1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ____ to ____
Commission File Number 000-22347
ASCENT PEDIATRICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3047405
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
187 Ballardvale Street, Suite B125, Wilmington, MA 01887
(Address of principal executive offices, including zip code)
(978) 658-2500
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.00004 par value
(title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES X NO __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $14,770,029 based on the closing price of the
Common Stock on the Nasdaq Stock Market on March 13, 1998. The number of shares
outstanding of the registrant's Common Stock as of March 13, 1998 was 6,912,575.
DOCUMENTS INCORPORATED BY REFERENCE
Document Description 10-K Part into which Incorporated
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Portions of the Registrant's definitive Items 10, 12, 11 and 13 of Part III
proxy statement to be filed with the
Securities and Exchange Commission for
the Annual Meeting of Stockholders to be
held June 10, 1998
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PART I
ITEM 1. BUSINESS
Ascent Pediatrics, Inc. ("Ascent" or the "Company") is a drug
development and marketing company focused exclusively on the pediatric market.
The Company's strategy is to address unmet medical needs of children through the
development of differentiated, proprietary products based on approved compounds
with well known clinical profiles. The Company introduced its first two
products, Feverall(R) acetaminophen suppositories and Pediamist(R) nasal saline
spray, to the market in the second half of 1997 and began to copromote a third
product, Duricef(R) oral suspension, with Bristol-Myers Squibb U.S.
Pharmaceuticals Group ("Bristol-Myers Squibb") in March 1998. Ascent has four
other principal products in development. The Company markets its products in the
United States through a direct sales force consisting of over 60 representatives
focused exclusively on the pediatric market.
The pharmaceuticals that Ascent is developing are designed to improve
upon currently available products for common pediatric illnesses through the
application of the Company's drug delivery and reformulation technologies. The
Company is developing most of these products for sale on a prescription basis.
By developing products based on currently approved drugs, rather than new
chemical entities, Ascent believes that it can reduce regulatory and development
risks and shorten the product development cycle. In addition, Ascent believes
that market acceptance of its products will be enhanced by the familiarity of
pediatricians with the compounds that serve as the basis of these products.
The Company has four principal products in various stages of
development:
- Primsol(R) trimethoprim solution, a prescription antibiotic
for the treatment of ear infections in patients age six months
to 12 years, for which the Company filed a New Drug
Application ("NDA") in October 1996.
- Orapred syrup, a prednisolone-based liquid steroid for the
treatment of inflammation, including inflammation resulting
from respiratory conditions, for which the Company filed
Abbreviated New Drug Applications ("ANDAs") in July 1997.
- Feverall(R) controlled-release beads, an acetaminophen-based
analgesic and antipyretic for the treatment of pain and fever
in children, for which the Company filed an NDA with the FDA
in December 1997.
- Pediavent(R) albuterol controlled-release suspension, a
bronchodilator for the treatment of asthma that currently is
in Phase III clinical trials.
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ASCENT'S STRATEGY
Ascent's objective is to be a leader in the development and marketing
of improved and differentiated pediatric pharmaceuticals. The Company is
developing a broad product line of proprietary products that are based on
approved compounds with well known clinical profiles. Ascent seeks to improve
these compounds by reducing their dosing frequency, increasing their
palatability, improving the method of administration or developing them as
substitutes for products with less favorable side effect profiles, all with the
goal of increasing patient compliance, improving therapeutic results or reducing
side effects. Key elements of Ascent's strategy include:
Focus Exclusively on Pediatric Market. Ascent's business is focused
exclusively on developing pharmaceuticals for children and marketing these
products to pediatricians, pediatric nurses and other pediatric caregivers. The
United States market for prescription pharmaceutical products for children age
16 years and under was estimated to be approximately $3.7 billion in 1997. The
Company believes that this market has been underserved in comparison with the
adult pharmaceutical market in terms of both development of specially designed
products and targeted promotion and represents an attractive market opportunity.
Select Products Based on Market Needs. Ascent actively evaluates the
pediatric pharmaceutical industry on an ongoing basis to assess product usage
and to identify unmet medical needs of children, particularly for prescription
drugs for the most common pediatric illnesses. Ascent's program to identify
pediatric product opportunities includes conducting focus groups with
pediatricians, pediatric nurses and parents, consulting with the Company's
scientific and medical advisors and evaluating drug delivery and other technical
developments for their applicability to the field of pediatric pharmaceuticals.
Ascent uses this information to select compounds as product development
candidates that it believes may be improved through the application of its
technologies and reformulation expertise and then successfully commercialized.
Develop Proprietary Formulations of Approved Compounds. Ascent selects
as product candidates approved compounds that have well known clinical profiles
and are not covered by third party patents. By developing products based on
approved compounds rather than new chemical entities, the Company believes that
it can reduce regulatory and development risks and shorten the product
development cycle. In addition, Ascent believes that market acceptance of its
products will be enhanced by the familiarity of pediatricians with the drugs
that serve as the basis of these products.
Establish a Corporate Identity for Ascent in the Pediatric Market.
Ascent believes that an important part of fulfilling its mission of becoming a
leader in the development and marketing of pediatric pharmaceuticals is the
establishment of a corporate identity. Accordingly, even before the launch of
its first products, Ascent initiated a program to familiarize pediatricians with
the Ascent name. This program included a direct mail campaign and journal
advertising directed at office-based pediatricians. The Company believes that
establishing a corporate identity will distinguish it from its competitors and
accelerate market awareness and penetration of its products.
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Create a Specialty Pediatric Sales Force. Ascent markets its products
in the United States through a direct sales force focused exclusively on the
pediatric pharmaceutical market. Ascent established its domestic sales
organization at the time that it introduced its initial two products in the
second half of 1997. Because pediatricians and pediatric nurses are concentrated
in group practices in urban and suburban centers and advertising may be
disseminated through a limited number of specialty pediatric publications,
Ascent believes that it can reach much of the domestic pediatric market with a
moderately sized sales force and carefully controlled marketing expenditures.
Acquire or In-License Additional Pediatric Products. Ascent intends to
acquire or in-license from third parties pediatric pharmaceuticals that permit
it to extend its product lines and leverage its marketing and sales
capabilities. Ascent is particularly seeking prescription pharmaceuticals that
either already have features that increase patient compliance, improve
therapeutic efficacy or reduce side effects or that can be further developed by
Ascent to incorporate such features through the application of the Company's
technologies. Ascent believes that its exclusive focus on the pediatric market
may facilitate its efforts to acquire product rights from third parties. As an
example of this strategy, in July 1997, the Company purchased the Feverall line
of acetaminophen rectal suppository products from Upsher-Smith Laboratories,
Inc. ("Upsher-Smith").
Establish Copromotion or Other Marketing Arrangements for Third Party
Products. Ascent intends to leverage its marketing and sales capabilities,
including its domestic sales force, by entering into arrangements to promote
third party pharmaceutical products to pediatricians. As an example of this
strategy, in February 1998 Ascent entered into a copromotion agreement with
Bristol-Myers Squibb pursuant to which Ascent promotes Bristol-Myers Squibb's
Duricef oral suspension product to pediatricians in the United States.
Establish Collaborations for International and Adult Markets. Ascent
plans to enter into licensing and distribution arrangements for the marketing
and sale of its products in international markets to leverage the established
international marketing, sales and distribution capabilities of third party
collaborators. Ascent plans to enter into similar arrangements with respect to
any adult applications of its products.
Obtain Competitive Protections. Ascent seeks to protect many of its
products by applying for use or formulation patents or employing technologies
that are covered by patents or patent applications owned by or licensed to the
Company or its suppliers. In addition, some of Ascent's products will require
NDA approval. Competition for such products may be limited by clinical and
formulation development challenges and, in certain cases, three-year protection
against approval of a potential competitor's ANDA under the Drug Price
Competition and Patent Term Restoration Act of 1984 (the "Waxman-Hatch Act").
Ascent also seeks to keep confidential as a trade secret important know-how
involved in the formulation and production of certain of its products. Finally,
Ascent applies for trademark registrations to protect the brand recognition of
its products and, as of March 1, 1998, owned ten registered U.S. trademarks.
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ASCENT TECHNOLOGIES
Ascent is developing therapeutic pharmaceutical products that are
designed to be more appropriate for pediatric patients. Ascent has developed
internally or acquired rights through in-licensing or supply arrangements to a
range of technologies that it applies in its product development efforts. These
technologies include:
Taste masking. Ascent has developed technology to mask the
objectionable or unpleasant taste of various common ingredients used in
pediatric pharmaceuticals. The Company believes that a drug's taste is a
critical factor in pediatric patient compliance, particularly when frequent
dosing is required. The Company is applying its taste masking technology to
liquid dosage forms of product candidates because of the widespread use of
liquids in the pediatric pharmaceutical market. The Company believes that this
technology also may be applicable to solid dosage forms. Ascent's taste masking
technology is based on a complex three-tiered system that entails dissolving the
drug through the addition of a polymer, adding carefully selected debittering
agents to neutralize the taste and then adding pleasant flavors which are
compatible with the physical characteristics of the formulation. Ascent has
received a notice of allowance of claim from the United States Patent and
Trademark Office with respect to a patent application relating to the Company's
taste masking technology.
Controlled-release. Ascent has developed its own controlled-release
technology and has in-licensed controlled-release technology from a third party.
In general, these technologies involve coating the active drug with certain
approved substances in a manner that allows the substance to be released in the
patient at specific rates over time. The controlled-release manufacturing
procedures also provide certain taste masking characteristics to the product.
Ascent is applying these technologies to reduce the dosing frequency and, in
some cases, improve the taste of its products, in order to increase patient
compliance.
Bioadhesion. Ascent is using commercially available bioadhesives to
deliver topical drugs in a manner that is designed to enhance the efficacy of
the active ingredient. Bioadhesives are substances, such as polymers, which are
mixed with drugs in order to anchor the drug to the mucous layer of tissue. When
a drug is so anchored, the body's normal clearance mechanism is slowed, thereby
permitting the drug to have a more rapid and prolonged effect, which may reduce
dosing frequency.
Intranasal delivery device. Ascent has developed a product using a
metering device supplied by a third party that facilitates intranasal use in
pediatric patients by delivering a small volume of fluid under low pressure.
Because the metering device delivers 20% of the amount of solution delivered by
most high volume metered systems, there is less drainage of excess solution from
the nose. The Company believes that this device will increase product acceptance
among children and assure delivery of a consistent volume of spray.
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The following table lists the technologies described above, the
principal benefit being sought and the products or product candidates to which
Ascent is applying these technologies.
TECHNOLOGY ANTICIPATED BENEFIT PRODUCT
Taste masking Improved taste Primsol trimethoprim solution
Orapred syrup
Cough/Cold products
Just For Kids Vitamin Drops
Controlled-release Reduced dosing frequency Feverall controlled-release beads
Pediavent albuterol suspension
Bioadhesion Improved efficacy Cromolyn products
Intranasal delivery device Ease of administration Pediamist nasal saline spray
PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
The following table lists the principal products developed, currently under
development, acquired or marketed by the Company. This table is qualified in its
entirety by reference to the more detailed descriptions of these products
elsewhere in this Annual Report.
PRODUCT INDICATION DEVELOPMENT STATUS(1) KEY FEATURES
Feverall(R) acetaminophen rectal Pain and fever Currently marketed Alternate form of administration
suppositories
Pediamist(R) nasal saline spray Nasal dryness Currently marketed Low pressure and volume spray;
reduced stinging
Duricef(R) oral suspension (2) Upper respiratory and Currently marketed Twice a day administration;
urinary tract infections pleasant tasting liquid
Primsol(R) trimethoprim solution Acute middle ear NDA filed (3) Reduced toxicity profile; pleasant
(50mg strength) infections tasting liquid
Orapred syrup Inflammation, ANDAs filed in July 1997 Significant taste improvement
including respiratory
problems
Feverall(R) controlled-release Pain and fever NDA filed Reduced dosing frequency;
beads improved taste
Pediavent(R) albuterol controlled- Asthma Phase III clinical trials Reduced dosing frequency;
release suspension improved taste
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(1) Phase III clinical trials. The product is administered to an expanded
patient population to (i) test the product for safety, (ii) evaluate
clinical effectiveness and (iii) provide an adequate basis for
labeling.
ANDA. Abbreviated New Drug Application to the FDA for marketing
approval relating to a new drug that is the same as a drug for which
the FDA has already approved an NDA and whose patent and marketing
exclusivity periods have expired.
NDA. New Drug Application to the FDA for marketing approval for a new
drug for which an ANDA is not permitted.
(2) Ascent is copromoting this product to pediatricians in the United
States pursuant to a copromotion agreement with Bristol-Myers Squibb.
See "License and Marketing Agreements."
(3) The FDA has approved the Company's NDA relating to a 25mg strength of
Primsol solution.
The Company has conducted a number of clinical trials of its product
candidates in children. The Company plans to continue to conduct such trials,
both in situations in which the trials are required by the FDA and in which the
Company believes that the clinical trial data will be of assistance in marketing
the product to pediatricians. The need to conduct clinical trials in children
under applicable FDA rules is determined on a product-by-product basis. In some
circumstances, the FDA may accept safety and efficacy data that are extrapolated
from adults in support of regulatory approval applications in children.
Because the Company's products are not based on new chemical entities,
Ascent believes that it can reduce regulatory and development risks and shorten
the product development cycle. As to certain product candidates, the Company
expects to be permitted to file an ANDA instead of an NDA. An ANDA is less
complex than an NDA, and, in some circumstances, only limited clinical trial
data or no clinical trial data are required for the application. For products
that contain active ingredients that have received FDA approval, after
expiration of any applicable patents and period of statutory protection under
the Waxman-Hatch Act, Ascent may use data from the NDA of the "pioneer" drug
concerning the safety and efficacy of the drug substance in support of its NDA
or ANDA. Finally, many nonprescription products do not require FDA pre-marketing
approval if the product is within an applicable FDA Over-the-Counter Drug
Monograph ("OTC Monograph"). See "Government Regulation."
Feverall(R) Acetaminophen Rectal Suppositories
In July 1997, Ascent began marketing the Feverall line of over-the-counter
acetaminophen rectal suppositories for the treatment of pain and fever. Ascent
acquired this product line from Upsher-Smith in July 1997. The Feverall product
line was originally introduced by Upsher-Smith in 1989 and consists of four
formulations, 80mg, 160mg, 325mg and 650mg. Acetaminophen rectal suppositories
are used in patients, primarily children or adolescents, who cannot take
acetaminophen orally as a result of regurgitation caused by influenza or an
inability to tolerate the taste of currently available liquid forms of
acetaminophen. The Feverall suppositories product line is covered by an
effective NDA.
