as well as to secure and retain the services of new employees,
consultants and directors and to provide incentives for such persons to exert
maximum efforts for the success of the company.
Administration
The stock option plan is administered by the board of directors unless the
board of directors delegates administration to a compensation committee which
shall be comprised of two or more members, appointed by the board of directors,
each a "disinterested person" as defined by Rule 16b-3(c)(2)(i) under the
Securities Exchange Act of 1934. The board of directors, or the compensation
committee if so empowered, has the power to interpret the stock option plan and
to adopt such rules for the administration, interpretation and application of
the stock option plan as are consistent with the stock option plan.
Securities Reserved
The aggregate number of shares of our common stock issuable under the stock
option plan is 2,475,000.
Grant of Awards
Certain employees, consultants and directors are eligible to be granted
awards under the stock option plan. The board of directors, or the compensation
committee if so empowered, determines (1) which employees, consultants, and
directors are to be granted awards; (2) the number of shares subject to option
grants; (3) whether the options are to be incentive stock options or
non-qualified stock options (except that only our employees may be granted
incentive stock options); (4) terms and conditions of such options, consistent
with the stock option plan; and (5) the type of award that is granted. The board
of directors, or the compensation committee if so empowered, has the discretion,
subject to the limitations of the stock option plan and applicable laws, to
grant incentive stock options and non-qualified stock options. A director shall
not be eligible to be granted awards under the stock option plan unless the
board of directors has (1) delegated its discretionary authority over the stock
option plan to the compensation committee; or (2) otherwise complied with the
requirements of Rule 16b-3 under the Securities Exchange Act of 1934.
Limitation on Incentive Stock Option Treatment
Even if an option agreement designates an option as an incentive stock
option, no option will qualify as an incentive stock option if the aggregate
fair market value of stock (determined as of the date of grant) with respect to
all of a holder's incentive stock options is exercisable for the first time
during any calendar year under the stock option plan or under any other of our
plans, as applicable, exceeds $100,000. Any option failing to qualify as an
incentive stock option will be deemed to be a non-qualified stock option.
52
Exercise Price
The board of directors, or the compensation committee if so empowered,
shall set the per share exercise price, subject to the following rules: (1) in
the case of incentive stock options, the exercise price shall not be less than
100% of the fair market value of shares of our common stock on the grant date
for all options granted; (2) in the case of non-qualified stock options, the
exercise price shall not be less than 85% of the fair market value of shares of
our common stock on the grant date for all options granted; and (3) for the
persons owning (within the meaning of 424(d) of the Internal Revenue Code of
1986) more than 10% of the total combined voting power of all classes of our
capital stock or of any of our subsidiaries, the exercise price shall be not
less than 110% of the fair market value of the shares of our common stock on the
grant date. The fair market value of a share of our common stock as of a given
date will be determined in good faith by the board of directors.
Expiration of Awards
The term of an award is set by the board of directors, or the compensation
committee if so empowered, subject to the following conditions: (1) that no
award term shall be longer than ten years from the date of grant; and (2) the
award term for a person owning more than 10% of the total combined voting power
of all classes of our capital stock shall not exceed five years from the date of
grant. Upon termination of an outstanding option holder's status as our employee
or consultant, the holder may exercise his or her options within the period of
time specified in the option grant, to the extent that the options were vested
at the time of termination. If no time period was specified in the notice of
grant, the option shall remain exercisable for three months following the
holder's termination of status as an employee or consultant, or until the date
of expiration of the option as set forth in the option agreement, whichever is
earlier. Options granted under the plan must be exercised within twelve months
if the holder's employment ends due to disability, and within eighteen months of
the holder's death, or until the date of expiration of the option as set forth
in the option agreement, whichever is earlier.
Adjustments of Awards
If the board of directors, or the compensation committee if so empowered,
determines that there is a corporate event, defined as a dividend,
recapitalization, reclassification, stock split, merger, consolidation,
split-up, spin-off, combination, consolidation, dissolution or other similar
corporate transaction that affects our common stock which causes dilution or
enlargement of benefits under the stock option plan, then the board of
directors, or the compensation committee if so empowered, may appropriately
adjust (1) the aggregate number of shares of our common stock subject to the
stock option plan; (2) the number of shares of our common stock subject to the
outstanding awards; and (3) the price per share of our common stock upon
exercise of outstanding awards to counter the dilution or enlargement of
benefits.
Change of Control
Upon the occurrence of a merger or the sale of substantially all of our
assets, each outstanding award shall be assumed or substituted for an equivalent
option by the successor corporation or shall continue in full force and effect.
If the successor corporation refuses to assume or substitute the awards, each
holder of an award shall be entitled to immediately exercise the award for all
shares of our common stock under the award, including unvested shares.
Amendment and Termination
The board of directors, or the compensation committee if so empowered, may
amend, modify, suspend or terminate the stock option plan at any time, except
the board of directors, or the compensation committee if so empowered, must
obtain approval of our stockholders within twelve months before or after such
action to (1) increase the number of shares of our common stock that may be
issued under the stock option plan; or (2) modify the requirements as to
eligibility for participation in the stock option plan.
53
Certain Restrictions on Resale
The board of directors, or the compensation committee if so empowered, may
require any person granted an award to give written assurances stating that such
person has no intention of selling or otherwise distributing the shares of our
common stock they acquire upon exercise of their options under the stock option
plan except that they may offer or sell the shares if they make such offers and
sales (1) pursuant to an effective registration statement under the Securities
Act of 1933; or (2) in reliance upon a determination made by our counsel that
such requirements need not be met pursuant to an appropriate exemption from the
registration requirements of the Securities Act of 1933.
2001 INCENTIVE AWARD PLAN
Purpose
Our board of directors adopted the 2001 Incentive Award Plan on November
14, 2001 and our stockholders approved it on November 14, 2001. The incentive
award plan provides for grants of incentive stock options, as defined in Section
422 of the Internal Revenue Code of 1986, to our employees, as well as
non-qualified stock options to our employees, directors and consultants. The
incentive award plan is intended to facilitate the retention of current
employees, consultants or directors as well as to secure and retain the services
of new employees, consultants and directors and to provide incentives for such
persons to exert maximum efforts for the success of the company.
Administration
The incentive award plan is administered by the compensation committee,
which shall be comprised of two or more directors, appointed by the board of
directors, each a "non-employee director" as defined by Rule 16b-3 under the
Securities Exchange Act of 1934 and an "outside director" under Section 162(m)
of the Internal Revenue Code of 1986. The compensation committee has the power
to interpret the incentive award plan and to adopt such rules for the
administration, interpretation and application of the incentive award plan as
are consistent with the incentive award plan, to interpret, amend or revoke any
such rules and to amend any award agreement provided that the rights or
obligations of the holder of the award that is the subject of any award
agreement is not affected adversely.
Securities Reserved
The aggregate number of shares of our common stock issuable under the
incentive award plan is 1,555,000.
Grant of Awards
Certain employees, consultants, and directors are eligible to be granted
awards under the incentive award plan. The compensation committee determines (1)
which employees, consultants, and directors are to be granted awards; (2) the
number of shares subject to option grants; (3) whether the options are to be
incentive stock options or non-qualified stock options (except that only our
employees may be granted incentive stock options); (4) terms and conditions of
such options, consistent with the incentive award plan and (5) the type of award
that is granted. The compensation committee has the discretion, subject to the
limitations of the incentive award plan and applicable laws, to grant incentive
stock options, non-qualified stock options, restricted stock awards, performance
awards, dividend equivalents, deferred stock, stock payments, and stock
appreciation rights.
Limitation on Incentive Stock Option Treatment
Even if an option agreement designates an option as an incentive stock
option, no option will qualify as an incentive stock option if the aggregate
fair market value of stock (determined as of the date of grant) with respect to
all of a holder's incentive stock options is exercisable for the first time
during any calendar year under the incentive award plan or under any other of
our plans, as applicable, exceeds $100,000. Any option failing to qualify as an
incentive stock option will be deemed to be a non-qualified stock option.
54
Exercise Price
The compensation committee shall set the per share exercise price, subject
to the following rules: (1) in the case of incentive stock options, the exercise
price shall not be less than 100% of the fair market value of the shares of our
common stock on the grant date for all options granted; and (2) for the persons
owning (within the meaning of 424(d) of the Internal Revenue Code of 1986) more
than 10% of the total combined voting power of all classes of our capital stock
or of any of our subsidiaries, the exercise price shall be not less than 110% of
the fair market value of the shares of our common stock on the grant date. The
fair market value of a share of our common stock as of a given date will be,
after the date of this offering, the average of the mean between the closing
representative bid and asked prices for a share of our common stock on the
trading day previous to such date, as reported by Nasdaq or such successor
quotation system, on such date (or the next preceding trading day, if our common
stock is not traded on that date).
Expiration of Awards
The term of an award is set by the compensation committee, subject to the
following conditions: (1) that no award term shall be longer than ten years from
the date of grant; and (2) the award term for a person owning more than 10% of
the total combined voting power of all classes of our capital stock shall not
exceed five years from the date of grant. The compensation committee also
establishes the time period following termination of employment, death or
disability during which vested options may be exercised, subject to the
requirements of Section 422 of the Internal Revenue Code of 1986 with respect to
incentive stock options.
Adjustments of Awards
If the compensation committee determines that there is a corporate event,
defined as a dividend, recapitalization, reclassification, stock split, merger,
consolidation, split-up, spin-off, combination, consolidation, dissolution or
other similar corporate transaction that affects our common stock which causes
dilution or enlargement of benefits under the incentive award plan, then the
compensation committee may appropriately adjust (1) the aggregate number of
shares of our common stock subject to the incentive award plan; (2) the number
of shares of our common stock subject to the outstanding awards; and (3) the
price per share of our common stock upon exercise of outstanding awards to
counter the dilution or enlargement of benefits.
Change of Control
Upon the occurrence of a merger or sale of substantially all of our assets,
each outstanding award shall be assumed or substituted for an equivalent option
by the successor corporation, or a parent or subsidiary of the successor
corporation. If the successor corporation refuses to assume or substitute the
awards, each holder of an award shall be entitled to immediately exercise the
award for all shares of our common stock under the award, including unvested
shares.
Amendment and Termination
The compensation committee may amend, modify, suspend or terminate the
incentive award plan at any time, except the compensation committee must obtain
approval of our stockholders within 12 months before or after such action to
increase the number of shares of our common stock that may be issued under the
incentive award plan.
Certain Restrictions on Resale
Employees, officers and directors who are our "affiliates" as defined by
the rules and regulations under the Securities Act of 1933, may offer or sell
the shares of our common stock they acquire upon exercise of their options under
the incentive award plan only if they make such offers and sales (1) pursuant to
an effective registration statement under the Securities Act of 1933; (2)
pursuant to an appropriate exemption from the registration requirements of the
Securities Act of 1933; or (3) within the limitations and subject to the
conditions set forth in Rule 144 under the Securities Act of 1933.
55
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes the securities authorized for issuance under
our equity compensation plans at December 31, 2002.
<Table>
<Caption>
NUMBER OF SECURITIES
NUMBER OF SHARES OF REMAINING AVAILABLE FOR
COMMON STOCK TO BE FUTURE ISSUANCE UNDER EQUITY
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE COMPENSATION PLANS
OUTSTANDING OPTIONS, PRICE OF OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS(A) WARRANTS AND RIGHTS(B) REFLECTED IN COLUMN (A))(C)
- ------------- ----------------------- ----------------------------- ----------------------------
Equity compensation
plans approved by
security holders... 2,114,957 $0.95 767,087
Equity compensation
plans not approved
by security
holders............ -- -- --
--------- ----- -------
Total................ 2,114,957 $0.95 767,087
--------- ----- -------
</Table>
401(k) PLAN
Effective January 2002, we adopted an employee savings and retirement plan,
that is intended to qualify under Section 401(k) of the Internal Revenue Code,
covering all of our employees. Pursuant to the 401(k) plan, employees may elect
to reduce their current compensation by up to the statutorily prescribed annual
limit and have the amount of the reduction contributed to the 401(k) plan. We
may make matching or additional contributions to the 401(k) plan in amounts to
be determined annually by our board of directors.
56
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock on a fully-diluted basis as of July 31,
2003 and as adjusted to reflect the sale of our common stock offered by this
prospectus by:
- each of the individuals listed in the "Management -- Summary Compensation
Table" above;
- each of our directors;
- each person, or group of affiliated persons, who is known by us to own
beneficially 5% or more of our common stock; and
- all of our directors and officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock under options held by that person that are currently
exercisable or exercisable within 60 days of July 31, 2003 are considered
outstanding. These shares, however, are not considered outstanding when
computing the percentage ownership of each other person.
Except as indicated in the footnotes to this table and pursuant to state
community property laws, each stockholder named in the table has sole voting and
investment power for the shares shown as beneficially owned by them. Percentage
of ownership is based on 14,821,081 shares of common stock outstanding on July
31, 2003 and shares of common stock outstanding after completion of this
offering, including the 366,851 shares to be issued to the former Renalogic
shareholders. This table assumes no exercise of the underwriters' over-allotment
option. Unless otherwise indicated in the footnotes, the address of each of the
individuals named below is: c/o Aderis Pharmaceuticals, Inc., 85 Main Street,
Hopkinton, Massachusetts 01748.
<Table>
<Caption>
PERCENT PERCENT
BENEFICIALLY BENEFICIALLY
NUMBER OF OWNED OWNED
SHARES BEFORE THIS AFTER THIS
NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- ------------------------ --------- ------------ ------------
FIVE PERCENT OR GREATER STOCKHOLDERS
Entities affiliated with the Sanderling
Group(1)....................................... 2,646,410 17.9
2730 Sand Hill Road, Suite 200
Menlo Park, CA 94025
Entities affiliated with the Alliance Technology
Ventures(2).................................... 1,530,197 10.3
8995 Westside Parkway
Alphretta, GA 30004
Schwarz Pharma AG(3).............................. 1,146,144 7.7
Alfred-Nobel-Strasse 10
40789 Monheim, Germany
Mac & Co. FBO New York Life Bio Venture Partners
LLC(4)......................................... 1,053,543 7.1
888 7th Avenue, 29th Floor
New York, NY 10106
Entities affiliated with Schroder(5).............. 755,253 5.1
22 Church Street
Hamilton, Bermuda HM11
China Development Industrial Bank(6).............. 755,250 5.1
125 Nanking East Road
Section 5 Taipei 105
Taiwan ROC 105
International Biotechnology Trust PLC(7).......... 755,250 5.1
71 Kinsway
London, United Kingdom, WC2B 6ST
</Table>
57
<Table>
<Caption>
PERCENT PERCENT
BENEFICIALLY BENEFICIALLY
NUMBER OF OWNED OWNED
SHARES BEFORE THIS AFTER THIS
NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- ------------------------ --------- ------------ ------------
DIRECTORS AND EXECUTIVE OFFICERS
Robert G. McNeil, Ph.D.(8)........................ 2,726,780 18.3
Peter G. Savas(10)................................ 547,040 3.6
Donald A. McAfee, Ph.D.(9)........................ 543,139 3.6
James V. Peck, Pharm.D.(11)....................... 400,229 2.7
Noel J. Cusack, Ph.D.(11)......................... 400,229 2.7
Gevork I. Minaskanian, Ph.D.(12).................. 388,368 2.6
Kenneth L. Rice, Jr., J.D., M.B.A.(13)............ 118,592 *
William S. Wheeler, M.D., FACC(13)................ 118,592 *
Gary E. Frashier(14).............................. 106,000 *
Wayne I. Roe(15).................................. 66,000 *
James M. Garvey(16)............................... 66,000 *
Michael J. Ross, Ph.D.(16)........................ 66,000 *
Executive officers and directors as a group(17)..... 5,546,969 37.0
</Table>
- ---------------
* Less than 1% of the outstanding shares of common stock.