IMS America, Ltd., a marketing research firm ("IMS"), estimates that the
1995 United States pediatric market for acetaminophen rectal suppositories was
approximately $5,800,000. Other acetaminophen rectal suppositories currently on
the market in the United
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States include "Acephen," which is marketed by G&W Laboratories, and "Neopap,"
which is marketed by PolyMedica Industries, Inc., as well as certain generic
brands. The Company had net product revenues in 1997 from sales of its Feverall
product line of $2,023,000.
Ascent acquired this product line because this dosage form of acetaminophen
permits administration to children who would otherwise be unable to take the
drug. In recent years, Upsher-Smith promoted this product line primarily through
the use of advertising and telemarketing programs during the fall of each year.
Ascent believes that it is possible to increase market penetration for this
product line through personal sales calls to pediatricians and pediatric nurses,
although there can be no assurance that Ascent will be successful in doing so.
In addition, under the acquisition agreement, Ascent acquired the Feverall
trademark to use in connection with other acetaminophen products that it is
currently developing, such as its acetaminophen controlled-release beads
products, which the Company intends to market as Feverall controlled-release
beads. Ascent believes that the name recognition of this trademark will be
useful in marketing these other acetaminophen products and in enhancing the
Company's profile in the pediatric market generally.
The purchase price for this product line and certain related assets,
including the Feverall trademark and certain inventory, was $11,905,000,
including related acquisition costs. Upsher-Smith has agreed to supply the
Company with its requirements of Feverall acetaminophen rectal suppositories,
and the Company has agreed to purchase from Upsher-Smith all amounts of such
product as it may require, for a period of five years.
Pediamist(R) Nasal Saline Spray
Ascent began marketing Pediamist nasal saline spray, an over-the-counter
product to relieve nasal dryness associated with low humidity, in October 1997.
This product is administered by a metering device that the Company believes is
particularly appropriate for use by children. No FDA pre-marketing approval was
required for Ascent to market this product in the United States.
Pediatricians frequently recommend nasal saline sprays instead of
decongestant sprays because decongestant sprays contain vasoconstrictors that
can cause "rebound," a phenomenon in which nasal congestion resulting from the
use of the drug is more intense than the original symptoms. Nasal saline sprays
are often an effective alternative therapy for this indication and are widely
recognized as safe.
There are a number of nasal saline spray products that are currently
available for nasal dryness associated with low humidity. All of these products
are designed primarily for use by adults and deliver a high volume of spray at
high pressure through a device sized for adult nasal openings. Moreover, certain
of these products are formulated with materials that are known to cause local
stinging.
Pediamist nasal spray is administered by a metering device specifically
designed to deliver saline solution in a low volume fine mist under low
pressure. This device includes a special actuator that determines the volume and
pressure of the saline to be delivered. Because the Pediamist nasal spray device
delivers approximately 20% of the amount of
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saline solution delivered by most high volume metered systems, there is less
drainage of excess saline from the nose. The Company believes that this device
will increase product acceptability among children and assure delivery of a
consistent volume of spray. Ascent has formulated Pediamist nasal spray with
glycerine to reduce stinging.
Duricef(R) Oral Suspension
In March 1998, Ascent began marketing Duricef oral suspension to
pediatricians in the United States pursuant to a four-year copromotion agreement
with Bristol-Myers Squibb. See "License and Marketing Agreements." Duricef oral
suspension is a prescription cephalosporin antibiotic for the treatment of
urinary tract infections, upper respiratory infections, including specifically
pharyngitis/tonsillitis, and infections of the skin and skin structure . The
Company believes that Duricef oral suspension's dosing regimen (twice a day),
pleasant taste and established reputation make it an attractive product for
pediatricians to prescribe. Duricef oral suspension is covered by an effective
NDA.
Duricef oral suspension is one of a number of cephalosporin oral suspension
products indicated for the treatment of urinary tract infections, upper
respiratory infections and infections of the skin and skin structure.
Scott-Levin estimates that sales of cephalosporin oral suspension products for
all indications in the United States were approximately $522 million in 1997.
Scott-Levin estimates that sales of Duricef were approximately $20.5 million in
1997.
The Company agreed to copromote Duricef oral suspension as part of its
strategy to leverage its marketing and sales capabilities, including its
domestic sales force. In recent years, Bristol-Myers Squibb has promoted Duricef
oral suspension to a range of medical specialties. The Company believes that it
can increase the market penetration of Duricef oral suspension in the pediatric
market through marketing activities directed exclusively at the pediatric
market. Moreover the Company believes that Duricef oral suspension strengthens
its product line and complements Primsol, which is being developed for the
treatment of acute otitis media ("AOM"), or middle ear infection.
Primsol(R) Trimethoprim Solution
Ascent has developed Primsol trimethoprim solution, containing the
antibiotic trimethoprim, as a prescription drug for the treatment of AOM in
children age six months to 12 years. Trimethoprim for the treatment of AOM in
children is currently only available in combination with the sulfa compound
sulfamethoxazole. The sulfa component of this combination therapy is associated
with allergic reactions that may be severe, or even fatal. In clinical trials
conducted by the Company, Primsol solution, which does not contain this sulfa
component, was shown to be as effective as the combination therapy for the
treatment of AOM in children, but with a more favorable side effect profile.
Because of this improved side effect profile, the Company believes that
pediatricians will be more likely to prescribe an antibiotic comprised only of
trimethoprim for the treatment of AOM in children than they historically have
been to prescribe the combination therapy.
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In 1996, Ascent filed two NDA's with the FDA covering the 25mg and 50mg
strengths of Primsol solution, respectively. In June 1997, the FDA approved the
Company's NDA for its 25mg strength of Primsol solution. The Company's NDA for
its 50mg strength of Primsol solution is still pending. In February 1998, the
Company received a letter from the FDA citing certain deficiencies in the
Company's NDA for the 50mg strength of Primsol. The Company is currently in the
process of preparing a response to this letter. Ascent plans to introduce the
50mg strength as the Primsol solution product that it brings to market. However,
if approval of its NDA for the 50mg strength is significantly delayed, the
Company may consider introducing its 25mg strength, which is less concentrated
and requires less than optimal dosing volumes, as the Primsol solution product
that it brings to market.
Acute infections are the most frequent illness treated by pediatricians.
AOM is the most common of these infections. By three years of age, approximately
80% of children in the United States have developed at least one ear infection.
In 1996, there were approximately 26,000,000 pediatric patient visits to doctors
in the United States for the treatment of AOM.
There are a number of currently available antibiotics for the treatment of
AOM in children. Most pediatricians initially prescribe amoxicillin, a form of
penicillin, unless the patient is allergic to the drug or the drug has
previously failed to provide a therapeutic effect in the patient. In such cases,
the pediatrician selects a second line antibiotic from a series of alternative
choices, including the trimethoprim/sulfa compound combination therapy (sold
under brand names such as Bactrim and Septra), cephalosporins (such as Ceclor),
a combination of amoxicillin and clavulanic acid (such as Augmentin) or newer
macrolides (such as Zithromax or Biaxin).
Scott-Levin estimates that the United States market for liquid antibiotics
for the treatment of AOM was approximately $485,800,000 in 1997. Of such amount,
approximately $55,400,000 was from the sale of amoxicillin (reflecting
approximately 11,000,000 prescriptions), approximately $16,100,000 was from the
sale of trimethoprim/sulfa compound combination products (reflecting
approximately 2,900,000 prescriptions) and approximately $414,300,000 was from
the sale of other liquid antibiotics (reflecting approximately 11,900,000
prescriptions), including cephalosporins and macrolides. The Company believes
that almost all liquid antibiotics are taken by children.
Ascent has developed Primsol solution as an antibiotic containing
trimethoprim only, thereby eliminating the potential for an allergic response to
the sulfa component of the combination product. Ascent has sought to facilitate
administration of this product by formulating it as an oral solution. Because
Primsol solution does not need to be shaken prior to administration, it does not
suffer from problems associated with suspensions, such as dose inconsistency.
The Company plans to market Primsol solution as a second line of therapy to
amoxicillin and as an alternative to trimethoprim combination products such as
Bactrim and Septra. Ascent believes that Primsol solution also may be an
attractive alternative to other antibiotics, such as cephalosporins and newer
macrolides, for pediatricians and managed care providers because the Company
plans to offer Primsol solution at a price that is significantly lower than the
current market prices of these other antibiotics.
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In December 1995, Ascent completed multicenter Phase III clinical trials of
Primsol solution for the treatment of AOM and uncomplicated urinary tract
infection ("UTI") in children age six months to twelve years. These clinical
trials, which included over 500 children, compared the 25mg strength of Primsol
solution with a commercially available trimethoprim/sulfamethoxazole combination
therapy. Primsol solution proved to be as clinically effective as the
combination therapy in alleviating the signs and symptoms commonly associated
with AOM or uncomplicated UTI. No statistically significant differences were
noted in response rates of valuable pediatric patients receiving either Primsol
solution or the combination therapy, and the bacteriologic cure rates were
similar for both types of therapies. However, there were statistically
significantly fewer treatment related side effects reported with Primsol
solution than with the combination therapy, particularly a lower incidence of
skin rash.
The FDA has granted Ascent three years of protection under the Waxman-Hatch
Act ending in June 2000 against the approval of a competitor's ANDA for a
generic version of the 25mg strength of Primsol solution for the treatment of
AOM in children age six months to twelve years.
Orapred Syrup
Ascent is developing Orapred syrup as a prescription steroid for the
treatment of inflammation associated with a variety of diseases, principally
those of the respiratory system, such as asthma and bronchitis. Currently
available liquid steroid products for the treatment of inflammation have a very
unpleasant taste. As a result, compliance problems frequently result, even
though these products are used for the treatment of serious and, in
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some cases, life threatening diseases. Ascent has applied its taste masking
technology to develop a steroid product with a pleasant taste. Ascent filed
ANDAs for two strengths of this product in July 1997.
Scott-Levin estimates that in 1997 approximately 3,200,000 prescriptions
for liquid steroids were written in the United States, of which approximately
59% were written by pediatricians, and that the 1997 United States pediatric
market for liquid steroids was approximately $26,100,000. The Company believes
that almost all liquid steroids are taken by children.
A number of currently available steroids are widely used in pediatrics
because of the anti-inflammatory properties of these drugs. Orapred syrup
contains the active ingredient prednisolone. Physicians generally prefer
prednisolone and prednisone to other products due to the greater margin of
safety of these two drugs and generally prefer prednisolone to prednisone
because prednisolone is more reliable, particularly if the patient suffers from
certain liver disorders.
Currently available liquid steroid brands are available in 5mg/5ml and
15mg/5ml strengths. Ascent is developing Orapred syrup in both of these
strengths. Ascent has conducted a pediatric study for marketing purposes to
compare the taste of its product with that of a currently-marketed prednisolone
sodium phosphate liquid product. In the study testing the 15mg/5ml strength
against an existing product with the same strength, 27 of the 35 participating
children preferred the taste of the Ascent product.
Feverall(R) Controlled-Release Beads
Ascent is developing Feverall controlled-release beads as an
over-the-counter acetaminophen product for the treatment of pain and fever in
children. The Company has designed this product to permit dosing every eight
hours, rather than the four hours required by currently available products.
Ascent filed an NDA for this product in December 1997.
FIND/SVP estimates that sales of pediatric forms of pain/fever medications
in the United States approximate $300,000,000 per annum. There are a number of
currently available acetaminophen products for the treatment of pain and fever
in children. Most of these products are in the form of a liquid or chewable
tablet. The product with the largest market share in the United States is
Tylenol liquid for children. None of the pediatric products currently on the
market is available in a controlled-release formulation. Accordingly, these
products are absorbed quickly from the gastrointestinal tract into the blood and
quickly cleared from the body, necessitating dosing every four hours. As a
result, if administered at bedtime, the patient needs an additional dose before
morning. If administered during the day, parents often must rely on school
nurses or day care providers to administer the medication. In addition, under
the applicable FDA OTC Monograph, only five doses of acetaminophen may be given
in each 24-hour period. Therefore, if the medication requires four hour dosing,
treatment may only be given for 20 hours in each 24-hour period.
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Ascent is developing Feverall beads with a proprietary controlled-release
technology that releases the acetaminophen at specific rates over time in order
to provide a therapeutic effect (reduction in fever and pain) for eight hours.
Ascent believes that dosing every eight hours may significantly increase
compliance and permit therapeutic coverage for the full 24-hours of each day. To
facilitate administration, Ascent has formulated this product in the form of
small beads that either can be sprinkled on a food that is appealing to the
child, such as applesauce, or delivered in a liquid, such as water.
Ascent has completed three Phase I definitive pharmacokinetic trials
comparing Feverall beads to Tylenol extended relief caplets and immediate
release Tylenol tablets. These trials involved 63 healthy adults. In these
trials, Feverall beads exhibited equivalent bioavailability to the Tylenol
product to which they were compared.
In December 1996, Ascent completed a Phase III clinical trial that
evaluated Feverall beads for the reduction of dental pain. This study was
conducted in 125 adults and was double blinded, with the control group receiving
an equivalent amount of Tylenol extended relief caplets. A single dose was
administered to each patient over an eight-hour period. The data from this study
indicated that Feverall beads provided consistent pain relief over the full
eight-hour period that was comparable to the pain relief provided over a shorter
period of time by Tylenol extended relief caplets.
A second Phase III clinical trial of this product for the treatment of
fever in children commenced in June 1996 and was completed in February 1997.
This study involved 100 febrile children between the ages of two and 11 years
old. In this second Phase III clinical trial, Feverall beads were compared on a
double blinded basis with an immediate release presentation of acetaminophen for
efficacy (reduction in fever) and safety. The data from this study indicated
that Feverall beads provided fever control over an eight hour period that was
comparable to the fever control provided by the immediate release presentation
of acetaminophen and that during the fourth to sixth hours of treatment the
fever control provided by the Feverall beads was more effective than the fever
control provided by the immediate release presentation.
The Company's NDA will need to be approved by the FDA for Ascent to market
this product in the United States. Ascent expects to submit a request to the FDA
for three years of protection under the Waxman-Hatch Act against the approval of
a competitor's ANDA for the treatment of pain and fever in children under 12
years of age.
Pediavent(R) Albuterol Controlled-Release Suspension
Ascent is developing Pediavent albuterol controlled-release suspension as a
prescription product for the treatment of asthma. Ascent is formulating the
product in a controlled-release suspension to permit twice-a-day administration
and to mask the normal bitterness of albuterol. Ascent is conducting Phase III
clinical trials of this product.
Asthma is the leading cause of pediatric hospital admissions. It is a
debilitating disease that causes swollen and inflamed airways that are prone to
constrict suddenly and violently. Asthmatic attacks can be life-threatening and,
in some cases, fatal.
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A common treatment for asthma is the administration of a beta agonist
bronchodilator, of which albuterol is the most widely prescribed. Scott-Levin
estimates that the 1997 U.S. pediatric market for all forms of beta agonists was
approximately $191,100,000, with oral liquid forms comprising approximately
12.7% of this market ($24,250,000). Albuterol is available in various dosage
forms, including tablets and liquids, which are generally used for chronic
administration, and inhalers, which are generally used for acute incidents.
Tablet formulations are typically not used by young children, as they are
difficult to swallow and must be administered every four or eight hours. The
only currently available controlled-release tablet (Volmax) is not approved for
use in patients under six years of age. Liquid albuterol formulations have an
unpleasant taste and must be dosed three to four times per day.
Ascent is developing its albuterol product as a suspension in the form of
granules which contain the drug in a coating. The coating allows the albuterol
to be released at a specific controlled rate and masks the normal bitterness of
the drug. To enhance patient compliance, the Company is designing this product
for twice-a-day administration.
In 1995, Ascent conducted Phase I open-label, single dose pharmacokinetic
studies of this product in Europe comparing this product's bioavailability
profile with that of Volmax. These studies involved 12 healthy adult subjects at
one site. The results of this study indicated that the pharmacokinetics of two
of the formulations being developed by Ascent were indistinguishable from Volmax
in terms of bioavailability. In February 1997, Ascent conducted a Phase I
clinical trial in the United States involving 12 healthy adults in February 1997
which confirmed the results of the European bioavailability study. Following
completion of the second study, in the second half of 1997, the Company
commenced Phase III clinical trials of the product to evaluate control of asthma
symptoms, lung efficiency and safety of Pediavent in children with asthma. This
study will involve over 60 asthmatic children. The Company expects that this
study will be completed in the first half of 1998.
An NDA will need to be approved by the FDA for Ascent to market this
product in the United States. Ascent plans to submit a request to the FDA for
three years of protection under the Waxman-Hatch Act against the approval of a
competitor's ANDA for the treatment of asthma in children under 12 years of age
which is based on the Company's clinical trial results.
Other Programs
In addition to the products and product development programs described
above, the Company also is engaged in the development of a number of other
pediatric pharmaceutical products. These programs include the following:
Cough/Cold and Other OTC Products. Ascent is developing a line of improved
flavor over-the-counter cough/cold products. Many of the over-the-counter
products for the treatment of coughs and congestion due to colds and influenza
contain the active ingredients guaifenisen, dextromethorphan or the decongestant
pseudoephedrine, which have a bitter taste.
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Ascent is applying its taste masking technology to the development of a
line of cough/cold products containing guaifenisen, dextromethorphan and
pseudoephedrine. Ascent already has completed the development of a guaifenisen
cough syrup. In a taste study involving 81 children age three to six years
comparing Ascent's cough syrup containing guaifenisen to Robitussin, a leading
liquid guaifenisen product, the participants showed a statistically significant
preference for Ascent's product.
The Company believes that it is preferable to introduce its cough/cold
products to the market as an integrated product line. Accordingly, Ascent does
not plan to introduce its guaifenisen cough syrup until it has completed
development of additional products, which the Company estimates will occur no
sooner than late 1999. Because these products are being formulated within the
applicable FDA over-the-counter monographs, Ascent expects that they will not
require FDA approval prior to marketing.
Cromolyn Products. Ascent is developing two cromolyn products for the
treatment of conditions that have an allergic element: cromolyn sodium cream as
a prescription drug for symptoms associated with moderate to severe contact
dermatitis caused by exposure to poison ivy or oak, insect bites and bee stings
and other allergic and non-allergic reactions; and a cromolyn sodium
controlled-release nasal spray as a prescription product for the prevention of
allergic rhinitis associated with conditions such as hay fever. An NDA will need
to be approved by the FDA for Ascent to market either of these products in the
United States.
Just For Kids Vitamin Drops. Ascent is developing Just For Kids Vitamin
Drops as an over-the-counter nutritional supplement for infants. The Company is
applying its taste masking technology to develop this product as a liquid
vitamin with a pleasant taste.
PRODUCT DEVELOPMENT
Ascent actively evaluates the pediatric pharmaceutical industry on an
ongoing basis to assess product usage and to identify unmet medical needs of
children, particularly for prescription drugs for the most common pediatric
illnesses. Ascent's program to identify pediatric product opportunities includes
conducting focus groups with pediatricians, pediatric nurses and parents,
consulting with the Company's scientific and medical advisors and evaluating
drug delivery and other technical developments for their applicability to the
field of pediatric pharmaceuticals. Ascent uses this information to select
compounds as product development candidates that it believes may be improved
through the application of its technologies and reformulation expertise and then
successfully commercialized. Ascent reviews the anticipated development
difficulty, time frame and cost, required technologies,
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applicable regulatory requirements, competitive environment and anticipated
marketing and sales approach in evaluating each development candidate.
Ascent selects as product candidates approved compounds that have well
known clinical profiles and are not covered by third party patents and that it
believes may be improved through the application of the Company's drug delivery
and reformulation technologies. Ascent then seeks to improve these products
through optimized formulations or new delivery technologies with the goal of
differentiating them from competitive products on the market. By developing
products based on approved compounds rather than new chemical entities, the
Company believes that it can reduce regulatory and development risks and shorten
the product development cycle.
Ascent identifies third party manufacturers or academic institutions that
have the required analytical expertise, technology, manufacturing capabilities
and personnel to perform much of the design and formulation work for the
Company's products. To expedite the regulatory process, Ascent seeks to enter
into arrangements with product manufacturers that extend from pilot production
for product stability testing through clinical trials and ultimately to
commercial production. Ascent works closely with these third parties in
connection with product design and formulation and monitors manufacturing
activities, including compliance with Good Manufacturing Practice ("GMP") and
Good Laboratory Practice ("GLP") rules of the FDA.
Ascent contracts with clinical research organizations for the conduct of
the Company's clinical trials. Ascent conducts clinical trials of many of its
products in children not only to comply with FDA requirements but also because
the Company believes that pediatricians will be more willing to prescribe
products for which specific efficacy and safety information is available with
respect to the effect of the drug on pediatric patients. To facilitate enrolling
children in the Company's clinical trials, Ascent has established a network of
relationships with influential pediatricians, industry associations and
pediatric research organizations specializing in conducting clinical trials in
children.
SALES AND MARKETING
Ascent established its domestic sales organization, coincident with the
introduction of its initial two products, Feverall acetaminophen rectal
suppositories and Pediamist nasal saline spray, to the market during the second
half of 1997. As of March 13, 1998, Ascent's sales force consisted of six
regional sales managers, 48 full-time sales representatives and 15 flex-time (or
part-time) sales representatives.
Ascent believes that its exclusive focus on the development and marketing
of pediatric pharmaceutical products meaningfully differentiates the Company
from other pharmaceutical companies in the pediatric medical community. Even
before the launch of its first products, Ascent initiated a program to
familiarize pediatricians with Ascent's corporate identity. This program has
included a direct mail campaign and journal advertising directed at private
pediatricians. The primary focus of the Company's marketing and sales efforts
are pediatricians and pediatric nurses, who are responsible for most
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prescriptions written for children in the United States and play a central role
in recommending over-the-counter medications for children.
Ascent has chosen to establish its own domestic sales force instead of
using third party sales organizations. The Company believes that marketing and
sales initiatives can be more efficiently and effectively implemented through a
direct sales force. Because pediatricians and pediatric nurses are concentrated
in group practices in urban and suburban centers and advertising may be
disseminated through a limited number of specialty pediatric publications,
Ascent believes that it can reach much of the domestic pediatric market with a
moderately sized sales force and carefully controlled marketing expenditures.
Ascent plans to expand this sales force in the future as it introduces
additional products.
The Company is using its sales force to promote products to high
prescribing pediatricians, influential pediatricians and nurses in
pediatricians' offices through personal sales calls by its sales representatives
and attendance by its sales representatives at industry conferences, seminars
and other meetings. Ascent plans to supplement these activities with a
telemarketing program designed to reach pediatricians and pediatric nurses in
geographic areas beyond the coverage of the Company's sales force and
pediatricians and pediatric nurses who are not targeted for one-on-one visits.
Ascent expects to advertise its products through direct mail and advertisements
in speciality pediatric journals.
Because more than 60% of patients are covered by a managed care program,
such as a health maintenance organization, preferred provider organization or
state Medicaid program, Ascent also is promoting its products directly to
managed care providers with the goal of obtaining inclusion of these products on
the providers' formularies.
Ascent is seeking to leverage its marketing and sales capabilities by
entering into arrangements to promote third party pharmaceutical products to
pediatricians. As an example of this strategy, Ascent has entered into a
four-year copromotion agreement with Bristol-Myers Squibb pursuant to which
Ascent is promoting Bristol-Myers Squibb's Duricef oral suspension product, a
cephalosporin antibiotic for the treatment of upper respiratory and urinary
tract infections, to pediatricians in the United States. The Company plans to
continue to evaluate additional third-party products for copromotion.
Ascent plans to enter into licensing and distribution arrangements for the
marketing and sale of its products in international markets to leverage the
established international marketing, sales and distribution capabilities of
third party collaborators. Ascent plans to enter into similar arrangements with
respect to any adult applications of its products.
MANUFACTURING AND DISTRIBUTION
The Company relies upon third parties to manufacture the Company's products
for preclinical tests, clinical trials and commercial purposes. Accordingly, the
Company does not have any manufacturing facilities and has not sought to employ
direct manufacturing personnel. The components of the Company's products
generally are available from a variety of commercial suppliers and are
inexpensive. The production of most of these
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products involves known manufacturing techniques, although the Company has
developed certain proprietary manufacturing technologies that it seeks to
protect as trade secrets.
Ascent believes that there are a number of third party manufacturers, both
in the United States and abroad, with the capability of manufacturing products
for the Company. The Company intends to establish supply agreements with
manufacturers that comply with the FDA's GMP requirements and other regulatory
standards. Certain of the Company's supply arrangements require that Ascent buy
all of the Company's requirements of a particular product exclusively from the
other party to the contract. Moreover, FDA regulations provide that a
manufacturer cannot supply a product to the Company and the Company cannot sell
the product unless the manufacturer is qualified (i.e., demonstrates to the FDA
that it can manufacture the product in accordance with applicable regulatory
standards). For many of its products, Ascent has qualified only one supplier,
even though the contractual arrangement with the supplier may permit Ascent to
qualify an alternative manufacturer. Any interruption in supply from any of its
manufacturers or the inability of these manufacturers to manufacture the
Company's products in accordance with GMP could have a material adverse effect
on the Company's business, financial condition and operating results.
To date, the Company has entered into several agreements with third parties
for the manufacture of the Company's products. In particular, the Company is a
party to a supply agreement with Lyne Laboratories, Inc. ("Lyne"), under which
Lyne has agreed to manufacture Primsol trimethoprim solution for the Company,
and the Company has agreed to purchase all amounts of such product as it may
require for sale in the United States from Lyne in accordance with an agreed
upon price schedule. The agreement may be terminated by either party on three
months' notice any time after October 17, 2004. See "License and Marketing
Agreements" for a description of the Company's agreement with Recordati S.A.
Chemical and Pharmaceutical Company ("Recordati") relating to the manufacture of
Pediavent albuterol controlled-release suspension and "Products and Products
under Development -- Feverall Acetaminophen Suppositories" for a description of
the Company's arrangements with Upsher-Smith for the manufacture of Feverall
acetaminophen rectal suppositories.
In the future, the Company may, if it becomes economically attractive to do
so, establish its own manufacturing facilities. In order for the Company to
establish a manufacturing facility, the Company would require substantial
additional funds and be required to hire and retain significant additional
personnel and comply with the extensive GMP regulations of the FDA.
Ascent distributes its products through a third party distribution
warehouse. Under this arrangement, the manufacturers of the Company's products
ship the products to the distribution warehouse, which performs various
functions on behalf of the Company, including order entry, customer service and
collection of accounts receivable. The Company may seek to develop the
capability to perform some or all of these functions through its own personnel
in the future.
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COMPETITION
Competition in the pediatric pharmaceutical market is intense. Although the
Company believes that no competitor focuses its commercial activities and
research and development efforts exclusively on the pediatric pharmaceutical
market, several large pharmaceutical companies with significant research,
development, marketing and manufacturing operations market pediatric products.
These competitors include Glaxo Wellcome Inc., Eli Lilly and Company, the
Ortho-McNeil Pharmaceutical Division of Johnson & Johnson Inc., Pfizer Inc., the
Ross Laboratories Division of Abbott Laboratories Inc., Schering-Plough
Corporation and the Wyeth-Lederle Vaccines and Pediatrics Division of American
Home Products, Inc.
Key competitive factors affecting the success of the Company include the
efficacy, side effect profile, taste, dosing frequency, method of
administration, patent or other proprietary protection, brand name recognition
and price of its products. The timing of market introduction of the Company's or
competitive products is another important competitive factor. Earlier entrants
in the market often obtain and maintain significant market share relative to
later entrants. Accordingly, the relative speed with which Ascent can develop
products, complete the clinical trials and approval processes and supply
commercial quantities of the products to the market is expected to be an
important competitive factor. The Company's competitive position will also
depend on its ability to attract and retain qualified personnel, to obtain
patent protection or otherwise protect the competitive positions of its products
and to secure sufficient capital resources for its operations.