(1) Includes 184,780 shares held by Sanderling III Biomedical, 241,681 shares
held by Sanderling IV Biomedical Co-Investment Fund, L.P., 444,357 shares
held by Sanderling III Limited, 84,626 shares held by Sanderling Management
Company, LLC Retirement Trust FBO Robert G. McNeil, 1,070,446 shares held
by Sanderling Venture Partners III, 120,840 shares held by Sanderling
Venture Partners IV Co-Investment Fund, L.P., 156,153 shares held by
Sanderling Venture Partners V Co-Investment Fund, L.P., 1,855 shares held
by Sanderling Ventures Management, 111,093 shares held by Middleton, McNeil
Associates III, L.P., 94,671 shares held by Sanderling V Biomedical
Co-Investment Fund, L.P., 25,535 shares held by Sanderling V Limited
Partnership, 22,722 shares held by Sanderling V Beteiligungs GmbH & Co. KG,
3,021 shares held by Sanderling Ventures Management V and 84,360 shares
held by Sanderling Ventures Management FBO Fred A. Middleton. Sanderling
Ventures is the managing general partner of the Sanderling entities. Robert
G. McNeil and Fred A. Middleton are general partners of Sanderling Ventures
and share voting and dispositive power over the shares held by Sanderling
and its related entities, except as to Sanderling Venture Partners V
Co-Investment Fund, L.P. Voting and dispositive power over the shares held
by Sanderling Venture Partners V Co-Investment Fund, L.P. is shared by
Robert G. McNeil, Fred A. Middleton and Timothy C. Mills.
(2) Includes 1,378,781 shares held by Alliance Technology Ventures, L.P.,
41,445 shares held by ATV/GP Parallel Fund, L.P., and 109,971 shares held
by ATV/MFJ Parallel Fund, L.P. Michael A. Henos is the sole general partner
of these funds and has sole voting and dispositive power over these shares.
(3) Voting and dispositive power for these shares is shared by the board of
directors of Schwarz Pharma AG, consisting of Patrick Schwarz-Schutte, Dr.
Klaus Veitinger, Jurgen Baumann, Dr. Iris Low-Friedrich and Detlef
Thielgen.
(4) The beneficial owner of these shares is Perseus Soros BioPharmaceutical
Fund. The investment committee of Perseus Soros BioPharmaceutical Fund
consists of Dennis Purcell, Christopher Earl, Ph.D., Steven A. Elms, Andrew
Schiff, M.D. and Keith Tarleton, all of whom share voting and dispositive
power over these shares.
(5) Includes 442,509 shares held by Schroder Ventures International Life
Sciences Fund II LP1, 188,462 shares held by Schroder Ventures
International Life Sciences Fund II LP2, 50,224 shares held by Schroder
Ventures International Life Sciences Fund II LP3, 6,828 shares held by
Schroder Ventures International Life Sciences Fund II Strategic Partners
L.P., 12,726 shares held by Sitco Nominees
58
Limited VC-01903 as Nominee of Schroder Ventures International Life
Sciences Fund II Group Co-Investment Scheme and 54,504 shares held by SV
(Nominees) Limited as Nominee of Schroder Ventures Investments Limited.
Schroder Venture Managers Limited is the fund manager for the Schroder
entities. The investment committee of Schroder Venture Managers Limited
consists of Nichola Lawson, Gary Carr, Deborah Speight and Peter Everson,
all of whom share voting and dispositive power over these shares.
(6) Voting and dispositive power for these shares is shared by the board of
directors and managing directors of China Development Industrial Bank. The
board of directors consists of Liu Tai-Ying, Ph.D., Weng-Hsiung Sun,
Carolyn Yeh Shih, Kou-I Yeh, Ming H. Chen, Ching-Jen Chen, Shin-I Lin, C.S.
Chou, Ben Chen, Ching-Jing Sheen, William T. Lin, I. C. Liu, Cheng-Chau
Kuo, Harvey Tang and Yi-Yi Tai. The managing directors consists of Chin
Lin, Frank Chen, Min-Hsun Chen, Yung-San Lee, Ph.D., Sheng-Yann Lii and
Benny T. Hu.
(7) Voting and dispositive power for these shares is shared by the investment
committee and the board of directors of International Biotechnology Trust
PLC. The investment committee consists of Thomas Daniel and Kate Bingham.
The board of directors consists of Andrew Barker, Alan Clifton, Peter
Collacott, Alex Hammond-Chambers and Ian Macgregor.
(8) Includes 99,000 shares of common stock and 66,000 shares issuable upon
exercise of options which are currently exercisable. Also includes
2,561,780 shares held by Sanderling and its related entities. Does not
include options to purchase 20,000 shares of common stock which are not
exercisable within 60 days of this table. Also does not include 84,630
shares held by Sanderling Ventures Management FBO Fred A. Middleton over
which Fred A. Middleton has sole voting and dispositive control. Dr. McNeil
is a general partner of Sanderling. In such capacity, Dr. McNeil may be
deemed to have an indirect pecuniary interest in an indeterminate portion
of the shares beneficially owned by Sanderling and its related entities.
Dr. McNeil disclaims beneficial ownership of the shares held by Sanderling
within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934.
(9) Includes 520,538 shares of common stock. Also includes 22,601 shares of
common stock issuable upon exercise of options. Does not include options to
purchase 5,158 shares of common stock which are not exercisable within 60
days of this table.
(10) Includes 165,215 shares of common stock. Also includes 381,825 shares
issuable upon exercise of options. Does not include options to purchase
278,606 shares of common stock which are not exercisable within 60 days of
this table.
(11) Includes 387,175 shares of common stock. Also includes 13,054 shares of
common stock issuable upon exercise of options. Does not include options to
purchase 1,548 shares of common stock which are not exercisable within 60
days of this table.
(12) Includes 380,124 shares of common stock. Also includes 8,244 shares of
common stock issuable upon exercise of options. Does not include options to
purchase 1,033 shares of common stock which are not exercisable within 60
days of this table.
(13) Includes 118,592 shares issuable upon exercise of options. Does not include
options to purchase 137,658 shares of common stock which are not
exercisable within 60 days of this table.
(14) Includes 106,000 shares issuable upon exercise of options. Does not include
options to purchase 20,000 shares of common stock which are not exercisable
within 60 days of this table.
(15) Includes 66,000 shares issuable upon exercise of options. Does not include
options to purchase 20,000 shares of common stock which are not exercisable
within 60 days of this table.
(16) Includes 66,000 shares issuable upon exercise of options. Does not include
options to purchase 10,000 shares of common stock which are not exercisable
within 60 days of this table
(17) Includes 1,045,962 shares issuable upon exercise of options. Does not
include options to purchase 643,209 shares of common stock which are not
exercisable within 60 days of this table. Please also see footnote 8, as
applicable.
59
DESCRIPTION OF CAPITAL STOCK
The following description of the material terms of our capital stock is
qualified by reference to our amended and restated certificate of incorporation,
the amended and restated investors' rights agreement, the amended and restated
stockholders rights agreement and applicable law. The descriptions of our common
stock and preferred stock reflect changes to our capital structure that will
occur upon the closing of this offering.
GENERAL
Upon completion of this offering, our authorized capital stock will consist
of 50,000,000 shares of common stock, par value $0.001 per share, 20,187,932 of
which will be issued and outstanding and 5,000,000 shares of preferred stock,
par value $0.001 per share, none of which will be outstanding.
COMMON STOCK
As of June 30, 2003, there were 3,879,088 shares of common stock
outstanding held of record by 39 stockholders.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by stockholders and are not entitled to cumulate their
votes in election of directors. All shares of common stock rank equally as to
voting and all other matters. Subject to the prior rights of holders of
preferred stock, the holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the board of
directors out of funds legally available for payment. Such dividends may be paid
in cash, property, or shares of common stock. The shares of our common stock
have no preemptive or conversion rights, no redemption or sinking fund
provisions and are not liable for further call or assessment. The outstanding
shares of our common stock are, and all shares of common stock to be outstanding
upon completion of this offering will be, validly issued, fully paid and
non-assessable.
PREFERRED STOCK
Upon the closing of this offering, the board of directors will be
authorized, without further stockholder approval, to issue from time to time up
to an aggregate of 5,000,000 shares of preferred stock in one or more series and
to fix or alter the designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each such series thereof, including
the dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption including sinking fund provisions, redemption price or prices,
liquidation preferences and the number of shares constituting any series or
designations of such series. The issuance of preferred stock could have the
effect of delaying, deferring or preventing a change in control of Aderis. We
have no present plans to issue any shares of preferred stock.
WARRANTS
As of June 30, 2003, we had outstanding a warrant to purchase 225,060
shares of common stock at an exercise price of $3.64 per share, which expires on
March 30, 2006. This warrant contains provisions for the adjustment of the
exercise price and the aggregate number of shares issuable upon the exercise of
the warrant in the event of stock dividends, stock splits, reorganizations,
reclassifications and consolidations.
REGISTRATION RIGHTS
Upon the completion of this offering, assuming exercise of all outstanding
warrants, conversion of the outstanding shares of preferred stock and conversion
to common stock of the shares of preferred stock to be issued to the former
shareholders of Renalogics upon the closing of this offering, the holders of
11,362,858 shares of common stock or their transferees will be entitled to
rights to register these shares under the Securities Act of 1933. If we propose
to register any of our securities under the Securities Act, either for our own
account or for the account of other security holders, the holders of these
shares will be entitled to notice of the registration and will be entitled to
include, at our expense, their shares of common stock. In
60
addition, the holders of these shares may require us, at our expense and on not
more than two occasions at any time beginning approximately six months from the
date of the closing of this offering, to file a registration statement under the
Securities Act covering their shares of common stock, and we will be required to
use our best efforts to have the registration statement declared effective.
Further, the holders may require us at our expense to register their shares on
Form S-3 when this form becomes available. These rights shall terminate on the
earlier of five years after the effective date of this offering, or when a
holder is able to sell all its shares pursuant to Rule 144 under the Securities
Act in any 90-day period. Attached to these registration rights are conditions
and limitations, including the right of the underwriters to limit the number of
shares included in the registration statement.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND CHARTER
PROVISIONS
In general, Section 203 of the Delaware General Corporation Law prohibits a
publicly held Delaware corporation from engaging in any business combination
with any interested stockholder for a period of three years following the date
that the stockholder became an interested stockholder unless:
- prior to the date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced;
- excluding those shares owned by persons who are directors and also
officers, and employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held under the
plan will be tendered in a tender or exchange offer; or
- on or subsequent to the date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines "business combination" to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
- in general, any transaction that results in the issuance or transfer by
the corporation of any stock of the corporation to the interested
stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% of more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
Our certificate of incorporation and bylaws include a number of provisions
that may have the effect of deterring hostile takeovers or delaying or
preventing changes in control of our company. Our certificate of incorporation
provides that all stockholder actions upon completion of this offering must be
effected at a duly called meeting of holders and not by a consent in writing.
Second, our bylaws provide that special meetings of the holders may be called
only by the chairman of the board of directors, the chief executive officer, or
our board of directors pursuant to a resolution adopted by a majority of the
total number of authorized directors. Third, our certificate of incorporation
provides that our board of directors can issue up to 5,000,000 shares of
preferred stock, as described under "-- Preferred Stock" above. Finally, our
bylaws establish procedures, including advance notice procedures with regard to
the nomination of candidates for election as directors and
61
stockholder proposals. These provisions of our certificate of incorporation and
bylaws could discourage potential acquisition proposals and could delay or
prevent a change in our control or management.
NATIONAL MARKET LISTING
We have applied to have our common stock approved for quotation on the
Nasdaq Stock Market's National Market under the symbol "ADPX."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is .
62
SHARES ELIGIBLE FOR FUTURE SALE
We will have shares of our common stock outstanding after the
completion of this offering ( shares if the underwriters'
over-allotment is exercised in full). Of those shares, the shares of
common stock sold in the offering ( shares if the underwriters'
over-allotment option is exercised in full) will be freely transferable without
restriction, unless purchased by persons deemed to be our "affiliates" as that
term is defined in Rule 144 under the Securities Act. Any shares purchased by an
affiliate may not be resold except pursuant to an effective registration
statement or an applicable exemption from registration, including an exemption
under Rule 144. The remaining shares of common stock to be outstanding
immediately following the completion of this offering are "restricted," which
means they were originally sold in offerings that were not registered under the
Securities Act. These restricted shares may only be sold through registration
under the Securities Act or under an available exemption from registration, such
as provided through Rule 144 promulgated under the Securities Act. As of the
effective date of this offering, all of our officers, directors and certain
other security holders, holding in the aggregate approximately % of our
outstanding common stock, have entered into lock-up agreements pursuant to which
they have agreed, subject to limited exceptions, not to offer or sell any shares
of common stock or securities convertible into or exchangeable or exercisable
for shares of common stock for a period of 180 days from the date of this
prospectus without the prior written consent of Lehman Brothers Inc. See
"Underwriting." After the 180-day lock-up period, these shares may be sold in
accordance with Rule 144.
After the offering, the holders of shares of our common stock (including
225,060 shares issuable upon exercise of outstanding warrants) will be entitled
to registration rights. For more information on these registration rights, see
"Description of Capital Stock -- Registration Rights."
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares of our common stock for one year or more, may sell in the open market
within any three-month period a number of shares that does not exceed the
greater of:
- one percent of the then outstanding shares of our common stock
(approximately shares immediately after the offering); or
- the average weekly trading volume in the common stock on the Nasdaq
National Market during the four calendar weeks preceding the sale.
Sales under Rule 144 are also subject to certain limitations on the manner
of sale, notice requirements and the availability or our current public
information. A person (or persons whose shares are aggregated) who is deemed not
to have been our affiliate at any time during the 90 days preceding a sale by
him and who has beneficially owned his shares for at least two years, may sell
the shares in the public market under Rule 144(k) without regard to the volume
limitations, manner of sale provisions, notice requirements or the availability
of current public information we refer to above.
Any of our employees, officers, directors or consultants who purchased his
or her shares before the date of completion of this offering or who holds
options as of that date pursuant to a written compensatory plan or contract is
entitled to rely on the resale provisions of Rule 701, which permits
non-affiliates to sell their Rule 701 shares without having to comply with the
public information, holding period, volume limitation or notice provisions of
Rule 144 and permits affiliates to sell their Rule 701 shares without having to
comply with Rule 144's holding-period restrictions, in each case commencing 90
days after completion of this offering.
63
UNDERWRITING
GENERAL
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, each of the underwriters
named below for whom Lehman Brothers Inc., CIBC World Markets Corp. and U.S.
Bancorp Piper Jaffray Inc. are acting as representatives, has agreed to purchase
from us the number of shares of common stock shown opposite its name below:
<Table>
<Caption>
NUMBER OF
UNDERWRITERS SHARES
- ------------ ---------
Lehman Brothers Inc.........................................