Many of Ascent's potential competitors have substantially greater name
recognition and greater financial, technical and human resources than Ascent. In
addition, many of these competitors have significantly greater experience than
the Company in undertaking preclinical testing and human clinical trials of
pharmaceutical products and obtaining FDA and other regulatory approvals of
products for use in health care. Accordingly, the Company's competitors may
succeed in obtaining FDA or other regulatory approvals for products more rapidly
than the Company. Furthermore, subject to obtaining required regulatory
clearances, Ascent will compete against these larger companies with respect to
manufacturing efficiency and marketing capabilities, areas in which Ascent has
limited or no experience. Ascent's competitors may introduce competitive pricing
pressures that may adversely affect Ascent's sales levels and margins. Moreover,
many of these competitors offer well established, broad product lines and
services not offered by the Company. Many of the products offered by these
competitors have well known brand names that have been promoted over many years.
The Company expects to market many of its product candidates as alternative
treatments for pediatric indications for which products with the same active
ingredient are well-entrenched in the market. For example, the Company intends
to market Primsol trimethoprim solution, a trimethoprim antibiotic, for the
treatment of AOM, for which pediatricians often prescribe the well-known
combination therapies Bactrim and Septra, which also contain trimethoprim.
Similarly, Feverall controlled-release beads would compete against Tylenol
liquid for children. The Company's product candidates also will face competition
from other products that do not contain the same active ingredient but are used
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for the same indication and are well entrenched within the pediatric market. For
example, Primsol solution will compete against other antibiotics, including
amoxicillin. Moreover, many of the Company's potential products that are
reformulations of existing drugs of other manufacturers may have significantly
narrower patent or other competitive protection. There can be no assurance that
pediatricians, pediatric nurses and third party payors will prefer the Company's
products to existing products.
LICENSE AND MARKETING AGREEMENTS
The Company is a party to certain license and other arrangements under
which it has obtained rights to manufacture and/or market certain products or
product candidates. Set forth below is a summary of those arrangements that the
Company believes are material to its business.
The Company is a party to a development and license agreement with
Recordati pursuant to which the Company holds a license under certain Recordati
patents and patent applications to clinically test, register, market, distribute
and sell a controlled-release suspension system formulation of albuterol in the
form of coated granules. The license is exclusive in all countries other than
Italy and Spain. The Company may sublicense its license rights under this
agreement, subject to certain restrictions in certain countries. Ascent and
Recordati have agreed to collaborate on the development, clinical testing and
regulatory approval of this albuterol product in the United States and in any
other country in which the Company elects to pursue the commercial development
of such product by providing Recordati notice of such intent within 24 months of
filing for regulatory approval in the United States. All license rights with
respect to (i) countries in which the Company does not so notify Recordati of
its intention to commercially develop such product and (ii) countries in which a
joint development committee comprised of two members from each of the Company
and Recordati determine that commercial development of the product is not
technically feasible, revert to Recordati. Recordati will own any intellectual
property resulting from the collaboration other than clinical research data,
product applications and regulatory approvals obtained by Ascent, which the
Company will own. This agreement has an initial term expiring 15 years from the
date of FDA approval of the product and may be extended at the Company's
election for an additional five year term. During the term of this agreement,
Recordati has agreed to supply such quantities of the product as the Company may
require. The Company is required to pay Recordati certain up-front license fees
and to purchase the product from Recordati at unit prices based upon net sales
in a given country. During the term of this agreement, the Company has agreed
not to develop, manufacture or sell other oral liquid controlled-release
suspension system formulations of a beta agonist.
The Company is a party to a copromotion agreement with Bristol-Myers Squibb
under which the Company has agreed to promote Bristol-Myers Squibb's Duricef
oral suspension product to pediatricians in the United States. Under the
agreement, the parties have established a sales/marketing committee comprised of
members of both the Company and Bristol-Myers Squibb to develop and coordinate
the marketing strategy and the promotional plans for the product. As
compensation for the Company's copromotional efforts, Bristol-Myers Squibb has
agreed to pay the Company a specified percentage of net sales of the
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product attributed to pediatricians (as defined in the agreement) on sales above
a specified minimum number of prescriptions for the product. In addition,
Bristol-Myers Squibb has agreed to reimburse the Company for a specified amount
of the Company's marketing costs during each year of the agreement. The term of
the agreement expires on February 28, 2002, unless terminated earlier under
specified circumstances.
The licenses and other third party product arrangements to which the
Company is a party may impose various commercialization, sublicensing, royalty
and other payment, insurance and other obligations on the Company. Failure of
the Company to comply with these requirements could result in termination of the
applicable agreement, which could have a material adverse effect on the Company.
PATENTS, TRADE SECRETS, LICENSES AND TRADEMARKS
The Company's success will depend in part on its ability to develop
patentable products and obtain patent or other proprietary rights protection for
its products, both in the United States and in other countries. The Company's
policy is to file patent applications to protect technology, inventions and
improvements that are considered novel and important to the development of its
business. The Company also relies upon trade secrets, know-how, continuing
technological innovation and licensing opportunities to develop and maintain its
competitive position. Ascent also plans to seek three year protection for
certain products under the Waxman-Hatch Act from the approval of a possible
competitor's ANDA which is based on the Company's clinical trial results as well
as trademark protection for its brand names. There can be no assurance, however,
that any steps taken by the Company to protect its proprietary position will be
effective.
The Company holds 10 issued United States patents, has filed three
patent applications and has received a notice of allowance of claims
with respect to one of such patent applications. One of the issued patents
relates to the Company's formulation of Primsol trimethoprim solution, and five
of the issued patents relate to the Company's cromolyn sodium cream product
candidate. The claims in the patent application as to which the Company has
received a notice of allowance relate to the Company's taste masking
technologies. One of the other two patent applications relates to the Company's
cromolyn sodium cream product candidate and the third patent application relates
to taste masking technologies. Four of the issued patents relate to product
development candidates which the Company currently is not planning to pursue.
The Company has sought foreign patent protection in other major industrial
countries in respect of its most commercially important technologies. All of the
Company's issued United States and foreign patents expire from 2002 to 2016,
although certain United States patents may be extended for specified periods,
and the Company's United States and foreign patents could lapse if certain
applicable fees are not paid.
The patent positions of pharmaceutical firms, including Ascent, are
generally uncertain and involve complex legal and factual questions.
Consequently, even though Ascent currently is prosecuting its patent
applications with the United States Patent and Trademark Office and certain
foreign patent authorities, the Company does not know whether any of its
remaining applications will result in the issuance of any patents or, if any
patents are
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issued, whether they will provide significant proprietary protection or will be
circumvented or invalidated. Since the Company's products and product candidates
represent reformulations of off-patent drugs, any patents which cover such
products would be use or formulation patents, and the Company's products would
therefore be afforded a significantly narrower level of protection than a patent
on the active ingredient itself. Since patent applications in the United States
are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature tend to lag behind actual
discoveries by several months or years, Ascent cannot be certain that it was the
first creator of inventions claimed by pending patent applications or that it
was the first to file patent applications for such inventions. Generally, in the
United States, the first to invent is entitled to the patent, whereas in the
European Economic Community, the first to file is entitled to the patent.
Competitors of the Company and other third parties hold issued patents and
pending patent applications relating to aspects of the Company's technology, and
it is uncertain whether these patents and patent applications will require the
Company to alter its products or processes, pay licensing fees or cease
activities. See "Governmental Regulation -- FDA Approvals."
Ascent's practice is to require its employees, consultants, outside
scientific collaborators and sponsored researchers and other advisors to execute
confidentiality and invention assignment agreements upon the commencement of
employment or consulting relationships with the Company. These agreements
provide that all confidential information developed pursuant to such
relationships or made known to the individual by Ascent during the course of the
individual's relationship with Ascent is to be kept confidential and not
disclosed to third parties, subject to a right to publish certain information in
the scientific literature in certain circumstances and subject to other specific
exceptions. In the case of employees, the agreements provide that all inventions
conceived by the individual relating to the business of the Company shall be the
exclusive property of the Company. There can be no assurance, however, that
these agreements will provide meaningful protection for the Company's trade
secrets or adequate remedies in the event of unauthorized use or disclosure of
such information.
Ascent engages in collaborations and sponsored research agreements and
enters into preclinical and clinical testing agreements with academic and
research institutions to take advantage of their technical expertise and staff
and to gain access to clinical evaluation models, patients, and related
technology. Ascent may be required to negotiate a license to any developments or
results arising out of such collaborations or agreements in order to
commercialize products incorporating them. There can be no assurance that the
Company will be able successfully to obtain any such license at a reasonable
cost or that such developments and results will not be made available to
competitors of the Company on an exclusive or nonexclusive basis. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors That May Affect Future Results -- Uncertainty
Regarding Patents and Proprietary Rights."
Because it believes that promotion of pediatric pharmaceutical products
under a brand name can be an important competitive factor, Ascent plans to seek
trademark protection for its products, both in the United States and, to the
extent the Company deems appropriate, in major foreign countries. To date,
Ascent has obtained eight trademark registrations from
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the United States Patent and Trademark Office, including for the marks "ASCENT,"
"PEDIAMIST," "PEDIATEMP," "PEDIAVENT " and "PRIMSOL." The "FEVERALL" trademark
of Upsher-Smith was included in the assets that the Company purchased as part of
the Company's acquisition of Upsher-Smith's Feverall line of acetaminophen
rectal suppositories in July 1997. All other brand names or trademarks appearing
in this Annual Report Form on 10-K are the property of their respective owners.
GOVERNMENT REGULATION
The testing, manufacture, labeling, distribution, sale, marketing,
promotion and advertising of the Company's products and its ongoing product
development activities are subject to extensive and rigorous regulation by
governmental authorities in the United States and other countries.
FDA Approval
In the United States, pharmaceutical products intended for therapeutic use
in humans are subject to rigorous and extensive FDA regulation before and after
approval. The process of completing preclinical studies and clinical trials and
obtaining FDA approvals for a new drug can take several years and requires the
expenditure of substantial resources. There can be no assurance that any product
will receive such approval on a timely basis, if at all. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors That May Affect Future Results -- No Assurance of
Regulatory Approval; Extensive Government Regulation."
The steps required before a new drug for human use may be marketed in the
United States include (i) preclinical tests, (ii) submission to the FDA of an
Investigation New Drug ("IND") application, which must become effective before
human clinical trials may commence, (iii) adequate and well-controlled human
clinical trials to establish the safety and effectiveness of the product, (iv)
submission of an NDA to the FDA, which application is not automatically accepted
for consideration by the FDA, and (v) FDA approval of the NDA prior to any
commercial marketing, sale or shipment of the product. A new drug in generic
form for use in humans may be marketed in the United States following FDA
approval of an ANDA. ANDA approval requires that if (i) such drug has the same
active ingredient, dosage form, route of administration, strength and conditions
of use as a "pioneer" drug that was previously approved by the FDA as safe and
effective, and (ii) any applicable patents and statutory period of protection
under the Waxman-Hatch Act have expired. Through a petition process, the FDA may
permit the filing of an ANDA for a generic version of an approved "pioneer" drug
with variations in active ingredient, dosage form, route of administration and
strength (but not in conditions of use), unless, among other reasons, (i)
clinical investigations must be conducted to demonstrate the safety and
effectiveness of the drug, (ii) an ANDA would provide inadequate information to
permit the approval of the variation or (iii) significant labelling changes
would be necessary to address new safety or effectiveness concerns raised by
changes in the product.
Preclinical tests include laboratory evaluation of product chemistry and
animal studies to gain preliminary information of a product's pharmacology and
toxicology and to identify any safety problems that would preclude testing in
humans. Preclinical safety tests must be
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conducted by laboratories that comply with FDA regulations regarding GLP. The
results of the preclinical tests are submitted to the FDA as part of an IND
application and are reviewed by the FDA prior to the commencement of human
clinical trials. Unless the FDA objects to, or makes comments or raises
questions concerning, an IND and places it on clinical hold, the IND will become
effective 30 days following its receipt by the FDA and initial clinical studies
may begin, although companies often receive FDA comments before beginning such
studies. There can be no assurance that submission of an IND to the FDA will
result in the IND becoming effective so that clinical trials may commence. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Certain Factors That May Affect Future Results -- Products in
Development; Technological Uncertainty."
Clinical trials involve the administration of the investigational new drug
to healthy volunteers and to patients under the supervision of a qualified
principal investigator. Clinical trials must be conducted in accordance with
applicable FDA regulations under protocols that detail, among other things, the
objectives of the study, the parameters to be used to monitor safety, and the
effectiveness criteria to be evaluated. Each protocol must be submitted to the
FDA as part of the IND. Further, each clinical study must be conducted under the
auspices of an Institutional Review Board ("IRB"). The IRB will consider, among
other things, ethical factors, the safety of human subjects, the possible
liability of the institution and the informed consent disclosure which must be
made to participants in the clinical trial.
Clinical trials are typically conducted in sequential phases, although the
phases may overlap. In Phase I, the investigational new drug usually is
administered to healthy human subjects (10 to 50 persons) and is tested for
safety (adverse effects), dosimetry, tolerance, metabolism, distribution,
excretion and pharmacokinetics (clinical pharmacology). Phase II involves
studies in a limited patient population (approximately 10 to 70 persons) to (i)
evaluate the effectiveness of the investigational new drug for specific
indications, (ii) determine dose response and optimal dosage and (iii) identify
possible adverse effects and safety risks. When an investigational new drug is
found to have an effect at an optimal dose and to have an acceptable safety
profile in Phase II evaluation, Phase III trials are undertaken to further test
for safety, further evaluate clinical effectiveness and to obtain additional
information for labeling within an expanded patient population at geographically
dispersed clinical study sites. There can be no assurance that Phase I, Phase II
or Phase III testing will be completed successfully within any specified time
period, if at all, with respect to any of the Company's products subject to such
testing. Furthermore, the FDA may at any time impose a clinical hold on ongoing
clinical trials, or the IRB or the Company may suspend clinical trials at any
time if it is felt that the participants are being exposed to an unanticipated
or unacceptable health risk. If the FDA imposes a clinical hold, clinical trials
may not recommence without prior FDA authorization and then only under the terms
authorized by the FDA.
The results of the pharmaceutical development, preclinical studies and
clinical studies, the chemistry and manufacturing data, and the proposed
labeling, among other things, are submitted to the FDA in the form of an NDA for
approval of the marketing and commercial shipment of the product. The FDA may
refuse to accept the NDA for filing if administrative
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and NDA content criteria are not satisfied, and even after accepting the NDA for
review, the FDA may require additional testing or information before approving
the NDA. The FDA must deny an NDA if applicable regulatory requirements are not
ultimately satisfied. Moreover, if regulatory approval of a product is granted,
such approval may be conditioned on post-marketing testing and surveillance to
monitor the safety of the product or may entail limitations on the indicated
uses for which it may be marketed. Finally, product approvals may be suspended
or withdrawn if, among other reasons, compliance with regulatory is not
maintained, new information raises safety or effectiveness questions or problems
occur following initial marketing.
The Waxman-Hatch Act permits the use of an abbreviated FDA approval
procedure by authorizing the filing of an ANDA for any drug product that has the
same active ingredient as a drug that was approved by the FDA as safe and
effective, subject to certain exclusions (such as drugs that are still protected
by patent or market exclusivity). Approval of a pharmaceutical product through
an ANDA does not require the conduct of preclinical tests on pharmacology or
toxicology or Phase I, II or III clinical trials to prove the safety and
effectiveness of such product, but instead is based upon a showing of
bioequivalence with the "pioneer" drug and adequate manufacturing. Therefore,
compared to an NDA, the filing of an ANDA may result in reduced research and
development costs associated with bringing a product to market.
An ANDA can be filed in cases where there is an existing patent on an
approved "pioneer" drug. The applicant is obligated to notify the patent holder
of the filing of the ANDA, which then starts a 45-day period during which the
patent holder can file a patent infringement suit against the applicant if the
patent holder believes that its patent would be infringed by the applicant's
product. If patent litigation is brought against the applicant, the FDA will
still review the ANDA, however, any FDA approval of the ANDA can not become
effective until the earlier of (i) a determination that the existing patent is
invalid, unenforceable or not infringed, (ii) such litigation has been dismissed
or (iii) 30 months after the ANDA filing.
The Waxman-Hatch Act also provides for a period of statutory protection for
new drugs which receive NDA (but not ANDA) approval from the FDA. If a new drug
receives NDA approval, and the FDA has not previously approved any other new
drug containing the same active ingredient, then the Waxman-Hatch Act does not
permit an ANDA to be submitted by another company for a generic version of such
drug for a period of five years (or four years if an ANDA applicant certifies
invalidity or non-infringement of the patent covering such drug) from the date
of approval of the NDA. Similarly, if NDA approval is received for a new drug
containing an active ingredient that was previously approved by the FDA, and if
such NDA approval was dependent upon the submission to the FDA of new clinical
investigations (other than bioavailability studies) by the applicant, then the
Waxman-Hatch Act prohibits the FDA from making effective the approval of an ANDA
for a generic version of such drug by another company for a period of three
years from the date of such NDA approval. The statutory protection provided
pursuant to the Waxman-Hatch Act will not prevent the filing or approval of an
NDA (as opposed to an ANDA) for any drug, including, for example, a drug with
the same active ingredient, dosage form, route of administration, strength and
conditions of use as a drug protected under the act.
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However, in order to obtain an NDA, a competitor would have had to have
conducted its own clinical trials. As the Company's products and product
candidates are based upon approved compounds for which the FDA has previously
granted NDA approval, the Company expects that any of its products which qualify
for statutory protection under the Waxman-Hatch Act will be afforded only a
three year period of protection.
The Company has completed clinical trials and submitted NDAs with respect
to two of its product candidates. No assurance can be given that the Company's
clinical trials with respect to any of its product candidates will be completed
on a timely basis, if at all, that the clinical trials will demonstrate safety
or effectiveness, that the clinical results will be accepted for consideration
by the FDA, that the FDA will find the data submitted adequate or that an NDA or
ANDA will be ultimately approved. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Certain Factors
That May Affect Future Results -- Unproven Safety and Effectiveness of Potential
Products; Uncertainties Related to Clinical Trials."
As part of the drug approval process, the FDA must inspect and find that
the Company's or its supplier's drug manufacturing facilities comply with GMP
before an NDA or an ANDA can be approved by the FDA for marketing in the United
States. The FDA will review the manufacturing procedures and inspect the
manufacturer's facilities and equipment for compliance with GMP and other
requirements. After an NDA is approved, any material change in the manufacturing
process, equipment or location would necessitate additional data, then FDA
review and approval before marketing.
Certain of the Company's products, such as guaifenisen cough syrup, fall
within the FDA's OTC Monograph system, rather than the IND/NDA system, and may
be marketed without the Company first obtaining FDA approval of an NDA or ANDA,
provided such product complies with the specifications set forth in the OTC
Monograph for the applicable product category. OTC drugs must also be
manufactured in compliance with GMP, but premarket approval is not required.
In addition, once a product is approved, any changes in manufacturing that
have substantial potential to adversely affect the safety or effectiveness of
the product, for example, certain changes in the formulation of a drug, will
require supplemental approval by the FDA, as may changes in labeling or
promotion.
Even after approval, all marketed products and their manufacturers are
subject to continual government review. Subsequent discovery of previously
unrecognized problems or failure to comply with applicable regulatory
requirements could result in, among other things, restrictions on manufacturing
or marketing of the product, product recall or withdrawal, fines, seizure of
product, or civil or criminal prosecution, as well as withdrawal or suspension
of regulatory approvals.
Foreign Regulatory Approval
Whether or not FDA approval has been obtained, approval of a pharmaceutical
product by comparable governmental regulatory authorities in foreign countries
must be obtained
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prior to the commencement of clinical trials and subsequent marketing of such
product in such countries. The approval procedure varies from country to
country, and the time required may be longer or shorter than that required for
FDA approval. Although there are some procedures for unified filing for certain
European countries, in general, each country has its own procedures and
requirements.
Under the FDA Export Reform and Enhancement Act of 1996, pharmaceutical
products generally may be freely exported from the United States before the FDA
has approved the product for marketing in the United States for use in
investigation in 24 listed countries and for marketing in any country after at
least one of the 24 listed countries has approved the product for marketing.
EMPLOYEES
As of December 31, 1997, Ascent had 83 full-time employees. Fourteen of
these employees are engaged in product development and quality control,
including medical and regulatory affairs, 53 are employed in sales and marketing
and 16 are employed in finance, business development and general and
administrative activities. Many of the Company's management and professional
employees have had prior experience with pharmaceutical, biotechnology or
medical products companies. None of the Company's employees is covered by a
collective bargaining agreement, and management considers relations with its
employees to be good.
ITEM 2. PROPERTIES
Ascent leases approximately 14,300 square feet of office space in Wilmington,
Massachusetts. The lease has an initial term expiring January 31, 2002. The
Company has an option to renew the lease for an additional five-year period.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1997.
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EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The following table sets forth certain information regarding the executive
officers and certain significant employees of the Company as of March 1, 1998.
NAME AGE POSITION
---- --- --------
Executive Officers
Emmett Clemente, Ph.D....................................... 59 Chairman of the Board
Alan R. Fox................................................. 53 President, Chief Executive Officer and
Director
John G. Bernardi............................................ 42 Vice President, Finance and Treasurer
Gregory A. Vannatter........................................ 45 Vice President, Marketing
Significant Employees
Mumtaz Ahmed, M.D., Ph.D.................................... 61 Vice President, Medical Affairs
Aloysius O. Anaebonam, Ph.D................................. 42 Vice President, Product Development and
Quality Control
William E. Brochu, Ph.D..................................... 52 Vice President, Regulatory Affairs
Albert R. Collinson, Ph.D................................... 39 Vice President, Business Development
Timothy K. Moffitt.......................................... 32 Vice President, Sales
Bobby R. Owen............................................... 49 Vice President, Manufacturing
Diane Worrick............................................... 45 Director of Human Resources
Emmett Clemente, Ph.D., founded the Company in 1989 and has served as a
director since 1989 and as Chairman of the Board since May 1996. From 1989 to
May 1996, Dr. Clemente also served as the Company's Chief Executive Officer. Dr.
Clemente served as the Director of Pharmaceutical Research for Fisons
Corporation, U.S., a pharmaceutical company ("Fisons"), from 1980 to 1989, and
as the Director of New Product Development and Acquisitions of Fisons from 1972
to 1980. From 1970 to 1972, Dr. Clemente served as Chief Scientist in the
Consumer Products Division of Warner-Lambert Company, a pharmaceutical company.
From 1967 to 1970, Dr. Clemente served as Senior Scientist of Richardson-Merrell
Company, a pharmaceutical company. Dr. Clemente received a B.S. in biology, an
M.S. in physiology and a Ph.D. in pharmacology from St. John's University.
Alan R. Fox, joined the Company as President, Chief Executive Officer
and a director in May 1996. Mr. Fox served as President of Mead Johnson Europe,
an infant formula and nutritional company, from 1991 to May 1996. From 1981 to
1991, Mr. Fox was President and General Manager of Mead Johnson Canada, an
infant formula and nutritional company. From 1968 to 1981, Mr. Fox served in
various positions, including as a Manager of Marketing and Sales for the Bristol
Laboratories Division ("Bristol Laboratories") of Bristol-Myers Squibb, Inc.,
("Bristol-Myers Squibb") a pharmaceutical company. Mr. Fox received a B.S. in
economics and an M.B.A. from the Wharton School, University of Pennsylvania.
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30
John G. Bernardi, Vice President, Finance, joined the Company in June
1996. Mr. Bernardi acted as an independent financial consultant from 1995 to
June 1996. From 1990 to 1995, Mr. Bernardi served as the Vice President of
Administration and Finance for Vision-Science, Inc., a medical device company.
Mr. Bernardi received a B.S. in accounting from Bentley College and an M.B.A.
from New Hampshire College.
Gregory A. Vannatter, Vice President, Marketing, joined the Company in
October 1996. Mr. Vannatter served in various positions with Mead Johnson
Nutritionals Division of Bristol-Myers Squibb from 1988 to October 1996,
including most recently Director of Pediatric Global Marketing from 1995 to
September 1996 and Director of Infant Formula Marketing from 1991 to 1995. From
1986 to 1988, Mr. Vannatter served as Product Manager for Bristol Laboratories.
From 1975 to 1986, Mr. Vannatter served in various sales and marketing positions
with Pfizer Pharmaceuticals, a pharmaceutical company. Mr. Vannatter received a
B.S. in marketing from Ball State University and an M.B.A. from Indiana
University.
Mumtaz Ahmed, M.D., Ph.D., Vice President, Medical Affairs, joined the
Company in 1993. Dr. Ahmed served as Executive Director/Distinguished Research
and Development Physician at Ciba-Geigy Corporation, a pharmaceutical company
("Ciba-Geigy"), from 1982 to 1993. Dr. Ahmed received a B.S. in biology and
chemistry and an M.S. in Microbiology from University of Karachi, Pakistan, an
M.D. from UACJ School of Medicine, Juarez, Mexico, and a Ph.D. in microbiology
from Indiana University School of Medicine.
Aloysius O. Anaebonam, Ph.D., Vice President, Product Development and
Quality Control, joined the Company in 1991. Dr. Anaebonam served as a Section
Head in the Analytical/Stability Group for Fisons from 1986 to 1991. Dr.
Anaebonam received a B.Pharm. from the University of Nigeria and an M.S. and a
Ph.D. in industrial pharmacy from the Massachusetts College of Pharmacy.
William E. Brochu, PhD., Vice President, Regulatory Affairs, joined the
Company in 1997. Dr. Brochu served as Director, Regulatory Affairs at Copley
Pharmaceutical, Inc., a pharmaceutical company, from 1995 to 1997. From 1985 to
1995 Dr. Brochu served in various regulatory and technical positions at Proctor
& Gamble Co., a personal and household products company, including Section Head,
Regulatory Affairs from 1991 to 1995. From 1978 to 1985 Dr. Brochu served as
Section Chief, New Product Development at Norwich-Eaton Pharmaceuticals which
was acquired by Proctor & Gamble in 1985. From 1974 to 1978 Dr. Brochu served as
Section Manager, Pharmaceutical Development at Travenol Laboratories, Inc., a
pharmaceutical company. Dr. Brochu received his B.S. and M.S. in pharmaceutical
sciences from the Massachusetts College of Pharmacy and his Ph.D. in industrial
and physical pharmacy from Purdue University.
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31
Albert R. Collinson, Ph.D., Vice President, Business Development,
joined the Company in November 1996. Dr. Collinson served as Head of Scientific
Development, Office of Technology, of Berlex Laboratories, a pharmaceutical
company, from 1995 to November 1996. From 1993 to 1995, Dr. Collinson served as
Director of Business Development of Apoptosis Technology, Inc., biotechnology
company. From 1992 to 1993, Dr. Collinson served as Director, Business
Development and from 1988 to 1992 as Group Leader, Biochemistry, at ImmunoGen,
Inc., a biotechnology company. Dr. Collinson received a B.S. in biology and
chemistry from the University of Rhode Island and a Ph.D. in biochemistry from
Brandeis University.
Timothy K. Moffitt, Vice President, Sales, joined the Company in 1997.
Mr. Moffitt served in various sales positions with G.D. Searle & Co, a
pharmaceutical company, from 1987 to 1997, including most recently Director,
Strategic Operations from 1996 to 1997, National Sales Director, LTC/Hospital
Markets from 1994 to 1996, National Director, Managed Care from 1993 to 1994,
and Regional Manager from 1991 to 1993. Mr. Moffitt received a B.S. in
biology/chemistry from Bradley University.
Bobby R. Owen, Vice President, Manufacturing, joined the Company in
1997. Mr. Owen served as Corporate Director of Manufacturing at AutoImmune,
Inc., a biotechnology company, from 1995 to 1997. From 1994 to 1995 Mr. Owen
served as Vice President of Technical Operations at Telor Ophthalmic
Pharmaceuticals, Inc., a pharmaceutical company. From 1989 to 1993 Mr. Owen
served as Vice President of Operations at PCM Corporation/Paco Pharmaceutical
Services, Inc, a pharmaceutical company. From 1971 to 1979 Mr. Owen served in
various manufacturing and developments positions with Baxter Health Care. Mr.
Owen received his B.S. in chemistry from the University of Alabama.
Diane Worrick, Director of Human Resources, joined the Company in 1990.
Ms. Worrick served in various human resources positions at Fisons from 1976 to
1989, last serving as Personnel Manager. Ms. Worrick received a B.B.A. from
Northeastern University.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since May 30, 1997, the Company's Common Stock has traded on the Nasdaq
National Market under the symbol "ASCT". Prior to May 30, 1997, there was no
established public trading market for the Company's Common Stock. The following
table sets forth the high and low sales prices per share of the Common Stock for
the periods indicated below as reported on the Nasdaq National Market.