CIBC World Markets Corp.....................................
U.S. Bancorp Piper Jaffray Inc..............................
Total..................................................
</Table>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement, including:
- the obligation to purchase all of the shares of common stock offered
hereby if any of the shares are purchased;
- the representations and warranties made by us to the underwriters are
true;
- there is no material change in the financial markets; and
- we deliver customary closing documents to the underwriters.
OVER-ALLOTMENT OPTION
We have granted to the underwriters an option to purchase up to an
aggregate of additional shares of common stock, exercisable to cover
over-allotments, if any, at the public offering price less the underwriting
discount shown on the cover page of this prospectus. The underwriters may
exercise this option at any time, and from time to time, until 30 days after the
date of the underwriting agreement. To the extent the underwriters exercise this
option, each underwriter will be committed, so long as the conditions of the
underwriting agreement are satisfied, to purchase a number of additional shares
of common stock proportionate to that underwriter's initial commitment as
indicated in the preceding table, and we will be obligated to sell the
additional shares of common stock to the underwriters.
COMMISSIONS AND EXPENSES
The following table summarizes the underwriting discount that we will pay.
These amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase up to an additional shares from us.
The underwriting fee is the difference between the public offering price and the
amount the underwriters pay to purchase the shares from us.
<Table>
<Caption>
NO EXERCISE FULL EXERCISE
----------- -------------
Per share................................................... $ $
Total....................................................... $ $
</Table>
The underwriters have advised us that they propose to offer the shares of
common stock directly to the public at the public offering price presented on
the cover page of this prospectus, and to selected dealers, who may include the
underwriters, at the public offering price less a selling concession not in
excess of $ per share. The underwriters may allow, and the selected
dealers may reallow, a concession not in excess of $ per share to
brokers and dealers. After the offering, the underwriters may change the
offering price and other selling terms.
64
We estimate that the total expenses of this offering, including
registration, filing and listing fees, printing fees and legal and accounting
expenses, but excluding underwriting discounts, will be approximately
$ . We will pay all costs and expenses of this offering.
LOCK-UP AGREEMENTS
We have agreed that, without the prior written consent of Lehman Brothers
Inc., we will not, directly or indirectly, offer, sell or dispose of any common
stock or any securities which may be converted into or exchanged for any common
stock for a period of 180 days from the date of this prospectus. All of our
executive officers, certain directors and other officers and certain others who
hold significant amounts of our common stock, holding in the aggregate
shares of our common stock, have agreed under lock-up agreements not
to, without the prior written consent of Lehman Brothers Inc., directly or
indirectly, offer, sell or otherwise dispose of any common stock or any
securities which may be converted into or exchanged or exercised for any common
stock for a period of 180 days from the date of this prospectus.
OFFERING PRICE DETERMINATION
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be negotiated between the
representatives and us. In determining the initial public offering price of our
common stock, the representatives will consider:
- prevailing market conditions;
- our historical performance and capital structure;
- estimates of our business potential and earnings prospects;
- an overall assessment of our management; and
- the consideration of these factors in relation to market valuation of
companies in related business.
INDEMNIFICATION
We have agreed to indemnify the underwriters against liabilities relating
to the offering, including liabilities under the Securities Act and liabilities
arising from breaches of the representations and warranties contained in the
underwriting agreement, and to contribute to payments that the underwriters may
be required to make for these liabilities. We have further agreed to indemnify
Lehman Brothers Inc. against any liabilities related to the directed share
program described below, including liabilities under the Securities Act.
STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
The underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, and penalty bids or purchases for the purpose
of pegging, fixing or maintaining the price of our common stock, in accordance
with Regulation M under the Securities Exchange Act of 1934:
- Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the
over-allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may close out any short position by either
exercising their over-allotment option and/or purchasing shares in the
open market.
- Stabilizing transactions permit bids to purchase common stock so long as
the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of common stock in the
open market after the distribution has been completed in order to cover
syndicate short positions. In determining the source
65
of shares to close out the short position, the underwriters will
consider, among other things, the price of shares available for purchase
in the open market as compared to the price at which they may purchase
shares through the over-allotment option. If the underwriters sell more
shares than could be covered by the over-allotment option, a naked short
position, the position can only be closed out by buying shares in the
open market. A naked short position is more likely to be created if the
underwriters are concerned that there could be downward pressure on the
price of the shares in the open market after pricing that could adversely
affect investors who purchase in the offering.
- Penalty bids permit the underwriters to reclaim a selling concession from
a syndicate member when the common stock originally sold by the syndicate
member is purchased in a stabilizing or syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may raise or maintain the market price of our common stock or prevent or
slow a decline in the market price of our common stock. As a result, the price
of our common stock may be higher than the price that might otherwise exist in
the open market. The transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.
Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, neither
we nor the underwriters make any representation that the underwriters will
engage in these stabilizing transactions or that any transaction, once
commenced, will not be discontinued without notice.
STAMP TAXES
If you purchase shares of common stock offered in this prospectus, you may
be required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
page of this prospectus.
DIRECTED SHARE PROGRAM
At our request, the underwriters have reserved up to shares, or
% of the common stock offered by this prospectus, for sale under a directed
share program to specified business associates. All of the persons purchasing
the reserved shares must commit to purchase no later than the close of business
on the day following the date of this prospectus. The number of shares available
for sale to the general public will be reduced to the extent these persons
purchase the reserved shares. Shares committed to be purchased by directed share
participants which are not so purchased will be reallocated for sale to the
general public in the offering. All sales of shares pursuant to the directed
share program will be made at the initial public offering price set forth on the
cover page of this prospectus.
DISCRETIONARY SALES
The underwriters have informed us that they will not confirm sales to
accounts over which they exercise discretionary authority in excess of 5% of the
total number of shares offered by them.
ELECTRONIC DISTRIBUTION
A prospectus in electronic format may be made available on Internet sites
or through other online services maintained by one or more of the underwriters
and/or selling group members participating in this offering, or by their
affiliates. In those cases, prospective investors may view offering terms online
and, depending upon the particular underwriter or selling group member,
prospective investors may be allowed to place orders online. The underwriters
may agree with us to allocate a specific number of shares for sale to online
brokerage and account holders. Any such allocation for online distributions will
be made by the representatives on the same basis as other allocations.
Other than the prospectus in electronic format, information contained in
any other web site maintained by an underwriter or selling group member is not
part of this prospectus or the registration statement of
66
which this prospectus forms a part, has not been approved and/or endorsed by us
and should not be relied on by investors in deciding whether to purchase any
shares of common stock. The underwriters and selling group members are not
responsible for information contained in web sites that they do not maintain.
RELATIONSHIPS
The underwriters have performed and may in the future perform investment
banking and advisory services for us from time to time for which they have
received or may in the future receive customary fees and expenses. The
underwriters may, from time to time, engage in transactions with or perform
services for us in the ordinary course of their business.
67
NOTICE TO CANADIAN RESIDENTS
OFFERS AND SALES IN CANADA
This prospectus is not, and under no circumstances is to be construed as,
an advertisement or a public offering of shares in Canada or any province or
territory thereof. Any offer or sale of shares in Canada will be made only under
an exemption from the requirements to file a prospectus with the relevant
Canadian securities regulators and only by a dealer properly registered under
applicable provincial securities laws or, alternatively, pursuant to an
exemption from the dealer registration requirement in the relevant province or
territory of Canada in which such offer or sale is made.
This prospectus is for the confidential use of only those persons to whom
it is delivered by the underwriters in connection with the offering of the
shares into Canada. The underwriters reserve the right to reject all or part of
any offer to purchase shares for any reason or allocate to any purchaser less
than all of the shares for which it has subscribed.
RESPONSIBILITY
Except as otherwise expressly required by applicable law or as agreed to in
contract, no representation, warranty, or undertaking (express or implied) is
made and no responsibilities or liabilities of any kind or nature whatsoever are
accepted by any underwriter or dealer as to the accuracy or completeness of the
information contained in this prospectus or any other information provided by us
in connection with the offering of the shares into Canada.
RESALE RESTRICTIONS
The distribution of the shares in Canada is being made on a private
placement basis only and is exempt from the requirement that we prepare and file
a prospectus with the relevant Canadian regulatory authorities. Accordingly, any
resale of the shares must be made in accordance with applicable securities laws,
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with exemptions from registration and
prospectus requirements. Canadian purchasers are advised to seek legal advice
prior to any resale of the shares.
REPRESENTATIONS OF PURCHASERS
Each Canadian investor who purchases shares will be deemed to have
represented to us, the underwriters and any dealer who sells shares to such
purchaser that: (i) the offering of the shares was not made through an
advertisement of the shares in any printed media of general and regular paid
circulation, radio, television or telecommunications, including electronic
display, or any other form of advertising in Canada; (ii) such purchaser has
reviewed the terms referred to above under "Resale Restrictions" above; (iii)
where required by law, such purchaser is purchasing as principal for its own
account and not as agent; and (iv) such purchaser or any ultimate purchaser for
which such purchaser is acting as agent is entitled under applicable Canadian
securities laws to purchase such shares without the benefit of a prospectus
qualified under such securities laws, and without limiting the generality of the
foregoing; (a) in the case of a purchaser located in a province other than
Ontario and Newfoundland and Labrador, without the dealer having to be
registered, (b) in the case of a purchaser located in a province other than
Ontario or Quebec, such purchaser is an "accredited investor" as defined in
section 1.1 of Multilateral Instrument 45-103 -- Capital Raising Exemptions, (c)
in the case of a purchaser located in Ontario, such purchaser, or any ultimate
purchaser for which such purchaser is acting as agent, is an "accredited
investor", other than an individual, as that term is defined in Ontario
Securities Commission Rule 45-501 -- Exempt Distributions and is a person to
which a dealer registered as an international dealer in Ontario may sell shares,
and (d) in the case of a purchaser located in Quebec, such purchaser is a
"sophisticated purchaser" within the meaning of section 44 or 45 of the
Securities Act (Quebec).
68
TAXATION AND ELIGIBILITY FOR INVESTMENT
Any discussion of taxation and related matters contained in this prospectus
does not purport to be a comprehensive description of all the tax considerations
that may be relevant to a decision to purchase the shares. Canadian purchasers
of shares should consult their own legal and tax advisers with respect to the
tax consequences of an investment in the shares in their particular
circumstances and with respect to the eligibility of the shares for investment
by the purchaser under relevant Canadian federal and provincial legislation and
regulations.
RIGHTS OF ACTION FOR DAMAGES OR RESCISSION
(ONTARIO)
Securities legislation in Ontario provides that every purchaser of shares
pursuant to this prospectus shall have a statutory right of action for damages
or rescission against us in the event this prospectus contains a
misrepresentation as defined in the Securities Act (Ontario). Ontario purchasers
who purchase shares offered by this prospectus during the period of distribution
are deemed to have relied on the misrepresentation if it was a misrepresentation
at the time of purchase. Ontario purchasers who elect to exercise a right of
rescission against us on whose behalf the distribution is made shall have no
right of action for damages against us. The right of action for rescission or
damages conferred by the statute is in addition to, and without derogation from,
any other right the purchaser may have at law. Prospective Ontario purchasers
should refer to the applicable provisions of Ontario securities legislation and
are advised to consult their own legal advisers as to which, or whether any, of
such rights or other rights may be available to them.
The foregoing summary is subject to the express provisions of the
Securities Act (Ontario) and the rules, regulations and other instruments
thereunder, and reference is made to the complete text of such provisions
contained therein. Such provisions may contain limitations and statutory
defenses on which we may rely. The enforceability of these rights may be limited
as described herein under "Enforcement of Legal Rights".
The rights of action discussed above will be granted to the purchasers to
whom such rights are conferred upon acceptance by the relevant dealer of the
purchase price for the shares. The rights discussed above are in addition to and
without derogation from any other right or remedy which purchasers may have at
law. Similar rights may be available to investors in other Canadian provinces.
ENFORCEMENT OF LEGAL RIGHTS
We are organized under the laws of the State of Delaware in the United
States of America. All, or substantially all, of our directors and officers, as
well as the experts named herein, may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon us or such persons. All or a substantial portion of
our assets and those of such other persons may be located outside of Canada and,
as a result, it may not be possible to satisfy a judgement against us or such
persons in Canada or to enforce a judgement obtained in Canadian courts against
us or such persons outside of Canada.
LANGUAGE OF DOCUMENTS
Upon receipt of this document, you hereby confirm that you have expressly
requested that all documents evidencing or relating in any way to the sale of
the securities described herein (including for greater certainty any purchase
confirmation or any notice) be drawn up in the English language only. Par la
reception de ce document, vous confirmez par les presentes que vous avez
expressement exige que tous les documents faisant foi ou se rapportant de
quelque maniere que ce soit a la vente des valeurs mobilieres decrites aux
presentes (incluant, pour plus de certitude, toute confirmation d'achat ou tour
avis) soient rediges en anglais seulement.
69
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Latham & Watkins LLP. Clifford Chance US LLP is counsel for the
underwriters in connection with this offering.
EXPERTS
The consolidated financial statements of Aderis Pharmaceuticals, Inc. and
subsidiary as of and for the years ended December 31, 2001 and 2002, included in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The consolidated financial statements for the year ended December 31, 2000
of Aderis Pharmaceuticals, Inc. and subsidiary, formerly Discovery Therapeutics,
Inc., included in this prospectus and elsewhere in the registration statement,
had been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of such firm as experts in accounting and auditing
in giving said report. Arthur Andersen LLP has not consented to the inclusion of
their report in this prospectus, and we have not obtained their consent to do so
in reliance upon Rule 437a of the Securities Act of 1933.
CHANGE IN INDEPENDENT AUDITORS
On August 5, 2002, upon the recommendation of our audit committee and
authorization by our board of directors, we dismissed Arthur Andersen LLP as our
independent accountants and engaged Deloitte & Touche LLP as our independent
accountants.
During the year ended December 31, 2000, and the interim period from
December 31, 2000 to August 4, 2002, Arthur Andersen did not have any
disagreement with us on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of Arthur Andersen, would have
caused it to make reference to the subject matter of the disagreement in
connection with its report on our financial statements. The report of Arthur
Andersen on our consolidated financial statements as presented in this
prospectus for our fiscal year ended December 31, 2000 did not contain an
adverse opinion or disclaimer of opinion, and was not qualified or modified as
to uncertainty, audit scope or accounting principles. We did not consult with
Deloitte & Touche on any financial or accounting reporting matters in the period
before its appointment.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 (including the exhibits, schedules and amendments thereto)
under the Securities Act with respect to the shares of common stock to be sold
in this offering. This prospectus does not contain all the information set forth
in the registration statement. For further information regarding us and our
shares of common stock to be sold in this offering, please refer to the
registration statement.
You may read and copy all or any portion of the registration statement or
any other information that we file at the Securities and Exchange Commission's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
request copies of these documents, upon payment of a duplicating fee, by writing
to the Securities and Exchange Commission. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information on the operation
of the public reference rooms. Our Securities and Exchange Commission filings,
including the registration statement, are also available to you on the
Securities and Exchange Commission's website (http://www.sec.gov).
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934, as amended, and,
in accordance therewith, will file periodic reports, proxy statements and other
information with the Securities and Exchange Commission.