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32
PERIOD HIGH LOW
1997
- ----
Second Quarter (from May 30, 1997) $10.250 $8.500
Third Quarter $10.250 $6.125
Fourth Quarter $ 9.875 $4.000
The reported closing price of the Common Stock on the Nasdaq National
Market on March 13, 1998 was $4.375. There were approximately 150 stockholders
of record at March 13, 1998.
The Company has never declared or paid cash dividends on its Common
Stock and does not expect to pay cash dividends on its Common Stock in the
foreseeable future. The Company is currently prohibited from paying cash
dividends under the terms of the convertible subordinated secured notes (the
"Triumph Notes") issued in the original aggregate principal amount of $7,000,000
in 1997 to Triumph-Connecticut Limited Partnership and certain other persons.
See "Certain Relationships and Related Transactions" in the Definitive Proxy
Statement (as defined below).
During the three-month period ended December 31, 1997, the Company did
not sell any securities that were not registered under the Securities Act of
1933, as amended (the "Securities Act").
(b) USE OF PROCEEDS OF INITIAL PUBLIC OFFERING
In connection with the initial public offering (the "Offering") of
shares of Common Stock of the Company, the Company's Registration Statement on
Form S-1, Commission File No. 333-23319 (the "Registration Statement"), was
declared effective by the Securities and Exchange Commission on May 29, 1997. In
the Offering, the Company issued and sold an aggregate of 2,240,000 shares of
Common Stock, with an aggregate offering price of $20,160,000, and paid an
aggregate of $2,630,661 in total expenses, which consisted of $1,411,110 in
underwriting discounts and commissions, $3,492 in expenses paid to or for the
underwriters and an aggregate of $1,216,059 in accounting, legal, printing and
other expenses. None of these expenses was paid, directly or indirectly, to
directors, officers, general partners of the Company or their associates,
persons owning ten percent or more of any class of equity securities of the
Company or affiliates of the Company. The net offering proceeds to the Company,
after deducting total expenses of the offering, was $17,529,339.
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From May 29, 1997 through December 31, 1997, the Company used the net
Offering proceeds in the following manner:
- -------------------------------------------------------------------------------------------------------------
Direct or indirect payments to Direct or indirect payments to
directors, officers, general others
partners of the Company or
their associates; to persons
owning ten percent or more of
any class of equity securities of
the Company; and to affiliates
of the Company
- -------------------------------------------------------------------------------------------------------------
Construction of plant, building $ 0 $ 0
and facilities
- -------------------------------------------------------------------------------------------------------------
Purchase and installation of 0 527,992
machinery and equipment
- -------------------------------------------------------------------------------------------------------------
Purchases of real estate 0 0
- -------------------------------------------------------------------------------------------------------------
Acquisition of other 0 5,971,000
business(es)
- -------------------------------------------------------------------------------------------------------------
Repayment of Indebtedness 893,250 156,750
- -------------------------------------------------------------------------------------------------------------
Working capital 0 4,241,856
- -------------------------------------------------------------------------------------------------------------
Temporary investment (specify) 0 0
- -------------------------------------------------------------------------------------------------------------
Other purposes (specify) 0 0
- -------------------------------------------------------------------------------------------------------------
In December 1997, the Company paid an aggregate of $1,050,000
(representing the first of eight equal quarterly payments of principal under the
Triumph Notes and interest on the outstanding principal amount of the Triumph
Notes as of such date) to the holders of the Triumph Notes, including a
director of the Company and an affiliated entity. See "Certain Relationships
and Related Transactions" in the Definitive Proxy Statement. In all other
respects, the Company's use of the net Offering proceeds in the period from
October 1, 1997 through December 31, 1997 does not represent a material change
in the use of proceeds described in the Registration Statement.
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ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data
(In thousands, except per share data)
Year Ended December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Product revenue, net..................... $ 2,073 $ -- $ -- $ -- $ --
Licensing Revenue ....................... -- -- 304 -- --
Gross margin............................. 1,122 -- 304 -- --
Loss from operations..................... (11,854) (6,566) (4,214) (3,692) (1,944)
Net loss................................. (12,498) (6,487) (4,101) (3,545) (1,821)
Net loss to common stockholders.......... (12,745) (6,625) (4,163) (3,545) (1,821)
Net loss per common share(1)
Basic and diluted...................... $ (3.08) $(33.44) $(21.05) $(17.93) $ (9.22)
December 31,
------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Cash, cash equivalents and current
marketable securities ................ $14,229 $ 2,086 $ 2,538 $ 2,171 $ 5,691
Working capital......................... 4,242 525 2,231 1,966 5,557
Total assets(2)......................... 28,433 2,628 2,750 2,466 5,866
Long term subordinated secured notes,
net of current portion................ 1,252 -- -- -- --
Redeemable Convertible Preferred Stock,
Series D, Series E and Series F(3).... -- 17,832 12,557 8,157 8,157
Total equity............... 15,515 (16,778) (10,158) (5,995) (2,451)
No dividends have been declared by the Company.
(1) On May 27, 1997, the Company affected a 0.85-for-one reverse split of its
common stock and increased the number of authorized shares of common stock to
60,000,000. Accordingly, all share and per share amounts have been adjusted to
reflect the reverse stock split as though it had occurred at the beginning of
the initial period presented.
(2) In July 1997, the Company acquired the Feverall acetaminophen suppository
product line and certain related assets for a purchase price of $11.9 million. A
significant portion of the purchase price was allocated towards "Feverall"
trademark, manufacturing agreement and goodwill.
(3) All outstanding preferred stock was converted to common stock at the
initial public offering in May 1997.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company is a drug development and marketing company focused
exclusively on the pediatric market. The Company commenced operations in March
1989 and prior to July 1997 was engaged primarily in developing its products and
product candidates and in organizational efforts, including recruiting
scientific and management personnel and raising capital. The Company closed its
acquisition of the Feverall product line and related assets on July 10, 1997 and
introduced its first product, Feverall acetaminophen suppositories during the
quarter ended September 30, 1997. The Company introduced its second product,
Pediamist nasal saline spray, during the quarter ended December 31, 1997.
The Company has incurred net losses since its inception and expects to
incur additional operating losses at least through 1998 as it continues its
product development programs, maintains its sales and marketing organization and
introduces products to the market. The Company expects cumulative losses to
increase over this period. The Company has incurred a deficit from inception
through December 31, 1997 of $32,378,000.
RESULTS OF OPERATIONS
FISCAL YEAR 1997 VS. FISCAL YEAR 1996
Revenue: The Company had product revenue of $2,073,000 for the year
ended December 31, 1997 compared with no revenue in the comparable prior year.
The revenue was primarily the result of the acquisition and subsequent marketing
of the Company's first product, Feverall acetaminophen suppositories, and to a
lesser extent the introduction of Pediamist nasal saline spray to the market.
Cost of Sales: Cost of sales was $952,000 for the year ended
December 31, 1997. The cost of sales was attributable to the manufacturing cost
associated with the Feverall and Pediamist products and the write-off of
$205,000 of Just For Kids Vitamin Drops inventory as a result of a formulation
change initiated by the Company.
Selling, General and Administrative Expenses: The Company incurred
selling, general and administrative expenses for the year ended December 31,
1997 of $8,538,000, an increase of $5,733,000 over the prior year.
Selling and marketing expenses were $5,739,000 for the year ended
December 31, 1997, an increase of $4,674,000 over the prior year. This increase
was primarily the result of (i) increased personnel expenses as the Company
assembled sales and marketing personnel for the anticipated introduction of its
products in the second half of 1997 and (ii) increases in advertising and
promotional activities in anticipation of such product introductions.
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36
General and administrative expenses were $2,799,000 for the year ended
December 31, 1997, an increase of $1,059,000 over the prior year. This increase
was primarily a result of additional staffing expenses resulting from the
Company's increased infrastructure relating to the anticipated product
introductions and amortization expenses of intangible assets related to the
Feverall acquisition.
Research and Development: The Company incurred research and development
expenses for the year ended December 31, 1997 of $4,438,000, an increase of
$677,000 over the prior year. The increase primarily reflected increased third
party pilot manufacturing and development expenditures relating to the Company's
twice a day liquid controlled release bronchodilator, Pediavent, and increased
expenditures for the development of the Company's Just for Kids Vitamin Drops.
Interest: The Company had interest income of $693,000 for the year
ended December 31, 1997, an increase of $614,000 over the comparable prior year.
The increase was primarily attributable to increases in funds available for
investment by the Company resulting from the Company's initial public offering
of Common Stock, the sale of Series F Convertible Preferred Stock and the
issuance of subordinated secured notes. The Company had interest expense of
$1,359,000 for the year ended December 31, 1997, which reflected the accretion
of the subordinated secured notes and related cash interest payments.
FISCAL YEAR 1996 VS. FISCAL YEAR 1995
Revenues: The Company had licensing revenue of $304,000 in 1995, which
was comprised of a $202,000 one-time technology transfer fee and $102,000 for
non-recurring product development activities pursuant to a license agreement.
Selling, General and Administrative Expenses: The Company incurred
selling, general and administrative expenses of $2,805,000 and $1,532,000 in
1996 and 1995, respectively. The increase in 1996 was primarily due to the
initiation by the Company of a program to familiarize pediatricians with the
Ascent name, development of a marketing program and increased expenditures to
recruit and hire personnel.
Research and Development: The Company incurred research and development
expenses of $3,761,000 and $2,986,000 in 1996 and 1995, respectively. The
increase was due to increased costs associated with the Company's clinical
trials of Feverall controlled-release beads, costs of producing Orapred syrup
for stability testing and payments to the Company's supplier in connection with
the development of Pediavent.
Interest: The Company had interest income of $79,000 and $113,000 in
1996 and 1995, respectively. The change was primarily due to attributable to
changes in the funds available for investment by the Company.
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37
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
from private sales of preferred stock, the private sale of subordinated secured
notes and related common stock purchase warrants and, in 1997, an initial public
offering of shares of Common Stock. As of December 31, 1997, the Company had
raised approximately $27,123,000 (net of issuance costs) from the sales of
preferred stock, approximately $6,404,000 (net of issuance costs) from the
issuance of subordinated secured notes and related warrants and approximately
$17,529,000 (net of issuance costs) from the initial public offering of
2,240,000 shares of Common Stock. In addition, in the second half of 1997, the
Company began shipping its first two products, Feverall acetaminophen
suppositories and Pediamist nasal saline spray.
In January 1997, the Company issued $2,000,000 of subordinated secured
notes, resulting in net proceeds to the Company of $1,790,000, which was
recorded as a liability of $1,163,000 with $837,000 to be accredited as interest
expense over the term of the notes. In May 1997, the Company issued an
additional $5,000,000 of subordinated secured notes, resulting in net proceeds
to the Company of $4,614,000, which was recorded as a liability of $3,331,000
with $1,669,000 to be accredited as interest expense over the term of the notes.
The notes amortize in eight equal quarterly principal installments and require
quarterly interest payments on the unpaid balance. The notes mature on September
2, 1999. The notes are collateralized by a lien on all of the Company's assets,
prohibit the payment of dividends by the Company and, subject to certain
exceptions (including for up to $6,000,000 of senior secured bank financing),
prohibit the incurrence of additional indebtedness.
On February 3, 1997, February 19, 1997 and February 28, 1997, the
Company raised an aggregate of $6,922,000 of net proceeds from private sales of
shares of Series F Convertible Preferred Stock.
On June 4, 1997, the Company completed its initial public offering of
2,000,000 shares of Common Stock, raising approximately $15,500,000 of net
proceeds. In addition, on June 26, 1997, the underwriters exercised an
overallotment option and purchased an additional 240,000 shares of Common Stock,
resulting in additional net proceeds to the Company of approximately $2,000,000.
On July 10, 1997, the Company closed the acquisition of the Feverall
line of acetaminophen rectal suppositories from Upsher-Smith. The purchase price
was $11,905,000, including related costs of $184,000. The Company paid
$6,405,000 of such amount in cash (including a $250,000 deposit that the Company
previously paid to Upsher-Smith) and issued a promissory note for the balance.
The Company paid this note in February 1998. The Company has allocated a
significant portion of these payments towards trademarks, manufacturing
agreements and goodwill, which will be amortized over 15 to 20 years on a
straight-line basis.
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On December 2, 1997, the Company made the first quarterly payment of
principal and interest, $875,000 and $175,000 respectively, that was due on the
subordinated secured notes.
Through December 31, 1997, the Company applied the proceeds from the
sales of preferred stock, subordinated notes, its initial public offering and
product and other revenues to fund the accumulated deficit of $32,378,000 and
net investment of $1,148,000 in property and equipment. As of December 31, 1997,
the Company had cash, cash equivalents and current marketable securities of
$14,229,000.
The Company expended $805,000, $60,000 and $18,000 to purchase fixed
assets, primarily equipment and furniture, in 1997, 1996 and 1995, respectively.
The Company expects that its capital expenditures in 1998 will be approximately
$100,000, primarily for computer hardware and software. In addition, the Company
has entered into several agreements with unaffiliated entities for the
performance of research and clinical trial studies. These commitments are
ongoing, and the Company expects to spend approximately $453,000 toward these
commitments in 1998. Factors affecting cash flow from operating activities in
1997 included increases in inventory of $379,000 and in accounts receivable of
$816,000.
The Company's future capital requirements will depend on many factors,
including continued progress in its product development programs, the magnitude
of these programs, the results of preclinical studies and clinical trials, the
time and cost involved in obtaining regulatory approvals, the costs involved in
filing, prosecuting, enforcing and defending patent claims, competing
technological and market developments, the ability of the Company to maintain
and, in the future, expand its sales and marketing capability and product
development, manufacturing and marketing relationships, and the costs and
success of commercialization activities and arrangements, particularly the level
of product sales. The Company's business strategy requires a significant
commitment of funds to conduct clinical testing of potential products, to pursue
regulatory approval of such products and maintain sales and marketing
capabilities and manufacturing relationships necessary to bring such products to
market.
The Company has no committed external sources of capital. Based on its
1998 operating plan, the Company anticipates that it will require approximately
$8,000,000 of additional funds from external sources no later than the beginning
of the third quarter of 1998 to meet its capital requirements and continue its
operations for the balance of the third quarter and the remainder of 1998. The
Company is currently in negotiations with a number of potential sources of
financing to obtain additional funding. No assurance can be given that such
financing will be available, or, if available, that it will be available on
acceptable terms.