70
INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----------
Independent Auditors' Report -- 2001 and 2002............... F-2
Report of Independent Public Accountants -- 2000............ F-3
Consolidated Balance Sheets as of December 31, 2001 and 2002
and June 30, 2003 (unaudited)............................. F-4
Consolidated Statements of Operations and Comprehensive Loss
for the Years Ended December 31, 2000, 2001 and 2002 and
for the Six Months Ended June 30, 2002 and 2003
(unaudited)............................................... F-5
Consolidated Statements of Convertible Preferred Stock and
Stockholders' Deficit for the Years Ended December 31,
2000, 2001, and 2002 and for the Six Months Ended June 30,
2003 (unaudited).......................................... F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 2001 and 2002 and for the Six Months
Ended June 30, 2002 and 2003 (unaudited).................. F-7
Notes to Consolidated Financial Statements.................. F-8 - F-22
</Table>
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Aderis Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of Aderis
Pharmaceuticals, Inc. and subsidiary (the "Company") as of December 31, 2001 and
2002, and the related consolidated statements of operations and comprehensive
loss, convertible preferred stock and stockholders' deficit, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. The
Company's consolidated financial statements for the year ended December 31, 2000
were audited by other auditors who have ceased operations. Those auditors
expressed an unqualified opinion on those consolidated financial statements in
their report dated August 22, 2001.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
2001 and 2002, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
June 27, 2003
F-2
THIS IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP. THIS REPORT
HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP NOR HAS ARTHUR ANDERSEN LLP
PROVIDED A CONSENT TO THE INCLUSION OF ITS REPORT IN THESE FINANCIAL STATEMENTS.
THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999, AS RESTATED, AND 2000 AND FOR
THE YEARS ENDED 1998 AND 1999 AND FOR THE PERIOD FROM INCEPTION (APRIL 22, 1994)
TO DECEMBER 31, 2000, AS RESTATED, ARE NOT PRESENTED HEREIN. ON JANUARY 4, 2002,
DISCOVERY THERAPEUTICS, INC. CHANGED ITS NAME TO ADERIS PHARMACEUTICALS, INC.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Discovery Therapeutics, Inc.:
We have audited the accompanying consolidated balance sheets of Discovery
Therapeutics, Inc. (a Delaware Corporation) as of December 31, 1999, as
restated, and 2000 and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the years in the
three-year period ended December 31, 2000 and for the period from inception
(April 22, 1994) to December 31, 2000, as restated. These financial statements
are the responsibility of Discovery Therapeutics, Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Note 1, the accompanying consolidated financial statements
for the years ended December 31, 1998 and 1999 have been restated to reflect
revised revenue recognition to comply with recent account pronouncements and
revised accounting in connection with the acquisition of Renalogics, Inc.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Discovery
Therapeutics, Inc. as of December 31, 1999 and 2000 and the results of its
operations and cash flows for each of the years in the three-year period ended
December 31, 2000 and for the period from inception (April 22, 1994) to December
31, 2000 in conformity with accounting principles generally accepted in the
United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
August 22, 2001
F-3
ADERIS PHARMACEUTICALS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
--------------------------- JUNE 30,
2001 2002 2003
------------ ------------ ------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents.............................. $ 42,820,944 $ 14,040,526 $ 3,583,726
Marketable securities.................................. -- 17,157,057 22,703,019
Prepaid expenses and other current assets.............. 152,497 789,139 659,266
------------ ------------ ------------
Total current assets................................. 42,973,441 31,986,722 26,946,011
Property and Equipment, net.............................. 365,058 782,490 759,514
Other Assets............................................. 123,500 -- --
------------ ------------ ------------
Total Assets............................................. $ 43,461,999 $ 32,769,212 $ 27,705,525
============ ============ ============
LIABILITIES, CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable....................................... $ 169,774 $ 528,980 $ 362,611
Accrued expenses and other current liabilities......... 1,975,674 958,791 859,683
Deferred revenues...................................... -- 846,525 --
------------ ------------ ------------
Total current liabilities............................ 2,145,448 2,334,296 1,222,294
Commitments and Contingencies (Note 6)
Convertible Preferred Stock, $0.001 par value:
Undesignated convertible preferred stock --
Authorized -- 203,647 shares
Issued and outstanding -- none....................... -- -- --
Series A Convertible Preferred Stock --
Authorized -- 666,667 shares
Issued and outstanding -- 666,667 shares at December
31, 2001, 2002 and June 30, 2003 (liquidation
value of $500,000 at December 31, 2002)........... 480,303 480,303 480,303
Series B Convertible Preferred Stock --
Authorized -- 1,500,000 shares
Issued and outstanding -- 1,316,909 shares at
December 31, 2001, 2002 and June 30, 2003
(liquidation value of $7,901,454 at December 31,
2002)............................................. 7,844,443 7,844,443 7,844,443
Series C Convertible Preferred Stock --
Authorized -- 538,776 shares
Issued and outstanding -- 538,776 shares at December
31, 2001, 2002 and June 30, 2003 (liquidation
value of $5,500,903 at December 31, 2002)......... 5,484,110 5,484,110 5,484,110
Series D Convertible Preferred Stock --
Authorized -- 4,090,910 shares
Issued and outstanding -- 4,076,834 shares at
December 31, 2001, 2002 and June 30, 2003,
(liquidation value of $44,845,174 at December 31,
2002)............................................. 42,406,576 42,406,576 42,406,576
------------ ------------ ------------
Total convertible preferred stock................. 56,215,432 56,215,432 56,215,432
Stockholders' Deficit:
Common stock, $0.001 par value --
Authorized -- 50,000,000 shares
Issued and outstanding -- 2,961,478 and 3,879,088
shares at December 31, 2001 and 2002,
respectively, and 3,879,088 shares at June 30,
2003.............................................. 2,961 3,879 3,879
Additional paid-in capital............................. 15,321,587 15,471,580 18,277,687
Deferred compensation.................................. (5,636,169) (2,243,992) (3,226,331)
Accumulated other comprehensive income................. -- 12,752 10,682
Accumulated deficit.................................... (24,587,260) (39,024,735) (44,798,118)
------------ ------------ ------------
Total stockholders' deficit....................... (14,898,881) (25,780,516) (29,732,201)
------------ ------------ ------------
Total Liabilities, Convertible Preferred Stock, and
Stockholders' Deficit.................................. $ 43,461,999 $ 32,769,212 $ 27,705,525
============ ============ ============
</Table>
See notes to consolidated financial statements.
F-4
ADERIS PHARMACEUTICALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<Table>
<Caption>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------- -------------------------
2000 2001 2002 2002 2003
----------- ------------ ------------ ----------- -----------
(UNAUDITED)
Revenues:
License fees and
collaboration
revenues(a).............. $ 2,967,071 $ 5,829,093 $ 3,153,475 $ 1,500,000 $ 846,525
Costs and Expenses:
Research and
development(a)........... 5,116,510 6,006,576 8,123,775 4,731,439 2,552,697
General and
administrative........... 2,040,592 3,926,586 6,850,328 2,327,997 2,537,331
Stock-based
compensation(b).......... 230,603 7,248,881 3,218,802 1,899,152 1,823,768
Royalty expense............. 48,372 617,907 90,000 10,000 10,000
Write-offs of purchased
technology............... 724,242 -- -- -- --
----------- ------------ ------------ ----------- -----------
8,160,319 17,799,950 18,282,905 8,968,588 6,923,796
----------- ------------ ------------ ----------- -----------
Loss from operations... (5,193,248) (11,970,857) (15,129,430) (7,468,588) (6,077,271)
----------- ------------ ------------ ----------- -----------
Other Income (Expense):
Interest income............. 246,877 889,882 692,115 362,633 299,560
Other income (expense)...... 3,848 -- (160) (160) 4,328
----------- ------------ ------------ ----------- -----------
250,725 889,882 691,955 362,473 303,888
----------- ------------ ------------ ----------- -----------
Net loss............... (4,942,523) (11,080,975) (14,437,475) (7,106,115) (5,773,383)
Unrealized Gain (Loss) on
Marketable Securities....... -- -- 12,752 -- (2,070)
----------- ------------ ------------ ----------- -----------
Comprehensive loss..... $(4,942,523) $(11,080,975) $(14,424,723) $(7,106,115) $(5,775,453)
=========== ============ ============ =========== ===========
Net Loss per Common Share
(Note 2):
Basic and diluted........... $ (1.87) $ (3.97) $ (3.87) $ (1.95) $ (1.49)
=========== ============ ============ =========== ===========
Unaudited pro forma basic
and diluted.............. $ (0.96) $ (0.38)
============ ===========
Weighted-Average Common Shares
Outstanding:
Basic and diluted........ 2,637,726 2,790,255 3,729,342 3,643,764 3,879,088
=========== ============ ============ =========== ===========
Unaudited pro forma basic
and diluted............ 15,038,186 15,187,932
============ ===========
Explanatory:
(a) The following summarizes
revenues and expenses from
related parties:
License fees and
collaboration
revenues.............. $ 673,019 $ 4,000,000 $ 1,500,000 $ 1,500,000 $ --
Research and development
expense............... $ 1,500,000 $ -- $ -- $ -- $ --
(b) The following summarizes
the allocation of the
stock-based compensation
charge:
Research and
development........... $ 32,297 $ 777,153 $ 830,284 $ 540,069 $ 740,706
General and
administrative........ 198,306 6,471,728 2,388,518 1,359,083 1,083,062
----------- ------------ ------------ ----------- -----------
$ 230,603 $ 7,248,881 $ 3,218,802 $ 1,899,152 $ 1,823,768
=========== ============ ============ =========== ===========
</Table>
See notes to consolidated financial statements.
F-5
ADERIS PHARMACEUTICALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002 AND SIX MONTHS ENDED JUNE 30, 2003
<Table>
<Caption>
CONVERTIBLE PREFERRED STOCK
---------------------------------------------
SERIES A CONVERTIBLE SERIES B CONVERTIBLE
-------------------- ----------------------
NUMBER OF CARRYING NUMBER OF CARRYING
SHARES VALUE SHARES VALUE
--------- -------- --------- ----------
Balance, January 1, 2000........... 666,667 $480,303 1,316,909 $7,844,443
Issuance of Series C Convertible
Preferred Stock, net of issuance
costs of $16,793 -- -- -- --
Stock-based compensation expense
related to options granted to
nonemployees...................... -- -- -- --
Deferred compensation on stock
options granted................... -- -- -- --
Amortization of deferred
compensation...................... -- -- -- --
Acceleration of vesting of stock
options........................... -- -- -- --
Exercise of stock options.......... -- -- -- --
Net loss........................... -- -- -- --
------- -------- --------- ----------
Balance, December 31, 2000......... 666,667 480,303 1,316,909 7,844,443
Issuance of Series D convertible
preferred stock, net of issuance
costs of $2,438,598............... -- -- -- --
Stock-based compensation expense
related to options granted to
nonemployees...................... -- -- -- --
Deferred compensation on stock
options granted................... -- -- -- --
Amortization of deferred
compensation...................... -- -- -- --
Acceleration of vesting of stock
options........................... -- -- -- --
Stock-based compensation expense
related to cashless exercise...... -- -- -- --
Exercise of stock options.......... -- -- -- --
Net loss........................... -- -- -- --
------- -------- --------- ----------
Balance, December 31, 2001......... 666,667 480,303 1,316,909 7,844,443
Exercise of stock options.......... -- -- -- --
Deferred compensation on stock
options granted................... -- -- -- --
Stock-based compensation expense
related to options granted to
nonemployees...................... -- -- -- --
Unamortized deferred compensation
on cancelled stock options........
Amortization of deferred
compensation...................... -- -- -- --
Unrealized gain on marketable
securities........................
Net loss........................... -- -- -- --
------- -------- --------- ----------
Balance, December 31, 2002......... 666,667 480,303 1,316,909 7,844,443
Deferred compensation on stock
options granted (unaudited)....... -- -- -- --
Stock-based compensation expense
related to options granted to
nonemployees (unaudited).......... -- -- -- --
Acceleration of vesting of stock
options (unaudited)............... -- -- -- --
Amortization of deferred
compensation (unaudited).......... -- -- -- --
Unrealized loss on marketable
securities........................
Net loss (unaudited)............... -- -- -- --
------- -------- --------- ----------
Balance, June 30, 2003
(unaudited)....................... 666,667 $480,303 1,316,909 $7,844,443
======= ======== ========= ==========
<Caption>
CONVERTIBLE PREFERRED STOCK
------------------------------------------------
SERIES C CONVERTIBLE SERIES D CONVERTIBLE COMMON STOCK
---------------------- ----------------------- ---------
NUMBER OF CARRYING NUMBER OF CARRYING NUMBER OF
SHARES VALUE SHARES VALUE SHARES
--------- ---------- --------- ----------- ---------
Balance, January 1, 2000........... -- $ -- -- $ -- 2,652,928
Issuance of Series C Convertible
Preferred Stock, net of issuance
costs of $16,793 538,776 5,484,110 -- -- --
Stock-based compensation expense
related to options granted to
nonemployees...................... -- -- -- -- --
Deferred compensation on stock
options granted................... -- -- -- -- --
Amortization of deferred
compensation...................... -- -- -- -- --
Acceleration of vesting of stock
options........................... -- -- -- -- --
Exercise of stock options.......... -- -- -- -- 8,250
Net loss........................... -- -- -- -- --
------- ---------- --------- ----------- ---------
Balance, December 31, 2000......... 538,776 5,484,110 -- -- 2,661,178
Issuance of Series D convertible
preferred stock, net of issuance
costs of $2,438,598............... -- -- 4,076,834 42,406,576 --
Stock-based compensation expense
related to options granted to
nonemployees...................... -- -- -- -- --
Deferred compensation on stock
options granted................... -- -- -- -- --
Amortization of deferred
compensation...................... -- -- -- -- --
Acceleration of vesting of stock
options........................... -- -- -- -- --
Stock-based compensation expense
related to cashless exercise...... -- -- -- -- 135,300
Exercise of stock options.......... -- -- -- -- 165,000
Net loss........................... -- -- -- -- --
------- ---------- --------- ----------- ---------
Balance, December 31, 2001......... 538,776 5,484,110 4,076,834 42,406,576 2,961,478
Exercise of stock options.......... -- -- -- -- 917,610
Deferred compensation on stock
options granted................... -- -- -- -- --
Stock-based compensation expense
related to options granted to
nonemployees...................... -- -- -- -- --
Unamortized deferred compensation
on cancelled stock options........
Amortization of deferred
compensation...................... -- -- -- -- --
Unrealized gain on marketable
securities........................
Net loss........................... -- -- -- -- --
------- ---------- --------- ----------- ---------
Balance, December 31, 2002......... 538,776 5,484,110 4,076,834 42,406,576 3,879,088
Deferred compensation on stock
options granted (unaudited)....... -- -- -- -- --
Stock-based compensation expense
related to options granted to
nonemployees (unaudited).......... -- -- -- -- --
Acceleration of vesting of stock
options (unaudited)............... -- -- -- -- --
Amortization of deferred
compensation (unaudited).......... -- -- -- -- --
Unrealized loss on marketable
securities........................
Net loss (unaudited)............... -- -- -- -- --
------- ---------- --------- ----------- ---------
Balance, June 30, 2003
(unaudited)....................... 538,776 $5,484,110 4,076,834 $42,406,576 3,879,088
======= ========== ========= =========== =========
<Caption>
COMMON STOCK
--------- ADDITIONAL OTHER TOTAL
PAID-IN DEFERRED COMPREHENSIVE ACCUMULATED STOCKHOLDERS
PAR VALUE CAPITAL COMPENSATION INCOME DEFICIT DEFICIT
--------- ----------- ------------ ------------- ------------ ------------
Balance, January 1, 2000........... $2,653 $ 907,291 $ -- $ -- $(8,563,762) $ (7,653,818)
Issuance of Series C Convertible
Preferred Stock, net of issuance
costs of $16,793 -- -- -- -- -- --
Stock-based compensation expense
related to options granted to
nonemployees...................... -- 23,154 -- -- -- 23,154
Deferred compensation on stock
options granted................... -- 1,109,313 (1,109,313) -- -- --
Amortization of deferred
compensation...................... -- -- 144,335 -- -- 144,335
Acceleration of vesting of stock
options........................... -- 63,114 -- -- -- 63,114
Exercise of stock options.......... 8 242 -- -- -- 250
Net loss........................... -- -- -- -- (4,942,523) (4,942,523)
------ ----------- ------------ -------- ------------ ------------
Balance, December 31, 2000......... 2,661 2,103,114 (964,978) -- (13,506,285) (12,365,488)
Issuance of Series D convertible
preferred stock, net of issuance
costs of $2,438,598............... -- 1,238,701 -- -- -- 1,238,701
Stock-based compensation expense
related to options granted to
nonemployees...................... -- 230,082 -- -- -- 230,082
Deferred compensation on stock
options granted................... -- 10,757,341 (10,757,341) -- -- --
Amortization of deferred
compensation...................... -- -- 6,086,150 -- -- 6,086,150
Acceleration of vesting of stock
options........................... -- 743,536 -- -- -- 743,536
Stock-based compensation expense
related to cashless exercise...... 135 188,978 -- -- -- 189,113
Exercise of stock options.......... 165 59,835 -- -- -- 60,000
Net loss........................... -- -- -- -- (11,080,975) (11,080,975)
------ ----------- ------------ -------- ------------ ------------
Balance, December 31, 2001......... 2,961 15,321,587 (5,636,169) -- (24,587,260) (14,898,881)
Exercise of stock options.......... 918 323,368 -- -- -- 324,286
Deferred compensation on stock
options granted................... -- 35,300 (35,300) -- -- --
Stock-based compensation expense
related to options granted to
nonemployees...................... -- 246,659 -- -- -- 246,659
Unamortized deferred compensation
on cancelled stock options........ (455,334) 455,334 -- --
Amortization of deferred
compensation...................... -- -- 2,972,143 -- -- 2,972,143
Unrealized gain on marketable
securities........................ 12,752 -- 12,752
Net loss........................... -- -- -- -- (14,437,475) (14,437,475)
------ ----------- ------------ -------- ------------ ------------
Balance, December 31, 2002......... 3,879 15,471,580 (2,243,992) 12,752 (39,024,735) (25,780,516)
Deferred compensation on stock
options granted (unaudited)....... -- 2,301,408 (2,301,408) -- -- --
Stock-based compensation expense
related to options granted to
nonemployees (unaudited).......... -- 194,510 -- -- -- 194,510
Acceleration of vesting of stock
options (unaudited)............... -- 310,189 -- -- -- 310,189
Amortization of deferred
compensation (unaudited).......... -- -- 1,319,069 -- -- 1,319,069
Unrealized loss on marketable
securities........................ (2,070) -- (2,070)
Net loss (unaudited)............... -- -- -- -- (5,773,383) (5,773,383)
------ ----------- ------------ -------- ------------ ------------
Balance, June 30, 2003
(unaudited)....................... $3,879 $18,277,687 $(3,226,331) $ 10,682 $(44,798,118) $(29,732,201)
====== =========== ============ ======== ============ ============
</Table>
See notes to consolidated financial statements.
F-6
ADERIS PHARMACEUTICALS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------------------------- --------------------------
2000 2001 2002 2002 2003
----------- ------------ ------------ ----------- ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss.......................... $(4,942,523) $(11,080,975) $(14,437,475) $(7,106,115) $ (5,773,383)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization... 501,958 60,978 167,847 60,875 130,148
Write-off of purchased
technology.................... 724,242 -- -- -- --
Stock-based compensation expense
related to options to
employees and nonemployees.... 230,603 7,248,881 3,218,802 1,899,152 1,823,768
Changes in operating assets and
liabilities:
Accounts receivable........... 83,333 -- -- -- --
Prepaids and other current
assets..................... 61,267 (150,224) (636,642) (334,401) 129,873
Income tax refund
receivable................. 52,500 -- -- -- --
Other assets.................. (17,960) (105,540) 123,500 (1,715,874) --
Accounts payable.............. (279,213) 139,801 359,206 921,555 (166,369)
Accrued expenses and other
current liabilities........ 749,596 1,103,075 (1,016,883) (980,307) (99,108)
Deferred revenues............. (141,596) (1,829,093) 846,525 -- (846,525)
----------- ------------ ------------ ----------- ------------
Net cash used in operating
activities........................ (2,977,793) (4,613,097) (11,375,120) (7,255,115) (4,801,596)
----------- ------------ ------------ ----------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and
equipment....................... (28,740) (389,398) (585,279) (495,692) (107,172)
(Purchase) maturities of
marketable securities, net...... -- -- (17,144,305) -- (5,548,032)
----------- ------------ ------------ ----------- ------------
Net cash used in investing
activities........................ (28,740) (389,398) (17,729,584) (495,692) (5,655,204)
----------- ------------ ------------ ----------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net proceeds from issuance of
Series C Convertible Preferred
Stock........................... 5,484,110 -- -- -- --
Net proceeds from issuance of
Series D Convertible Preferred
Stock........................... -- 43,645,277 -- -- --
Proceeds from exercise of common
stock options................... 250 60,000 324,286 280,726 --
----------- ------------ ------------ ----------- ------------
Net cash provided by financing
activities........................ 5,484,360 43,705,277 324,286 280,726 --
----------- ------------ ------------ ----------- ------------
Net Increase (Decrease) in Cash and
Cash Equivalents.................. 2,477,827 38,702,782 (28,780,418) (7,470,081) (10,456,800)
Cash and Cash Equivalents, Beginning
of period......................... 1,640,335 4,118,162 42,820,944 42,820,944 14,040,526
----------- ------------ ------------ ----------- ------------
Cash and Cash Equivalents, End of
period............................ $ 4,118,162 $ 42,820,944 $ 14,040,526 $35,350,863 $ 3,583,726
=========== ============ ============ =========== ============
</Table>
See notes to consolidated financial statements.
F-7
ADERIS PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 2001, AND 2002 AND
SIX MONTHS ENDED JUNE 30, 2002 AND 2003
(INFORMATION FOR JUNE 30, 2002 AND 2003 IS UNAUDITED)
1. OPERATIONS
Discovery Therapeutics, Inc. ("Discovery") was incorporated in Delaware on
April 22, 1994 to acquire, on April 25, 1994, a research business from Whitby,
Inc., a pharmaceutical company. On January 4, 2002, Discovery changed its name
to Aderis Pharmaceuticals, Inc. (the "Company"). The Company expanded its
business through the acquisition in June 1999 of Renalogics, Inc.
("Renalogics"), a company engaged in the development and commercialization of
products for treatment of glumorolonephritis and other diseases (see Note 12).
The Company's primary activity is to engage in the discovery and development of
its portfolio compounds and the subsequent commercialization of products
utilizing these compounds. These compounds represent therapeutics for disease
states for which there is a significant medical need, including Parkinson's
disease, cardiac disease, and other disorders.
The Company is subject to a number of risks associated with companies in
the biotechnology industry. Principal among these are the risks associated with
the Company's dependence on collaborative arrangements, development by the
Company or its competitors of new technological innovations, dependence on key
personnel, protection of proprietary technology, compliance with the U.S. Food
and Drug Administration and other governmental regulations and approval
requirements, as well as the ability to grow the Company's business and the need
to possibly obtain adequate financing to fund this growth.
The Company was in the development stage at December 31, 2000 and 2001;
during the year ended December 31, 2002, the Company completed its development
activities and commenced its planned principal operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION --
Principles of Consolidation -- The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiary, Renalogics. All intercompany balances and transactions have
been eliminated.
Stock Split -- In March 2002, the Company effected a stock split of
1.65 shares per share of common stock. All common share amounts have been
retroactively restated to reflect the stock split.
Unaudited Interim Financial Statements -- The accompanying
consolidated financial statements as of June 30, 2003 and for the six
months ended June 30, 2002 and 2003 are unaudited. These unaudited
financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all normal recurring adjustments necessary for a fair presentation of the
financial position, results of operations and cash flows for the interim
periods presented have been included. The results of operations for the six
months ended June 30, 2003 are not necessarily an indication of the results
that may be expected for the entire fiscal year or future periods.
USE OF ESTIMATES -- The preparation of the Company's consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of certain assets and liabilities and the
disclosure of certain contingent assets and liabilities at the balance sheet
date and the reported amounts of revenues and expenses during the reporting
period. Actual results may differ from such estimates.
F-8
ADERIS PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION -- The Company has entered into agreements with
pharmaceutical companies under which it (i) licenses product rights to certain
compounds and earns milestone payments (based on the pharmaceutical companies'
successful achievement of certain milestones in the development of the
compound); (ii) renders consulting services; and (iii) is entitled to certain
research and development cost reimbursements. The Company has fulfilled all of
its contractual development obligations as of December 31, 2002, as defined in
the agreements, and any additional development work requested to be performed by
the pharmaceutical company will be charged at a rate to be determined at the
time the work is requested. The Company is recognizing the total expected fees
under these contracts, exclusive of royalties (as the receipt of royalties does
not occur until the successful development and sale of a product, which is a
separate discrete earnings event), as revenue on a straight-line basis over the
estimated development period of the compound to the extent such amount is not
greater than cash received. The Company periodically reviews the estimated
development period and, to the extent such estimate changes, the impact of such
change is recorded in operations at that time. The pharmaceutical companies have
the right to cancel these agreements at any time, and all payments received are
nonrefundable; therefore, no revenue is recognized ahead of cash received.
Deferred revenue consists of payments received in advance of revenue recognized
under these agreements.
CASH AND CASH EQUIVALENTS -- Cash equivalents consist of short-term, highly
liquid investments with maturities of 90 days or less when acquired. Cash
equivalents, which consisted primarily of money market accounts, are stated at
cost, which approximates market value. At December 31, 2002, there were no
unrealized holding gains or losses on cash equivalents.
MARKETABLE SECURITIES -- All of the Company's marketable securities, which
consist primarily of corporate bonds and government obligations, are classified
as securities available for sale in current assets and are carried at fair value
based on quoted market prices. Such securities are held for an indefinite period
of time and are intended to be used to meet the ongoing liquidity needs of the
Company. Unrealized gains and losses, which are deemed to be temporary, are
reported in a separate component of stockholders' deficit. Declines in value
judged to be other-than-temporary, if any, are included in general and
administrative expense in the consolidated statements of operations. The cost of
the debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity. The amortization/accretion is included in interest
income. The cost of securities is based on the specific-identification method.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the related assets.
The estimated useful lives of property and equipment are as follows:
<Table>
<Caption>
ASSET ESTIMATED LIFE
- ----- ------------------------------------------------
Computer equipment.................. 3-5 years
Furniture and fixtures.............. 5 years
Laboratory equipment................ 5 years
Vehicles............................ 5 years
Leasehold improvements.............. Lesser of estimated useful life or life of lease
</Table>
LONG-LIVED ASSETS -- The Company periodically evaluates the potential
impairment of its long-lived assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Upon the
occurrence of a certain event or change in circumstances, the Company evaluates
the potential impairment of an asset based on future undiscounted cash flows
over the estimated remaining useful life of the asset and compares such amount
to the carrying value. If the undiscounted future cash flows are less than the
carrying value, the fair value of the asset is determined. The Company will
measure the amount of such impairment based on the fair value of the related
asset, calculated based on the present value of estimated future cash flows
using a discount rate commensurate with the risks involved, and if such fair
value
F-9
ADERIS PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
is less than the carrying value, the asset is written down to its estimated fair
value. Factors that management considers in performing this assessment include
current operating results, trends and prospects and, in addition, demand,
competition, and other economic factors.
As of December 31, 2000, the Company determined that the value of its
purchased technology was impaired under Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," (see Note 12) and wrote off the
net book value of the purchased technology of $724,242. There were no
impairments of the Company's assets during 2001 or 2002. Amortization expense
related to the Company's intangible assets for the year ended December 31, 2000
was approximately $491,000 and $0 in both 2001 and 2002.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The estimated fair values of cash,
cash equivalents, accounts payable, and accrued expenses approximate carrying
value due to the short-term nature of these instruments. Marketable securities
have been designated as available-for-sale investments and are stated at fair
value.
RESEARCH AND DEVELOPMENT EXPENSES -- Research and development costs are
charged to operations as incurred.
STOCK-BASED COMPENSATION -- The Company accounts for stock-based award
grants to employees and members of the Board of Directors using the
intrinsic-value method under the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations and provides additional footnote disclosure based on the
fair-value method as required by SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB Opinion No. 25, no compensation expense is recognized
for stock awards granted at fair market value with fixed terms.
Had the Company elected to recognize compensation cost on the fair value of
the options granted at the grant date, as prescribed by SFAS No. 123, pro forma
net loss would have been:
<Table>
<Caption>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------- -------------------------
2000 2001 2002 2002 2003
----------- ------------ ------------ ----------- -----------
(UNAUDITED)
Applicable to common
stockholders:
Net loss -- as
reported............. $(4,942,523) $(11,080,975) $(14,437,475) $(7,106,115) $(5,773,383)
Add: Stock-based
compensation expense
included in reported
net loss............. 230,603 7,248,881 3,218,802 1,899,152 1,823,768
Deduct: Stock-based
compensation expense
determined under fair
value method......... (313,125) (7,406,823) (3,425,406) (2,002,454) (1,906,003)
----------- ------------ ------------ ----------- -----------
Net loss -- pro
forma................ $(5,025,045) $(11,238,917) $(14,644,079) $(7,209,417) $(5,855,618)
=========== ============ ============ =========== ===========
Net loss per common
share (basic and
diluted):
As reported............ $ (1.87) $ (3.97) $ (3.87) $ (1.95) $ (1.49)
=========== ============ ============ =========== ===========
Pro forma.............. $ (1.91) $ (4.03) $ (3.92) $ (1.98) $ (1.51)
=========== ============ ============ =========== ===========
</Table>
F-10
ADERIS PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has computed the pro forma disclosures required under SFAS No.