If adequate funds are not available, the Company may be required to
significantly curtail one or more of its product development programs or product
commercialization efforts, obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish rights to certain
of its technologies, product candidates or products which the Company would
otherwise pursue on its own or significantly scale back or terminate operations.
In the Report of Independent Accountants set forth in Appendix A to
this Annual Report on Form 10-K, Coopers & Lybrand L.L.P., the Company's
independent public accountants, states that there is substantial doubt about the
Company's ability to continue as a going concern.
The Company is aware of the issues that many computer systems will
face as the millenium ("Year 2000") approaches. The Company does not expect the
cost of the effort to install Year 2000 compliant software to be material. In
addition, the Company believes that the Year 2000 issue will not pose
significant operational problems. However, Year 2000 issues could have a
significant impact on the Company's business, financial condition and results of
operations if modifications cannot be completed on a timely basis, unforeseen
needs or problems arise, or if the systems operated by suppliers, collaborative
partners or licensees are not Year 2000 compliant.
Recent Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement requires that changes in the comprehensive income to be shown in
a financial statement be displayed with the same prominence as other financial
statements. The statement will be effective for annual periods beginning after
December 15, 1997 and the Company will adopt its provisions in fiscal year 1998.
Reclassification for earlier periods is required for comparative purposes. The
Company is currently evaluating the impact this statement will have on its
financial statements; however, because the statement requires only additional
disclosure, the Company does not expect the statement to have a material impact
on its financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." This statement
includes requirements to report selected segment information quarterly and
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenues. The
statement will be effective for annual periods beginning after December 15, 1997
and the Company will adopt its provisions in fiscal year 1998. Reclassification
for earlier periods is required, unless impracticable, for comparative purposes.
The Company is currently evaluating the impact this statement will have on its
financial statements; however, because the statement requires only additional
disclosure, the Company does not expect the statement to have a material impact
on its financial position or results of operations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Annual Report on Form 10-K contains forward-looking statements.
for this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects,"
"intends" and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the
Company's actual results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation, those set
forth below.
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CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company has no committed external sources of capital. Based on its
1998 operating plan, the Company anticipates that it will require approximately
$8,000,000 of additional funds from external sources no later than the beginning
of the third quarter of 1998 to meet its capital requirements and continue its
operations for the balance of the third quarter and the remainder of 1998. The
Company is currently in negotiations with a number of potential sources of
financing to obtain additional funding. No assurance can be given that such
financing will be available, or, if available, that it will be available on
acceptable terms. If additional funds are raised by issuing equity securities,
further dilution to then existing stockholders will result. Additionally, the
terms of the financing may adversely affect the holdings or the rights of the
then existing stockholders.
If adequate funds are not available, the Company may be required to
significantly curtail one or more of its product development programs or product
commercialization efforts, obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish rights to certain
of its technologies, product candidates or products which the Company would
otherwise pursue on its own or significantly scale back or terminate operations.
The Company's future capital requirements will depend on many factors,
including continued progress in its product development programs, the magnitude
of these programs, the results of preclinical studies and clinical trials, the
time and cost involved in obtaining regulatory approvals, the costs involved in
filing, prosecuting, enforcing and defending patent claims, competing
technological and market developments, the ability of the Company to maintain
and, in the future, expand its sales and marketing capability and product
development, manufacturing and marketing relationships, and the costs and
success of commercialization activities and arrangements, particularly the level
of product sales. The Company's business strategy requires a significant
commitment of funds to conduct clinical testing of potential products, to pursue
regulatory approval of such products and maintain sales and marketing
capabilities and manufacturing relationships necessary to bring such products to
market.
EARLY STAGE OF DEVELOPMENT; HISTORY OF OPERATING LOSSES AND CUMULATIVE DEFICIT
Ascent has incurred net operating losses since its inception. At
December 31, 1997, the Company's cumulative deficit was approximately
$32,378,000. Such losses have resulted primarily from costs incurred in the
Company's product development programs, general and administrative costs
associated with the Company's product development and costs associated with
raising equity capital and the establishment of the Company's sales force. The
Company first began to market products in the second half of 1997 and most of
its products are still in development.
The Company expects to incur additional operating losses over at least
the next two years, as it continues its product development programs and incurs
the costs of maintaining its marketing and sales capabilities, and expects
cumulative losses to increase. The Company expects that losses will fluctuate
from quarter to quarter and that such fluctuations may be substantial. The
Company's ability to achieve profitability is dependent in part upon obtaining
regulatory approval for new products, commercial acceptance of products that
are introduced to the market after required approvals have been obtained, the
successful development and commercialization of its products and sales of such
products and margins on such sales. There can be no assurance that the Company
will obtain required regulatory approvals, successfully develop, commercialize,
manufacture and market its products or ever achieve sales or profitability.
UNCERTAINTY RELATED TO APPROVAL OF PRIMSOL TRIMETHOPRIM SOLUTION
In 1996, the Company filed two NDA's covering 25mg and 50mg strengths
of Primsol trimethoprim solution for the treatment of acute otitis media
("AOM"), or middle ear infection, for children age six months to 12 years. In
June 1997, the FDA approved the Company's NDA for its 25mg strength of Primsol
solution. The Company's NDA for its 50mg strength of Primsol solution is still
pending. In February 1998, the Company received a letter from the FDA citing
certain deficiencies in the Company's NDA for the 50mg strength. There can be no
assurance as to when or if the Company will receive approval of such NDA.
Ascent plans to introduce the 50mg improved formulation as the Primsol
solution product that it brings to market. If the FDA were not to grant
marketing approval of the 50mg strength of Primsol solution for this indication,
or if there were significant delays in such approval, the business, financial
condition and operating results of the Company would be adversely affected,
possibly materially. See "Item 1. Business -- Products and Products Under
Development -- Primsol Trimethoprim Solution."
PRODUCTS IN DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY
Ascent has introduced only one internally-developed product, Pediamist
nasal saline spray, into the market. Although the Company has completed
development of certain other products and has filed with the FDA applications
for marketing approval, many of the Company's product candidates are in
development and require additional formulation, preclinical studies, clinical
trials and regulatory approval prior to any commercial sales. With respect to
certain product candidates, the Company must successfully address a number of
technological challenges to complete its development efforts. In addition, there
can be no assurance that the Company will be permitted to undertake and complete
human clinical trials of certain of the Company's potential products, either in
the United States or elsewhere, or, if permitted, that such products will be
demonstrated to be safe and
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efficacious. The administration of any product the Company develops may produce
undesirable side effects that could result in the interruption, delay or
suspension of clinical trials. In addition, there can be no assurance that any
of the Company's product candidates will obtain the approval of the FDA or other
regulatory approvals or that any approved product will be capable of being
produced in commercial quantities at reasonable cost and successfully marketed.
LIMITED SALES AND MARKETING EXPERIENCE
The Company markets and sells its products in the United States through
its own dedicated marketing staff and sales force. The Company only recruited
its marketing staff and sales force in the second half of 1997 and has limited
experience in marketing and sales. The Company believes that its success will
depend in significant part upon its ability to maintain a dedicated marketing
staff and sales force capable of promoting its products. However, there can be
no assurance that the Company will be able to maintain the marketing staff and
sales force that it has recruited, that the cost of establishing and maintaining
this marketing staff and sales force will be justifiable in light of product
revenues or that the Company's marketing and sales efforts will be successful.
Should the Company fail in its marketing and sales efforts, its business,
financial condition and operating results would be materially adversely
affected. See "Item 1. Business -- Sales and Marketing."
UNCERTAINTY OF MARKET ACCEPTANCE OF PRODUCTS
Although many of the Company's product candidates are reformulations of
compounds marketed by other manufacturers, there can be no assurance that these
products or other current or future products of the Company will achieve market
acceptance. The commercial success of the Company's products and products under
development, when and if any required approval for marketing by the FDA or any
other regulatory agency is obtained, will depend, in significant part, on such
products' efficacy, side effect profile, taste, dosing frequency, method of
administration, patent and other proprietary position, brand name recognition
and price. Another important factor will be the timing of market introduction of
the Company's or competitive products. Earlier entrants in the market often
obtain and maintain significant market share relative to later entrants.
The commercial success of the Company's products also will depend in
significant part upon their acceptance by pediatricians, pediatric nurses and
third party payors (particularly managed care providers). Acceptance of the
Company's products by pediatricians, pediatric nurses and third party payors
will in turn be dependent upon the success of the Company's marketing and sales
activities. There can be no assurance that pediatricians, pediatric nurses and
third party payors will accept the Company's products on a timely basis or at
all. In addition, in order to stimulate demand for its products, the Company may
be required to, among other things, offer substantial price discounts. Failure
to achieve market acceptance would have a material adverse effect on the
Company's business, financial condition and operating results.
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COMPETITION
Competition in the pediatric pharmaceutical market is intense. Several
large pharmaceutical companies with significant research, development, marketing
and manufacturing operations market pediatric products in addition to products
for the adult market. These competitors include Glaxo Wellcome Inc., Eli Lilly
and Company, the Ortho-McNeil Pharmaceutical Division of Johnson & Johnson Inc.,
Pfizer Inc., the Ross Products Division of Abbott Laboratories Inc.,
Schering-Plough Corporation and the Wyeth-Lederle Vaccines and Pediatrics
Division of American Home Products, Inc.
Many of the companies against which Ascent competes have
substantially greater name recognition and greater financial, technical and
human resources than Ascent. In addition, many of these competitors have
significantly greater experience than the Company in undertaking preclinical
testing and human clinical trials of pharmaceutical products and obtaining FDA
and other regulatory approvals of products for use in health care. Accordingly,
the Company's competitors may succeed in obtaining FDA or other regulatory
approvals for products more rapidly than the Company. Furthermore, Ascent
competes against these larger companies with respect to manufacturing efficiency
and marketing capabilities, areas in which Ascent has limited or no experience.
These competitors may introduce competitive pricing pressures that may adversely
affect Ascent's sales levels and margins. Moreover, many of these competitors
offer well established, broad product lines and services not offered by the
Company. Many of the products and services offered by these competitors have
well known brand names that have been promoted over many years.
The Company expects to market many of its product candidates as
alternative treatments for pediatric indications for which products with the
same active ingredient are well entrenched in the market. For example, the
Company intends to market Primsol, a trimethoprim antibiotic, for the treatment
of AOM, an indication for which pediatricians often prescribe the well-known
combination therapies Bactrim and Septra, which also contain trimethoprim.
Similarly, Feverall controlled-release beads will compete against Tylenol liquid
for children. The Company's product candidates also will face competition from
other products that do not contain the same active ingredient but are used for
the same indication and are well entrenched within the pediatric market. For
example, Primsol solution will compete against other antibiotics, including
amoxicillin. Moreover, many of the Company's potential products that are
reformulations of existing drugs of other manufacturers may have limited patent
or other competitive protection. There can be no assurance that pediatricians,
pediatric nurses and third party payors will prefer the Company's products to
existing products. See "Item 1. Business -- Competition."
The Company plans to apply for three year protection for certain
products under the Waxman-Hatch Act from the approval of a potential
competitor's ANDA which is based on the Company's clinical trial results. There
can be no assurance that any of the Company's products will qualify for
protection under the Waxman-Hatch Act or, if any
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product does so qualify, that the statutory protection will enhance the
competitive position of such product. See "Item 1. Business -- Government
Regulation."
UNCERTAINTY OF IDENTIFICATION OR ACQUISITION OF NEW PRODUCT CANDIDATES AND NEW
TECHNOLOGIES
The success of the Company depends in part upon its ability to identify
and develop or obtain rights to pharmaceuticals suitable for pediatric use.
There can be no assurance that the Company will be successful in identifying and
developing pharmaceuticals suitable for pediatric use or in acquiring such
rights. The Company's success also depends upon its ability to apply its drug
delivery and reformulation technologies to produce proprietary products. There
can be no assurance that the Company will be able to develop additional
technologies or obtain rights from third parties to additional technologies on
reasonable terms, or at all.
UNPROVEN SAFETY AND EFFICACY OF PRODUCTS; UNCERTAINTIES RELATED TO CLINICAL
TRIALS
In order to obtain regulatory approval for the commercial sale of many
of its products, the Company is conducting or plans to conduct clinical trials
to demonstrate that such products are safe and effective. There can be no
assurance that any of these clinical trials will be successfully completed
within any specified time period, if at all. The results from early clinical
trials may not be predictive of results that will be obtained in large-scale
clinical trials, and there can be no assurance that the Company's clinical
trials will demonstrate the safety and effectiveness of any products or will
result in marketable products.
The rate of completion of the Company's clinical trials is dependent
upon, among other things, the rate of patient enrollment. Patient enrollment is
a function of many factors, including the size of the patient population, the
nature of the protocol, the proximity of patients to clinical sites and the
eligibility criteria for the study. Historically, recruiting children to
participate in clinical trials has been difficult, as parents are reluctant to
permit their children to take experimental medications. Delays in planned
patient enrollment may result in increased costs, program delays, or both, which
could have a material adverse effect on the Company.
The Company has contracted with clinical research organizations for the
conduct of all of its clinical trials and expects to continue to do so for the
foreseeable future. There can be no assurance that such entities will conduct
the clinical trials successfully. The Company relies on scientific, technical
and clinical data supplied by its academic and industry collaborators and
licensors in the design, development and evaluation of product candidates. There
can be no assurance that there are no errors or omissions in such data that
would materially adversely affect the development of these products.
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NO ASSURANCE OF REGULATORY APPROVAL; EXTENSIVE GOVERNMENT REGULATION
The production and the marketing of the Company's products and the
Company's ongoing product development activities are and will be subject to
extensive regulation by numerous federal, state and local governmental
authorities in the United States and abroad. The Company has had only limited
experience in filing or pursuing applications necessary to gain regulatory
approvals. Preclinical testing of the Company's product candidates is subject to
Good Laboratory Practice ("GLP") requirements and the manufacture of products is
subject to Good Manufacturing Practice ("GMP") requirements prescribed by the
FDA.