123 for employee options using the Black-Scholes option-pricing model prescribed
by SFAS No. 123. The assumptions used and weighted-average information are as
follows:
<Table>
<Caption>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------- -----------------------
2000 2001 2002 2002 2003
------------- ------------- ------------- ------- -------------
Risk-free interest
rate............... 5.17% - 6.50% 4.51% - 5.03% 2.94% - 4.34% 4.34% 2.35% - 3.12%
Expected dividend
yield.............. -- -- --
Expected lives....... 5 years 5 years 5 years 5 years 5 years
Expected
volatility......... 90% 95% 95% 95% 95%
Weighted-average fair
value of options
granted equal to
fair market
value.............. $ 0.44 $ -- $ 1.17 $ -- $ --
Weighted-average fair
value of options
granted below fair
market value....... $ 2.77 $ 14.97 $ 10.94 $ 10.94 $ 10.47
</Table>
The Company records the fair value of stock options and warrants granted to
nonemployees in exchange for services under the fair-value method in accordance
with SFAS No. 123 and Emerging Issues Task Force ("EITF") Issue No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services," in the
consolidated statements of operations. Under this method, the resulting
compensation is measured at the fair value of the equity instrument on the date
of vesting and recognized as a charge to operations over the service period,
which is usually the vesting period.
Deferred compensation included in stockholders' deficit relates to
compensatory awards under the Company's stock option plan and is being amortized
over the vesting period.
BASIC AND DILUTED NET LOSS PER COMMON SHARE -- Basic net loss per common
share excludes potential dilution and is computed by dividing net loss by the
weighted-average number of unrestricted common shares outstanding for the
period. Diluted net loss per common share is computed by dividing net loss by
the diluted weighted-average number of common and common-equivalent shares
outstanding during the period. Antidilutive securities consisting of stock
options and stock warrants that are not included in the diluted net loss per
common share calculation, aggregated 1,813,996, 2,997,706 and 2,114,957 for the
years ended December 31, 2000, 2001 and 2002, respectively. In addition, shares
of convertible preferred stock, as converted, totaling 4,161,881 for the year
ended December 31, 2000 and 10,941,993 for the years ended December 31, 2001 and
2002, have been excluded from the calculation of diluted net loss per common
share because their effect would be antidilutive.
F-11
ADERIS PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Calculation of historical net loss per share is as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------- -------------------------
2000 2001 2002 2002 2003
----------- ------------ ------------ ----------- -----------
(UNAUDITED)
BASIC AND DILUTED:
Net loss............. $(4,942,523) $(11,080,975) $(14,437,475) $(7,106,115) $(5,773,383)
=========== ============ ============ =========== ===========
Weighted-average
common shares
outstanding....... 2,660,672 2,800,629 3,729,342 3,643,764 3,879,088
Weighted-average
restricted common
shares
outstanding....... (22,946) (10,374) -- -- --
----------- ------------ ------------ ----------- -----------
Basic and diluted
weighted-average
common shares
outstanding....... 2,637,726 2,790,255 3,729,342 3,643,764 3,879,088
=========== ============ ============ =========== ===========
Basic and diluted
loss per common
share........... $ (1.87) $ (3.97) $ (3.87) $ (1.95) $ (1.49)
=========== ============ ============ =========== ===========
</Table>
UNAUDITED PRO FORMA NET LOSS PER COMMON SHARE -- Unaudited pro forma net
loss per common share gives effect to the automatic conversion of all
outstanding convertible preferred stock that will convert upon the completion of
the Company's proposed initial public offering from the original date of
issuance, as well as the issuance of convertible preferred stock and common
stock to the former Renalogics shareholders upon the closing of the Company's
proposed initial public offering (See Note 12).
The following table reconciles the weighted-average common shares used in
the computation of basic and diluted weighted-average common shares outstanding
to the unaudited pro forma basic and diluted weighted-average common shares
outstanding:
<Table>
<Caption>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
2002 2003
------------ -----------
(UNAUDITED)
PRO FORMA:
Net loss................................................ $(14,437,475) $(5,773,383)
============ ===========
Basic and diluted weighted-average common shares
outstanding.......................................... 3,729,342 3,879,088
Issuance of contingent shares to former Renalogics'
stockholders......................................... 366,851 366,851
Weighted-average adjustment to reflect the conversion of
preferred stock...................................... 10,941,993 10,941,993
------------ -----------
Pro forma basic and diluted weighted-average common
shares outstanding................................. 15,038,186 15,187,932
============ ===========
Pro forma basic and diluted net loss per common
share.............................................. $ (0.96) $ (0.38)
============ ===========
</Table>
INCOME TAXES -- The Company accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes," which requires an asset-and-liability approach to
financial accounting and reporting for income taxes. The difference between the
financial statement and tax bases of assets and liabilities is determined
annually. Deferred income tax assets and liabilities are computed for those
temporary differences
F-12
ADERIS PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
that have future tax consequences using the tax laws and rates that are expected
to apply to periods in which there may be taxable income. Valuation allowances
are established, if necessary, to reduce the deferred tax asset to the amount
that will more likely than not be realized.
CONCENTRATION OF CREDIT RISK -- As of December 31, 2001 and 2002, the
Company has no significant off-balance-sheet risk or concentrations of credit
risk. The Company's financial instruments that could subject the Company to
credit risk at December 31, 2001 and 2002 consist of cash and cash equivalents
and investments; however, the Company maintains the majority of these balances
with highly rated financial institutions. For each of the three years in the
period ended December 31, 2002, the Company has recorded significant revenues
from collaborative agreements with three pharmaceutical companies (see Note 13).
COMPREHENSIVE INCOME (LOSS) -- SFAS No. 130, "Reporting Comprehensive
Income," requires disclosure of all components of comprehensive income (loss) on
annual and interim bases. Comprehensive income (loss) is defined as the change
in equity of a business enterprise during a period from transactions and other
events and circumstances involving nonowner sources. The Company does not have
any items of comprehensive loss other than its reported net loss for the years
ended December 31, 2000 and 2001. For the year ended December 31, 2002,
comprehensive loss consists of net loss and the unrealized holding gain on the
Company's available-for-sale securities.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE -- SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information," establishes standards
for reporting information regarding operating segments and establishes standards
for related disclosure about products and services and geographic areas.
Operating segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation by the chief
operating decision-maker, or decision-making group, in making decisions
regarding resource allocation and assessing performance. To date, the Company
has viewed its operations and manages its business as one operating segment.
As of December 31, 2000, 2001, and 2002, all of the Company's assets are
located in the United States.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS -- In August 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121 and
the accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. SFAS No. 144 further
refines the requirements of SFAS No. 121 that companies (i) recognize an
impairment loss only if the carrying amount of a long-lived asset is not
recoverable based on its undiscounted future cash flows and (ii) measure an
impairment loss as the difference between the carrying amount and fair value of
the asset. In addition, SFAS No. 144 provides guidance on accounting and
disclosure issues surrounding long-lived assets to be disposed of by sale. The
Company adopted the provisions of SFAS No. 144, as required, on January 1, 2002.
The adoption of this statement did not have any impact on the Company's
financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an Amendment of FASB Statement No.
123." This statement amends FASB Statement No. 123 to provide alternative
methods of transition for a voluntary change to the fair-value-based method of
accounting for stock-based employee compensation. In addition, this statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. Management has determined that it will continue to
account for stock-based compensation to employees under the provisions of APB
Opinion No. 25 and will make all required disclosures in its financial reports.
F-13
ADERIS PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -- In December 2002, the EITF
reached consensus on EITF Issue No. 00-21, "Accounting for Revenue Arrangements
with Multiple Deliverables," that the provisions of EITF Issue No. 00-21 should
be used to determine when a revenue arrangement for multiple deliverables should
be divided into separate units of accounting and, if separation is appropriate,
how the arrangement consideration should be allocated to the identified
accounting units. The provisions of EITF Issue No. 00-21 are effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. Management will evaluate multiple elements in accordance with this EITF
Issue for new arrangements into which it enters.
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." This statement establishes how a company classifies and
measures certain financial instruments with characteristics of both liabilities
and equity, including redeemable preferred stock. This statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise effective at the beginning of the interim period commencing July 1,
2003, except for mandatorily redeemable financial instruments of nonpublic
companies. The Company has not yet determined the impact of this statement on
its financial statements.
3. MARKETABLE SECURITIES
Marketable securities are classified as available-for-sale and consist of
the following at December 31, 2002:
<Table>
<Caption>
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAIN LOSS FAIR VALUE
----------- ---------- ---------- -----------
U.S. government obligations........... $ 2,637,196 $ 2,763 $ -- $ 2,639,959
Corporate debt securities............. 9,980,841 21,080 9,930 9,991,991
Auction instruments................... 4,023,544 1,563 -- 4,025,107
Equities.............................. 502,724 -- 2,724 500,000
----------- ------- ------- -----------
$17,144,305 $25,406 $12,654 $17,157,057
=========== ======= ======= ===========
</Table>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31,:
<Table>
<Caption>
2001 2002
-------- ----------
Computer equipment.......................................... $168,897 $ 303,273
Furniture and fixtures...................................... 135,279 363,377
Laboratory equipment........................................ 346,374 414,264
Vehicles.................................................... 17,500 17,500
Leasehold improvements...................................... -- 154,915
-------- ----------
668,050 1,253,329
Less accumulated depreciation and amortization.............. 302,992 470,839
-------- ----------
Total....................................................... $365,058 $ 782,490
======== ==========
</Table>
Depreciation and amortization expense related to property and equipment for
the years ended December 31, 2000, 2001, and 2002 was approximately $11,000,
$61,000, and $168,000, respectively.
F-14
ADERIS PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31,:
<Table>
<Caption>
2001 2002
---------- --------
Development costs........................................... $ 580,046 $193,815
Payroll related............................................. 518,033 571,272
Professional fees........................................... 163,200 142,510
Other/travel-related........................................ 114,395 31,194
Royalties................................................... 600,000 20,000
---------- --------
$1,975,674 $958,791
========== ========
</Table>
6. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS -- The Company leases its facilities and office equipment
under cancelable and noncancellable operating leases that expire through July
31, 2006. The Company holds an option to renew its lease for the administrative
facility through November 2007. During the years ended December 31, 2000, 2001,
and 2002, rent expense totaled approximately $62,000, $122,000, and $236,000,
respectively.
Future minimum payments under the noncancelable operating lease agreements
at December 31, 2002 are as follows:
<Table>
<Caption>
YEAR ENDING DECEMBER 31
- -----------------------
2003........................................................ $196,000
2004........................................................ 106,000
2005........................................................ 10,000
2006........................................................ 5,000
--------
$317,000
========
</Table>
ROYALTIES -- The Company has a number of agreements with various research
firms and universities in which the Company has potential obligations to pay
royalties upon the achievement of specific milestones, as defined, as well as
for certain patent, license, and know-how fees received by the Company. During
the years ended December 31, 2000, 2001, and 2002, the Company incurred $48,000,
$620,000, and $90,000, respectively, of royalties under these agreements, which
are included in the accompanying consolidated statements of operations and
comprehensive loss as royalty expense. Future annual minimum royalties amount to
$20,000 until such agreements are terminated by either party in accordance with
their provisions, as defined.
CONTINGENCIES -- From time to time, the Company may have certain contingent
liabilities that arise in the ordinary course of its business activities. The
Company accrues contingent liabilities when it is probable that future
expenditures will be made and such expenditures can be reasonably estimated. As
of December 31, 2002, the Company is not a party to any pending litigation or
other legal proceeding.
On January 18, 2002, the Company was served with a complaint which alleged
that the plaintiff was injured while he was a participant in a clinical trial.
This lawsuit was settled during the year ended December 31, 2002. The Company
made payments totaling $180,000 and recorded such amount in the accompanying
statement of operations and comprehensive loss for the year ended December 31,
2002. The remainder of the settlement, $150,000, was paid directly to the
plaintiff by the Company's insurer.
On February 12, 2002, the Company was served with a complaint which alleged
that its use of the trademark ADERIS infringed on the plaintiff's trademark,
constituted unfair competition, and was likely to
F-15
ADERIS PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
dilute what the plaintiff perceived to be the distinctive quality of its
trademark. The plaintiff was seeking unspecified monetary relief in addition to
an injunction which could have prevented the Company from using the trademark
ADERIS. This claim was settled during the year ended December 31, 2002 at no
cost to the Company.
7. CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
CONVERTIBLE PREFERRED STOCK -- The Company has 7,000,000 authorized shares
of convertible preferred stock, $0.001 par value, of which 666,667 shares have
been designated as Series A Convertible Preferred Stock ("Series A Preferred
Stock"), 1,500,000 shares have been designated as Series B Convertible Preferred
Stock ("Series B Preferred Stock"), 538,776 shares have been designated as
Series C Convertible Preferred Stock ("Series C Preferred Stock"), and 4,090,910
shares have been designated as Series D Convertible Preferred Stock ("Series D
Preferred Stock"). The remaining 203,647 shares are undesignated.
In February, March, and August 2001, the Company issued an aggregate of
4,076,834 shares of Series D Preferred Stock at $11.00 per share, resulting in
gross proceeds to the Company of approximately $44.8 million.
In connection with the Series D Preferred Stock financing, the Company paid
a placement agent approximately $1.1 million and issued to it a warrant to
purchase 225,060 shares of common stock at $3.64 per share. The value of the
warrant using the Black-Scholes option pricing model was approximately
$1,239,000 (which was credited to additional paid-in capital). Both amounts are
included in the Series D issuance costs. The warrant expires five years from the
issuance date.
In February and May 2000, the Company issued an aggregate of 538,776 shares
of Series C Preferred Stock at $10.21 per share, resulting in net proceeds to
the Company of $5,484,110.
The rights, preferences, and privileges of the Series A, Series B, Series
C, and Series D Preferred Stock are detailed below:
Dividends -- The Company is not required to pay dividends to any
preferred stockholders. However, in the event of a dividend to common
stockholders, holders of Series A, Series B, Series C, and Series D
Preferred Stock are entitled to receive dividends at rates of $0.06, $0.48,
$0.82, and $0.88 per annum (8% of purchase price), respectively, prior to
any dividend payments to common stockholders. These dividends are not
cumulative.
Liquidation -- In the event of any voluntary or involuntary
liquidation, dissolution, or winding-up, including the sale of all or
substantially all of the assets of the Company, as defined, the holders of
Series A, Series B, and Series D Preferred Stock then-outstanding shall be
entitled to be paid an amount equal to $0.75, $6.00, and $11.00 per share,
respectively, plus any declared but unpaid dividends. After payment in full
to the holders of Series A, Series B, and Series D Preferred Stock, holders
of Series C Preferred Stock will be entitled to be paid an amount equal to
$10.21 per share plus any declared but unpaid dividends. As the potential
liquidation event upon a change in control of the Company could be deemed
outside the control of the Company, the convertible preferred stock has
been presented outside of stockholders' deficit in the accompanying
financial statements. Since redemption is uncertain because it is based on
a liquidation event, the Company has presented the preferred stock at net
issuance value.
After the liquidation preference payments to all preferred
stockholders, the remaining assets of the Company shall be distributed
ratably among the holders of common stock and Series A, Series B, and
Series D Preferred Stock based on the number of shares of common stock into
which the Series A, Series B, and Series D Preferred Stock is then
convertible.
If, upon any such liquidation, dissolution, or winding-up of the
Company, the remaining assets of the Company available for distribution to
its stockholders are insufficient to pay the holders of shares of
F-16
ADERIS PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
preferred stock the full amount to which they are entitled, the holders of
shares of Series A, Series B, and Series D Preferred Stock shall share
ratably in any distribution of the remaining assets and funds of the
Company in proportion to their aggregate liquidation amount.
Conversion -- Each share of Series A and Series B Preferred Stock is
convertible at the option of the holder, at any time, into 1.65 share of
common stock, adjustable for certain dilutive events. In July 2001, the
Company issued a warrant to purchase 225,060 shares of common stock at
$3.64 per share. This issuance has been deemed a dilutive event for the
holders of Series C and Series D Preferred Stock, and accordingly, the
conversion ratio has been adjusted to approximately 1.66 shares of common
stock per share of Series C and Series D Preferred Stock. An automatic
conversion occurs into common stock at the then-applicable conversion price
upon the closing of a public offering in which the share price is not less
than $9.09 per share (adjusted for specified events) and the aggregate
proceeds to the Company are greater than $25,000,000 or upon approval by
holders of more than 50% of the then-outstanding shares of all preferred
stock voting together as a single class.
Voting Rights -- The holders of Series A, Series B, Series C, and
Series D Preferred Stock are entitled to the number of votes for each share
of common stock into which the preferred stock is then convertible on most
matters submitted to a vote of stockholders. In addition, holders of Series
A Preferred Stock, voting as a separate class, are entitled to elect one
director of the Company. Holders of Series B Preferred Stock, voting as a
separate class, are entitled to elect one director of the Company.
The Company must reserve a sufficient number of its authorized but unissued
common stock to provide for the conversion of Series A, Series B, Series C, and
Series D Preferred Stock. Therefore, the following number of shares of common
stock has been reserved as of December 31, 2002:
<Table>
Series A Preferred Stock.................................... 1,100,004
Series B Preferred Stock.................................... 2,475,000
Series C Preferred Stock.................................... 895,204
Series D Preferred Stock.................................... 6,797,252
----------
11,267,460
==========
</Table>
RESTRICTED COMMON STOCK -- The Company entered into a vesting and buyback
agreement with a stockholder/member of the Board of Directors. The agreement
provided that in the event the stockholder was no longer on the Board of
Directors, the Company had the right to repurchase any unvested shares from the
stockholder at the original issuance price which ranged from $0.03 to $0.37 per
share. The repurchase option on the 122,100 shares of restricted common stock
outstanding at December 31, 2000 lapsed on a monthly basis through 2004. In
September 2001, the Company accelerated the vesting of the remaining unvested
restricted shares and terminated its option to repurchase such restricted shares
held by the Board member upon her resignation from the Board. The Company
recorded a non-cash compensation charge of approximately $79,000 during the year
ended December 31, 2001 related to the acceleration of vesting.
8. STOCK OPTION PLANS
In March 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Plan"), whereby the Board of Directors may grant incentive stock options to
employees only and nonstatutory stock options to employees, directors, and
consultants. At December 31, 2002, 2,475,000 shares of common stock are reserved
for issuance to eligible employees and directors of, and consultants to, the
Company. Options granted under the 1995 Plan expire no later than 10 years from
the date of grant. The option price for incentive stock options shall be at
least 100% of the fair value on the date of grant and, in the case of
non-qualified stock options, shall be no less than 85% of the fair value. If, at
the time the Company grants an incentive stock option, the optionee directly or
by attribution owns stock possessing more than 10% of the total combined
F-17
ADERIS PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
voting power of all classes of stock of the Company, the option price shall be
at least 110% of the fair value and shall not be exercisable more than five
years after the date of grant. Options generally vest over a period of four
years from the date of grant. Options may be granted with different vesting
terms from time to time at the discretion of the Board of Directors. As of
December 31, 2002, the Company had 86,287 shares available for future grant
under the 1995 Plan.
In November 2001, the Company adopted the 2001 Incentive Award Plan (the
"2001 Plan"), whereby the Board of Directors may grant incentive stock options
to employees only, nonstatutory stock options to employees, directors, and
consultants, and restricted stock awards to employees and consultants. The
Company has reserved 1,555,000 shares of common stock for issuance under the
2001 Plan. Options granted under the 2001 Plan expire no later than 10 years
from the date of grant. The option price for incentive stock options shall be at
least 100% of the fair value on the date of grant and, in the case of
nonqualified stock options, shall be no less than 85% of the fair value. If, at
the time the Company grants an incentive stock option, the optionee directly or
by attribution owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company, the option price shall be at least
110% of the fair value and shall not be exercisable more than five years after
the date of grant. Options generally vest over a period of four years from the
date of grant. Options may be granted with different vesting terms from time to
time. As of December 31, 2002, the Company had 680,800 shares available for
future grant under the 2001 Plan.
Activity under these stock option plans is summarized as follows:
<Table>
<Caption>
WEIGHTED-
AVERAGE
EXERCISE
NUMBER OF EXERCISE PRICE PRICE PER
SHARES PER SHARE SHARE
--------- -------------- ---------
Balance, January 1, 2000.................................. 980,925 $0.03 - $0.36 $0.33
Granted................................................. 841,321 0.36 - 0.61 0.36
Exercised............................................... (8,250) 0.03 0.03
--------- ------------- -----
Balance, December 31, 2000................................ 1,813,996 0.30 - 0.61 0.35
Granted................................................. 1,326,600 0.66 0.67
Exercised............................................... (300,300) 0.36 0.36
Cancelled............................................... (67,650) 0.36 0.36
--------- ------------- -----
Balance, December 31, 2001................................ 2,772,646 0.30 - 0.66 0.49
Granted................................................. 125,100 0.66 - 1.60 1.58
Exercised............................................... (917,610) 0.30 - 0.66 0.35
Cancelled............................................... (90,239) 0.36 - 0.66 0.63
--------- ------------- -----
Balance, December 31, 2002................................ 1,889,897 0.30 - 1.60 0.62
Granted (unaudited)..................................... 235,800 1.60 1.60
--------- ------------- -----
Balance, June 30, 2003 (unaudited)........................ 2,125,697 $0.30 - $1.60 $0.73
========= ============= =====
Exercisable, June 30, 2003 (unaudited).................... 1,229,157 $0.30 - $1.60 $0.61
========= ============= =====
Exercisable, December 31, 2002............................ 963,447 $0.30 - $0.66 $0.56
========= ============= =====
Exercisable, December 31, 2001............................ 1,361,384 $0.30 - $0.66 $0.43
========= ============= =====
Exercisable, December 31, 2000............................ 863,769 $0.30 - $0.36 $0.33
========= ============= =====
</Table>
F-18
ADERIS PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about options outstanding at
December 31, 2002:
<Table>
<Caption>
OUTSTANDING
-----------------------------------
WEIGHTED- EXERCISABLE
AVERAGE -------------------
REMAINING WEIGHTED- WEIGHTED-
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE OF LIFE EXERCISE OF EXERCISE
PRICES SHARES (IN YEARS) PRICE SHARES PRICE
- -------- --------- ----------- --------- ------- ---------
$0.30 31,350 2.2 $0.30 31,350 $0.30
0.36 555,347 6.7 0.36 286,702 0.36
0.66 1,181,400 8.6 0.66 645,395 0.66
1.60 121,800 9.4 1.60 -- --
--------- --- ----- ------- -----
1,889,897 8.0 $0.63 963,447 $0.56
========= === ===== ======= =====
</Table>
Because the Company accounts for its stock-based awards using the
intrinsic-value method in accordance with APB Opinion No. 25 and its related
interpretations, no compensation expense has been recognized in the consolidated
financial statements at the date of grant for employee stock option arrangements
for which the exercise price is equal to the deemed fair market value of the
underlying shares at that date.
In connection with stock options granted to employees during the years
ended December 31, 2000, 2001 and 2002, the Company recorded deferred
compensation of $1,109,313, $10,757,341, and $35,300, respectively, which
represents the aggregate difference between the option exercise price and the
deemed fair market value of the common stock determined for financial reporting
purposes on the grant date. The deferred compensation will be recognized as an
expense over the vesting period of the underlying stock options, generally four
years, in accordance with the method described in FASB Interpretation No. 28,
"Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans (An Interpretation of APB Opinion No. 15 and No. 25)." The Company
recorded stock-based compensation expense of $144,335, $6,086,150, and
$2,972,143 for the years ended December 31, 2000, 2001, and 2002 respectively,
related to these options including a charge of $4,236,000 in 2001 for
immediately vested stock option grants to members of our Board of Directors.
Unamortized deferred compensation is charged to additional paid-in capital in
the event employment of the respective employee or director is terminated.
Deferred compensation of $0, $49,250 and $455,334 was charged to additional
paid-in capital related to employee terminations in 2000, 2001 and 2002,
respectively.
At December 31, 2002, the remaining unamortized deferred stock-based
compensation totaled $2,243,992 and will be amortized over the following periods
(assuming no forfeitures):
<Table>
Year ending December 31, 2003............................... $1,363,416
Year ending December 31, 2004............................... 675,581
Year ending December 31, 2005............................... 204,995
----------
$2,243,992
==========
</Table>
Prior to 2002, the Company has issued options to nonemployees to purchase a
total of 316,800 shares which typically vest 25% upon the first anniversary of
the vesting start date and ratably on a monthly basis thereafter through 2004.
The Company has recorded the applicable stock-based compensation expense based
on the fair value of these options as calculated by the Black-Scholes option
pricing model of $23,154,
F-19
ADERIS PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$230,082 and $246,659, during the years ended December 31, 2000, 2001, and 2002,
respectively. The assumptions used are as follows:
<Table>
<Caption>
2000 2001 2002
------------- ------------- -------------
Risk-free interest rate.............. 5.17% - 6.50% 4.51% - 5.55% 3.50% - 5.28%
Expected dividend yield.............. -- -- --
Expected lives....................... 10 years 10 years 6.5 - 9 years
Expected volatility.................. 90% 95% 95%
</Table>
In December 2000, the Company recorded a charge of $63,000 related to the
acceleration of one executive's 42,281 unvested options on the date of his
termination. In January 2001, the former executive exercised his 169,125 options
in a cashless exercise in exchange for 135,300 shares of the Company's common
stock. The cashless exercise of options utilizing immature shares resulted in a
new measurement date, and the Company recorded a non-cash compensation charge of
approximately $189,000 in relation to this exercise in the year ended December
31, 2001. This charge was calculated based on the fair market value on the date
of exercise. This cashless exercise was not a provision of the original plan and
has only been granted to this one executive.
In September 2001, the Company accelerated the vesting and extended the
exercise term of options to two Board members who resigned. In connection with
this agreement, the Company recorded a non-cash compensation charge of
approximately $665,000 related to the option modification in the year ended
December 31, 2001. This charge was calculated based on the fair market value of
the options on the date of the acceleration.
9. INCOME TAXES
The Company has no provision for income taxes in 2000, 2001, and 2002.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. As of December 31, the
components of the net deferred tax assets are approximately as follows:
<Table>
<Caption>
2001 2002
------------ ------------
Net operating loss carryforwards........................ $ 7,726,000 $ 11,647,000
Stock compensation...................................... 2,900,000 3,098,000
Research and development tax credit carryforwards....... 735,000 1,150,000
Other tax credit carryforwards.......................... 70,000 70,000
Deferred revenue........................................ -- 339,000
Depreciation and amortization........................... 227,000 334,000
Other................................................... 56,000 165,000
------------ ------------
11,714,000 16,803,000
Valuation allowance..................................... (11,714,000) (16,803,000)
------------ ------------
Net deferred income tax asset........................... $ -- $ --
============ ============
</Table>
The Company has placed a full valuation allowance against its net deferred
tax assets since the Company believes it is more likely than not that it will
not be able to utilize its net deferred tax asset.
F-20
ADERIS PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes differs from the federal statutory rate due
to the following:
<Table>
<Caption>
2000 2001 2002
----- ----- -----
Income tax at statutory rate............................... (34.0)% (34.0)% (34.0)%
State taxes, net of federal benefit........................ (5.7) (5.9) (5.9)
Permanent differences...................................... 1.6 -- 6.8
Tax credits................................................ (2.5) (2.1) (2.1)
Change in valuation allowance.............................. 40.6 42.0 35.2
----- ----- -----
Effective tax rate......................................... --% --% --%
===== ===== =====
</Table>
At December 31, 2002, the Company had net operating loss carryforwards and
research and development tax credit carryforwards of approximately $29,072,000
and $1,150,000, respectively. The federal net operating losses and the research
and development tax credits expire beginning in 2009 and extending through 2022.
In addition, at December 31, 2002, the Company also had alternative minimum tax
("AMT") credit carryforwards of approximately $70,000. The carryforward period
for the AMT credit is unlimited. The use of these losses may be limited due to
ownership change limitations under Section 382 of the Internal Revenue Code.
10. 401(K) PLAN
The Company adopted the Aderis Pharmaceuticals 401(k) Retirement Plan (the
"Plan"), effective January 1, 2002, in which all employees 21 years or older are
eligible to participate upon meeting an hours-of-service requirement, as defined
in the Plan. Under the terms of the Plan, employees may elect to defer a
percentage of their annual compensation, subject to legal limitations. The
Company may make matching contributions at its discretion. For the year ended
December 31, 2002, the Company made discretionary contributions of $132,038 to
the Plan.
11. RELATED-PARTY TRANSACTIONS
In February 2000, the Company sold 489,804 shares of Series C Preferred
Stock to a customer at $10.21 per share for gross proceeds of $5,000,000. Total
revenues from this customer for the years ended December 31, 2000, 2001, and
2002 were $673,019, $4,000,000, and $1,500,000, respectively. No portion of the
proceeds from the sales of Series C Preferred Stock was allocated to revenue. In
addition, in March 2001, this customer purchased 200,000 shares of Series D
Preferred Stock at $11.00 per share. This price is consistent with that paid by
other investors.
In May 2000, the Company issued an additional 48,972 shares of Series C
Preferred Stock to the owner of a molecule the Company was developing as partial
payment for licensing the molecule from this Company. The license agreement was
for $1,500,000, of which the Company paid $1,000,000 in cash and issued stock
valued at $500,000 based on a price of $10.21 per share. This amount is included
in research and development expense on the accompanying statement of operations.
12. ACQUISITION
On June 21, 1999, the Company acquired all of the outstanding capital stock
of Renalogics for consideration including common stock and Series B Preferred
Stock.
Approximately $1,428,000 of the purchase price was allocated to purchased
technology, representing the value of the licensing and research agreements with
Emory University assumed by the Company. Under these arrangements, the Company
acquired the right to develop and commercialize any intellectual property that
resulted from Emory University's efforts with respect to the development of a
family of novel anti-
F-21
ADERIS PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
inflammatory molecules in exchange for certain milestone payments and royalties
based on sales of a product resulting from the intellectual property of Emory
University. The Company has paid approximately $136,000, $0, and $0, and in
2000, 2001, and 2002, respectively, in connection with the research agreement,
which has been recorded as research and development expense in the accompanying
consolidated statements of operations.
The value allocated to the licensing agreement from Emory University was
capitalized as purchased technology which the Company began amortizing on a
straight-line basis over the estimated useful life of three years. In December
2000, the Company re-evaluated the commercial potential of the licensing
agreement with Emory University and the employment arrangement it had with the
former president of Renalogics and concluded that it would not pursue the
further commercialization of this technology. Accordingly, the Company
terminated its licensing agreement with Emory University and wrote off the
remaining $724,242 of unamortized value of the purchased technology. In
addition, as of December 31, 2000, the Company terminated the former president
of Renalogics.
In connection with the acquisition of Renalogics, the Company is required
to issue an additional 171,046 shares of its common stock and 118,670 shares of
its Series B Preferred Stock, which will convert to 195,805 shares of common
stock, to the shareholders of Renalogics upon the closing of an underwritten
initial public offering of the Company's common stock at a price of at least
$10.00 per share or upon the sale of the Company for a price greater than $60
million. As of December 31, 2002, none of these milestones had been achieved. As
there is no longer value related to the assets acquired in this acquisition, the
Company will expense this contingent purchase amount if it is paid based on the
fair market value of the stock on the date it is issued.
13. SIGNIFICANT CUSTOMERS
The Company recorded revenues of greater than 10% of total revenues from
the following collaborative agreements with pharmaceutical companies as follows:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
------------------
COLLABORATOR 2000 2001 2002
- ------------ ---- ---- ----
A........................................................... 72% 31% 36%
B........................................................... * * 16%
C........................................................... 23% 69% 48%
</Table>
- ---------------
* Revenues derived from this collaborator were less than 10% of the Company's
total revenue for the applicable period.
Revenue was derived from the following geographic regions (based on
location of customer):
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
------------------
2000 2001 2002
---- ---- ----
United States............................................... 77% 31% 52%
Germany..................................................... 23% 69% 48%
</Table>
F-22
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discount and commissions, payable by the registrant in connection
with the sale of the common stock being registered. All amounts are estimates
except the SEC registration fee, the NASD filing fees and the Nasdaq National
Market listing fee.
<Table>
<Caption>
AMOUNT TO
BE PAID
---------
SEC registration fee........................................ $6,068
NASD filing fee............................................. 8,000
Nasdaq National Market listing fee.......................... *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Printing and engraving...................................... *
Blue sky fees and expenses (including legal fees)........... *
Transfer agent fees......................................... *
Miscellaneous............................................... *
*
Total............................................. *
</Table>
- ---------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Amended and Restated Certificate of Incorporation in effect as of the
date hereof, and our Restated Certificate of Incorporation to be in effect upon
the closing of this offering (collectively, the "Certificate") provide that,
except to the extent prohibited by the Delaware General Corporation Law, as
amended (the "DGCL"), the registrant's directors shall not be personally liable
to the registrant or its stockholders for monetary damages for any breach of
fiduciary duty as directors of the registrant. Under the DGCL, the directors
have a fiduciary duty to the registrant which is not eliminated by this
provision of the Certificate and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of nonmonetary relief will remain
available. In addition, each director will continue to be subject to liability
under the DGCL for breach of the director's duty of loyalty to the registrant,
for acts or omissions which are found by a court of competent jurisdiction to be
not in good faith or involving intentional misconduct, for knowing violations of
law, for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
prohibited by the DGCL. This provision also does not affect the directors'
responsibilities under any other laws, such as the Federal securities laws or
state or Federal environmental laws. The registrant has applied for liability
insurance for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this provision
shall not eliminate or limit the liability of a director: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) arising under Section 174 of the DGCL, or (iv)
for any transaction from which the director derived an improper personal
benefit. The DGCL provides further that the indemnification permitted thereunder
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under the corporation's bylaws, any agreement, a vote
of stockholders or otherwise. The Certificate eliminates the personal liability
of directors to the fullest extent permitted by
II-1
Section 102(b)(7) of the DGCL and provides that the registrant may fully
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (whether
civil, criminal, administrative or investigative) by reason of the fact that
such person is or was a director or officer of the registrant, or is or was
serving at the request of the registrant as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Certificate. The registrant is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth information regarding all securities sold by the
registrant since January 1, 2000, adjusted where applicable for the 1.65-for-1
stock split in March 2002:
1. In February 2000, we issued and sold an aggregate of 489,804 shares
of our Series C preferred stock at a price per share of $10.21 to one
accredited investor. These shares will convert into common stock at the
rate of one share of common stock for 1.66 shares of Series C preferred
stock, at the completion of this offering.
2. In May 2000, we issued and sold an aggregate of 48,972 shares of
our Series C preferred stock at a price per share of $10.21 to one
accredited investor. These shares will convert into common stock at the
rate of one share of common stock for 1.66 shares of Series C preferred
stock, at the completion of this offering.
3. In February 2001 and March 2001, we issued and sold an aggregate of
2,713,200 shares of our Series D Preferred Stock at a price per share of
$11.00 to twenty-one accredited investors. These shares will convert into
common stock at the rate of one share of common stock for 1.66 shares of
Series D preferred stock, at the completion of this offering.
4. In August 2001, we issued and sold an aggregate of 1,363,634 shares
of our Series D preferred stock at a price per share of $11.00 to nine
accredited investors. These shares will convert into common stock at the
rate of one share of common stock for 1.66 shares of Series D preferred
stock, at the completion of this offering.
5. Between January 1, 2000 and September 30, 2001, we granted options
to purchase an aggregate of 1,336,321 shares of common stock at exercise
prices ranging from $.36 to $.60 per share with a weighted average exercise
price of $0.48 per share.
6. In August 2001, we issued a warrant to purchase an aggregate of
225,060 shares of common stock at an exercise price of $3.64 to Gerard
Klauer & Mattison, an accredited investor, for services rendered in
connection with the sale of our Series D preferred stock.
7. On November 14, 2001, we granted options to purchase an aggregate
of 831,600 shares of common stock at an exercise price of $.66 per share
under the 2001 Incentive Award Plan.
8. During the year ended December 31, 2002, we granted options to
purchase an aggregate of 125,100 shares of common stock at exercise prices
ranging from $.66 to $1.60 per share with a weighted average exercise price
of $1.58 per share.
9. Between January 1, 2003 and June 30, 2003, we granted options to
purchase an aggregate of 235,800 shares of common stock at an exercise
price of $1.60 per share.
The sale of the above securities were deemed to be exempt from registration
under the Securities Act of 1933 in reliance on Section 4(2) of the Securities
Act, or Regulation D promulgated thereunder, or, with respect to issuances to
employees and consultants, Rule 701 promulgated under Section 3(b) of the
Securities Act as transactions by an issuer not involving a public offering or
transactions pursuant to compensatory
II-2
benefit plans and contracts relating to compensation as provided under such Rule
701. The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment purposes only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the instruments representing such securities issued in
such transactions. All recipients either received adequate information about the
registrant or had adequate access, through their relationships with the
registrant to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
<Table>
<Caption>
NUMBER DESCRIPTION
- ------ -----------
*1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of Aderis
Pharmaceuticals, Inc., as currently in effect.
3.2 Amended and Restated Bylaws of Aderis Pharmaceuticals, Inc.,
as currently in effect.
*3.3 Form of Amended and Restated Certificate of Incorporation of
Aderis Pharmaceuticals, Inc., to be effective upon the
closing of this offering.
*3.4 Bylaws of Aderis Pharmaceuticals, Inc., to be effective upon
the closing of this offering.
*4.1 Specimen Common Stock certificate.
4.2 Restated Investor Rights Agreement dated March 31, 1995, as
amended by the First Amendment to Restated Investor Rights
Agreement dated November 3, 1995, the Second Amendment to
Restated Investor Rights Agreement dated June 21, 1999, the
Third Amendment to Restated Investor Rights Agreement dated
February 21, 2001 and the Fourth Amendment to Restated
Investor Rights Agreement dated August 15, 2001.
4.3 Warrant to Purchase Common Stock, dated June 16, 2003,
granted to Midtown Holdings, LLC.
*5.1 Opinion of Latham & Watkins LLP.
10.1 Form of Indemnification Agreement between Aderis
Pharmaceuticals, Inc. and each of our directors and
officers.
10.2 1995 Stock Option Plan as amended by the First Amendment
dated June 7, 1999 and the Second Amendment dated August 10,
2001.
10.3 Amended and Restated 2001 Incentive Award Plan.
*10.4 Development and License Agreement by and between Discovery
Therapeutics, Inc. and Fujisawa Healthcare, Inc., dated July
29, 1999.
*10.5 Development and Commercialization Agreement by and between
Medco Research, Inc. and Discovery Therapeutics, Inc., dated
August 19, 1997.
*10.6 Exclusive License Agreement by and between Discovery
Therapeutics, Inc. and Schwarz Pharma AG, dated August 10,
1999, as amended by Amendment No. 1 dated December 22, 1999
and as amended by Amendment No. 2 dated October 21, 2002.
*10.7 Earn Out Agreement by and between Whitby, Inc. and Discovery
Therapeutics, Inc. dated April 25, 1994.
10.8 Property Lease by and between Straley Corporation and
Discovery Therapeutics, Inc. dated December 15, 2000, as
amended by Lease dated November 1, 2001, Lease dated
November 1, 2001 and Lease dated February 12, 2002.
10.9 Property Lease by and between Thomas S. Gilman and Discovery
Therapeutics, Inc. dated February 24, 1998, as amended by
the First Addendum to Lease dated January 7, 1999, the
Second Addendum to Lease dated July 14, 1999, and the Third
Addendum to Lease dated September 12, 2000.
10.10 Employment Agreement between Peter G. Savas and Aderis
Pharmaceuticals, Inc., dated January 2, 2002.
10.11 Employment Agreement between Kenneth L. Rice, Jr. and Aderis
Pharmaceuticals, Inc., dated January 2, 2002.
</Table>
II-3
<Table>
<Caption>
NUMBER DESCRIPTION
- ------ -----------
10.12 Employment Agreement between William S. Wheeler and Aderis
Pharmaceuticals, Inc., dated January 2, 2002.
10.13 Patent License Agreement by and between Aderis
Pharmaceuticals, Inc. and Can-Fite Biopharma Ltd. dated May
6, 2002.
21.1 List of Subsidiaries of Aderis Pharmaceuticals, Inc.
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Latham & Watkins LLP (included in Exhibit 5.1).
24.1 Powers of Attorney (Included on Signature Page).
</Table>
- ---------------
* To be supplied by amendment.
(b) Financial Statement Schedules.
None.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424 (b)(1) or
(4), or 497(h) under the Securities Act of 1933, shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and this offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Hopkinton,
State of Massachusetts, on this 26th day of August 2003.
Aderis Pharmaceuticals, Inc.
By: /s/ PETER G. SAVAS
------------------------------------
Name: Peter G. Savas
Title: Chairman of the Board of
Directors,
Chief Executive Officer
and President
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Peter G.
Savas and Kenneth L. Rice, Jr. and each of them individually, as
attorney-in-fact, with the power of substitution, for him or her in any and all
capacities, to sign any amendment to this registration statement (including
post-effective amendments and registration statements filed pursuant to Rule 462
and otherwise), and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
to said attorneys-in-fact, and each of them individually, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully to all intents and purposes as her
or she might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact or each of them individually, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PETER G. SAVAS Chairman of the Board of Directors, August 26, 2003
- ----------------------------------------------- Chief Executive Officer and
Peter G. Savas President (Principal Executive
Officer)
/s/ KENNETH L. RICE, JR. Vice President, Chief Commercial August 26, 2003
- ----------------------------------------------- Officer and Chief Financial Officer
Kenneth L. Rice, Jr. (Principal Financial Officer)
/s/ PAMELA MCDONOUGH Controller (Principal Accounting August 26, 2003
- ----------------------------------------------- Officer)
Pamela McDonough
/s/ GARY E. FRASHIER Director August 26, 2003
- -----------------------------------------------
Gary E. Frashier
/s/ JAMES M. GARVEY Director August 26, 2003
- -----------------------------------------------
James M. Garvey
Director
- -----------------------------------------------
Robert G. McNeil, Ph.D.
/s/ WAYNE I. ROE Director August 26, 2003
- -----------------------------------------------
Wayne I. Roe
/s/ MICHAEL ROSS, PH.D. Director August 26, 2003
- -----------------------------------------------
Michael Ross, Ph.D.
</Table>
II-5
EXHIBITS INDEX
<Table>
<Caption>
NUMBER DESCRIPTION
- ------ -----------
*1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of Aderis
Pharmaceuticals, Inc., as currently in effect.
3.2 Amended and Restated Bylaws of Aderis Pharmaceuticals, Inc.,
as currently in effect.
*3.3 Form of Amended and Restated Certificate of Incorporation of
Aderis Pharmaceuticals, Inc., to be effective upon the
closing of this offering.
*3.4 Bylaws of Aderis Pharmaceuticals, Inc., to be effective upon
the closing of this offering.
*4.1 Specimen Common Stock certificate.
4.2 Restated Investor Rights Agreement dated March 31, 1995, as
amended by the First Amendment to Restated Investor Rights
Agreement dated November 3, 1995, the Second Amendment to
Restated Investor Rights Agreement dated June 21, 1999, the
Third Amendment to Restated Investor Rights Agreement dated
February 21, 2001 and the Fourth Amendment to Restated
Investor Rights Agreement dated August 15, 2001.
4.3 Warrant to Purchase Common Stock, dated June 16, 2003,
granted to Midtown Holdings, LLC.
*5.1 Opinion of Latham & Watkins LLP.
10.1 Form of Indemnification Agreement between Aderis
Pharmaceuticals, Inc. and each of our directors and
officers.
10.2 1995 Stock Option Plan as amended by the First Amendment
dated June 7, 1999 and the Second Amendment dated August 10,
2001.
10.3 Amended and Restated 2001 Incentive Award Plan.
*10.4 Development and License Agreement by and between Discovery
Therapeutics, Inc. and Fujisawa Healthcare, Inc., dated July
29, 1999.
*10.5 Development and Commercialization Agreement by and between
Medco Research, Inc. and Discovery Therapeutics, Inc., dated
August 19, 1997.
*10.6 Exclusive License Agreement by and between Discovery
Therapeutics, Inc. and Schwarz Pharma AG, dated August 10,
1999, as amended by Amendment No. 1 dated December 22, 1999
and as amended by Amendment No. 2 dated October 21, 2002.
*10.7 Earn Out Agreement by and between Whitby, Inc. and Discovery
Therapeutics, Inc. dated April 25, 1994.
10.8 Property Lease by and between Straley Corporation and
Discovery Therapeutics, Inc. dated December 15, 2000, as
amended by Lease dated November 1, 2001, Lease dated
November 1, 2001 and Lease dated February 12, 2002.
10.9 Property Lease by and between Thomas S. Gilman and Discovery
Therapeutics, Inc. dated February 24, 1998, as amended by
the First Addendum to Lease dated January 7, 1999, the
Second Addendum to Lease dated July 14, 1999, and the Third
Addendum to Lease dated September 12, 2000.
10.10 Employment Agreement between Peter G. Savas and Aderis
Pharmaceuticals, Inc., dated January 2, 2002.
10.11 Employment Agreement between Kenneth L. Rice, Jr. and Aderis
Pharmaceuticals, Inc., dated January 2, 2002.
10.12 Employment Agreement between William S. Wheeler and Aderis
Pharmaceuticals, Inc., dated January 2, 2002.
10.13 Patent License Agreement by and between Aderis
Pharmaceuticals, Inc. and Can-Fite Biopharma Ltd. dated May
6, 2002.
21.1 List of Subsidiaries of Aderis Pharmaceuticals, Inc.
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Latham & Watkins LLP (included in Exhibit 5.1).
24.1 Powers of Attorney (Included on Signature Page).
</Table>
- ---------------
* To be supplied by amendment.
(b) Financial Statement Schedules.
None.