Many of the products that the Company is developing are subject to
the NDA regulatory process. This process generally includes preclinical studies,
clinical trials and ongoing post-approval testing of each compound to establish
or monitor its safety and effectiveness for the intended indications, typically
takes many years and requires the expenditure of substantial resources. The
Company has limited experience in filing or pursuing applications necessary to
gain regulatory approval. There can be no assurance that, even after the
performance of clinical studies and the expenditure of resources, regulatory
approval will be obtained for any products developed by the Company on a timely
basis, if at all. The Company's analysis of data obtained from preclinical and
clinical activities is subject to confirmation and interpretation by regulatory
authorities which could delay, limit or prevent FDA regulatory approval. The
Company or the FDA may suspend clinical trials at any time if the participants
in such trials are being exposed to unanticipated or unacceptable health risks.
Moreover, if regulatory approval to market a product is granted, such approval
may entail limitations on the indicated uses for which it may be marketed.
See "Item 1. Business -- Government Regulation."
Failure to comply with applicable regulatory requirements can, among
other things, result in fines, suspension or withdrawal of regulatory approvals,
product recalls, seizure of products, operating restrictions and criminal
prosecutions. FDA policy may change and additional government regulations may be
established that could prevent or delay regulatory approval of the Company's
product candidates. In addition, a marketed product, its manufacturer and its
manufacturing facilities are subject to continual review and periodic
inspections, and subsequent discovery of previously unknown problems with a
product, manufacturer or facility may result in restrictions on such product or
manufacturer, including withdrawal of the product from the market. There can be
no assurance that additional statutes or regulations applicable to the Company's
business will not be adopted, impose substantial additional costs upon or
otherwise adversely affect the Company's operations.
The Company is also subject to numerous and varying foreign regulatory
requirements governing the design and conduct of clinical trials and the
manufacturing and marketing of its products. The approval procedure varies among
countries and can involve additional testing, and the time required to obtain
approval may differ from that required to obtain FDA approval. The foreign
regulatory approval process may include all of the
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risks associated with obtaining FDA approval set forth above. There can be no
assurance that foreign regulatory approvals will be obtained on a timely basis,
if at all.
DEPENDENCE ON THIRD PARTY MANUFACTURING; RISKS RELATED TO SOLE SOURCE OF SUPPLY
The Company has no manufacturing facilities and has to date relied, and
plans in the future to rely, upon third parties to manufacture the Company's
products in accordance with GMP for preclinical testing, clinical trial and
commercial purposes. In addition, the Company has not arranged for the
production of certain of its product candidates in commercial quantities, and it
is possible that the Company will encounter difficulties in scaling up the
production of these product candidates. Although there are a number of
manufacturers that operate under GMP regulations capable of manufacturing
certain of the Company's products, in the event that the Company is unable to
obtain contract manufacturing, or obtain such manufacturing on commercially
reasonable terms, it may not be able to develop and commercialize its products
as planned. Where third-party arrangements are established, the Company will
depend upon such third parties to perform their obligations in a timely manner.
There can be no assurance that third parties depended upon by the Company will
perform and any failures by third parties may delay clinical trial development
or the submission of products for regulatory approval, impair the Company's
ability to commercialize its products as planned and deliver products on a
timely basis, or otherwise impair the Company's competitive position, which
could have a material adverse effect on the Company's business, financial
condition and operating results.
Certain of the Company's supply arrangements require that Ascent buy
all of the Company's requirements of a particular product exclusively from the
other party to the contract. Moreover, for many of its products, Ascent has
qualified only one supplier, even though the contractual arrangement with the
supplier may permit Ascent to qualify an alternative manufacturer. Any
interruption in supply from any of the Company's manufacturers or the inability
of these manufacturers to manufacture the Company's products in accordance with
GMP could have a material adverse effect on the Company's business, financial
condition and operating results. See "Item 1. Business -- Manufacturing and
Distribution."
In the future, the Company may establish its own manufacturing
facilities if it becomes economically attractive to do so. In order for the
Company to establish a manufacturing facility, the Company would require
substantial additional funds and be required to hire and retain significant
additional personnel and comply with the extensive GMP regulations of the FDA.
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS
The Company's success depends in part on its ability to develop
patentable products and obtain patent or other proprietary rights protection for
its products, both in the United States and in other countries. The Company
intends to file applications as appropriate for patents and other protection
covering both its products and processes. However, the patent
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positions of pharmaceutical firms, including Ascent, are generally uncertain and
involve complex legal and factual questions. Moreover, because the Company's
product candidates are reformulations of existing off-patent drugs, any patent
protection afforded will be significantly narrower than a patent on the active
ingredient itself. In particular, the Company does not expect that
composition-of-matter patent protection will be available for the active
ingredients in its products. No assurance can be given that patents will issue
from any patent applications owned by or licensed to the Company or that, if
patents do issue, the claims allowed will be sufficiently broad to protect the
Company's products or technology. In addition, no assurance can be given that
any issued patents owned by or licensed to the Company will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
competitive advantages to the Company.
The commercial success of the Company will also depend in part on its
neither infringing patents or other proprietary rights granted to competitors or
others nor breaching the technology licenses upon which the Company's products
are based. The Company's licenses of third party patents and patent applications
impose various commercialization, sublicensing, royalty and other payment,
insurance and other obligations on the Company. Failure of the Company to comply
with these requirements could result in termination of the licenses. Competitors
of the Company and other third parties hold issued patents and pending patent
applications which may result in claims of infringement against the Company or
other patent-related litigation. There can be no assurance that the Company will
be able to successfully obtain a license to any technology that it may require
or that, if obtainable, such technology can be licensed at a reasonable cost or
on an exclusive basis. Failure by the Company to obtain a license to any
technology that it may require to commercialize its products could have a
material adverse effect on the Company.
The pharmaceutical industry has been characterized by extensive
litigation regarding patents and other intellectual property rights. Litigation,
which could result in substantial cost to the Company, may be necessary to
enforce any patents issued or licensed to the Company and/or to determine the
scope and validity of others' proprietary rights. Competitors of the Company and
other third parties hold issued patents and pending patent applications relating
to aspects of the Company's technology, and it is uncertain whether these
patents and patent applications will require the Company to alter its products
or processes, pay licensing fees or cease activities. The Company also may have
to participate in interference proceedings declared by the United States Patent
and Trademark Office to determine the priority of inventions, which could result
in substantial cost to the Company. Furthermore, the Company may have to
participate at substantial cost in International Trade Commission proceedings to
abate importation of products which would compete unfairly with products of the
Company.
The Company relies on trade secret and proprietary know-how which it
seeks to protect, in part, by confidentiality agreements with its collaborators,
employees, advisors and consultants. There can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any breach or that the Company's trade secrets will not otherwise become
known or be independently developed by competitors.
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Failure to obtain or maintain patent and trade secret protection, for any
reason, could have a material adverse effect on the Company's business,
financial condition and operating results.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND ADEQUATE REIMBURSEMENT; NEED FOR
INCLUSION ON FORMULARIES
The Company's ability to commercialize its products successfully
depends in part on the extent to which appropriate reimbursement levels for the
cost of such products are obtained from government authorities, private health
insurers and other organizations, such as health maintenance organizations
("HMOs"). Third-party payors are increasingly challenging the prices charged for
medical products and services. Also, the trend towards managed health care in
the United States and the concurrent growth of organizations such as HMOs, which
control or significantly influence the purchase of health care services and
products, as well as legislative proposals to reduce government insurance
programs, may all result in lower prices for the Company's products. The cost
containment measures that health care providers are instituting could affect the
Company's ability to sell its products and may have a material adverse effect on
the Company.
Thus, there can be no assurance that reimbursement in the United States
or foreign countries will be available for any of the Company's products, or if
available, will not be decreased in the future, or that reimbursement amounts
will not reduce the demand for, or the price of, the Company's products. The
unavailability or inadequacy of third-party reimbursement for the Company's
products would have a material adverse effect on the Company's business,
financial condition and operating results.
Managed care providers generally maintain formularies, or lists of
products, that such providers have approved for use and reimbursement. The
Company plans to seek to have its products included on such formularies. There
can be no assurance that the Company's products will be included on the
formularies of managed care providers on a timely basis, or at all. The
Company's success in obtaining inclusion of its products on managed care
formularies will materially affect the Company's business, financial condition
and operating results.
POTENTIAL PRODUCT LIABILITY EXPOSURE AND INSURANCE
The use of the Company's products in human clinical trials and the
commercial sale of such products may expose the Company to potential product
liability risks which are inherent in the testing, manufacturing, marketing and
sale of human therapeutic pharmaceuticals. Product liability claims might be
made directly by consumers, health care providers or by licensees, distributors
or others selling such products. There can be no assurance that product
liability claims, if made, would not result in a recall of the Company's
products or a change in the indications for which they may be used. Ascent has
limited product liability insurance coverage, and such coverage is subject to
various deductibles. Such coverage is expensive, and no assurance can be given
that the Company
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will be able to maintain or obtain such insurance at reasonable cost or in
sufficient amounts to protect the Company against losses due to liability claims
that could have a material adverse effect on the Company.
ATTRACTION AND RETENTION OF KEY EMPLOYEES
The Company is highly dependent on the principal members of its
management and scientific staff, particularly Dr. Clemente, the Company's
Chairman, the loss of whose services could have a material adverse effect on the
Company. Also, recruiting and retaining qualified scientific personnel to
perform product development work in the future will be critical to the Company's
success. There can be no assurance that the Company will be able to attract and
retain such highly skilled personnel on acceptable terms given the competition
among numerous pharmaceutical and health care companies, universities and
non-profit research institutions for experienced scientists. The Company does
not carry key-man insurance with respect to any of its executive officers other
than Dr. Clemente.
The Company's anticipated growth and expansion into areas and
activities requiring additional expertise are expected to require the addition
of new management personnel and the development of additional expertise by
existing management personnel. The failure to acquire such services or to
develop such expertise could have a material adverse effect on the Company's
business, financial condition and operating results.
RISKS RELATED TO POSSIBLE ACQUISITIONS
The Company may expand its operations or product offerings through the
acquisition of businesses, products or technologies. There can be no assurance
that the Company will be able to identify, acquire or profitably manage
additional businesses or successfully integrate any acquired businesses,
products or technologies into the Company without substantial expense, delays or
other operational or financial problems. Further, acquisitions may involve a
number of special risks, including diversion of management's attention, failure
to retain key acquired personnel, unanticipated events or circumstances and
legal liabilities, some or all of which could have a material adverse effect on
the Company's business, financial condition and operating results. In addition,
there can be no assurance that acquired businesses, products or technologies, if
any, will achieve anticipated revenues and earnings
DEPENDENCE ON COLLABORATORS; COPROMOTION ARRANGEMENTS
In addition to the manufacturing of product candidates and products,
the Company is dependent upon third parties with respect to significant other
aspects of its operations, including product design and formulation work,
conduct of clinical trials, marketing to managed care organizations and product
distribution. There can be no assurance that the Company will be able to enter
into future collaborative arrangements with respect to these matters or as to
whether any of the Company's existing or future relationships will be
-47-
48
successful. The success of any such arrangement is dependent on, among other
things, the skills, experience and efforts of the third party, the third party's
commitment to the arrangement and the financial condition of the third party,
all of which are beyond the control of the Company.
The Company plans to enter into arrangements to copromote certain
pharmaceutical products of third parties to pediatricians in the United States.
To date, the Company has entered into a four-year copromotion agreement with
Bristol-Myers Squibb to market Bristol-Myers Squibb's Duricef oral suspension
product. See "Item 1. Business - Products and Products Under Development -
Duricef Oral Suspension." There can be no assurance that the Company will be
able to enter into future arrangements or as to whether any of the Company's
existing or any future copromotion arrangements will be successful. The success
of any such arrangement is dependent on, among other things, the third party's
commitment to the arrangement, the financial condition of the third party and
market acceptance of the third party's products.
RELIANCE ON THIRD PARTIES FOR CERTAIN SALES AND MARKETING AND DISTRIBUTION
ACTIVITIES
The Company plans to sell its pediatric products in international
markets through distribution, licensing and similar arrangements and to sell its
products for adult indications in the United States and in international markets
through similar arrangements. To date, the Company has not entered into any
material arrangements of this nature. To the extent the Company enters into such
arrangements with third parties, any revenues the Company receives will depend
upon the efforts of such parties. There can be no assurance that any third party
will market the Company's products successfully or that any arrangements with
third parties will be on terms favorable to the Company. If a third party does
not market the Company's products successfully, the Company's business,
financial condition and operating results would be adversely affected, possibly
materially. If Ascent's plan to rely on third parties for certain aspects of
marketing and selling the Company's products is unsuccessful for any reason,
Ascent may need to forgo international and adult market opportunities or recruit
and train a larger marketing staff and sales force and establish a larger
distribution capability than it currently anticipates doing, which would entail
the incurrence of significant additional costs.
Ascent distributes its products through a third party distribution
warehouse. The Company has no experience with the distribution of products and
relies on the third party distributor to perform various functions on behalf of
the Company, including order entry, customer service and collection of accounts
receivable. The success of this arrangement is dependent on, among other things,
the skills, experience and efforts of the third party distributor, all of which
are beyond the control of the Company.
UNCERTAINTY OF HEALTH CARE REFORM MEASURES
Federal, state and local officials and legislators (and certain foreign
government officials and legislators) periodically propose or consider proposing
a variety of reforms to
-48-
49
the health care systems in the United States and abroad. The Company cannot
predict what health care reform legislation, if any, will be enacted in the
United States or elsewhere or when such legislation will be enacted. Significant
changes in the health care system in the United States or elsewhere are likely
to have a substantial impact over time on the manner in which the Company
conducts its business and could have a material adverse effect on the Company.
The existence of pending health care reform proposals could have a material
adverse effect on the Company's ability to raise capital. Further, to the extent
that proposals have a material adverse effect on other pharmaceutical companies
that are prospective collaborators with the Company, the Company's ability to
establish collaborative commercial relationships may be adversely affected.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements as of December 31, 1997 and 1996 and for each of
the three years in the period ended December 31, 1997 are filed as Appendix A
hereto, are listed in Item 14 (a) and are incorporated by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in part in the
Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on June 10, 1998 (the "Definitive Proxy Statement") under the caption
"Proposal 1 -- Election of Directors," which section is incorporated herein by
this reference. The information required by this item is also contained in part
under the caption "Executive Officers and Significant Employees" in Part I of
this Annual Report on Form 10-K, following Item 4.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in the Definitive
Proxy Statement under the caption "Proposal 1 -- Election of Directors," which
section is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the Definitive
Proxy Statement under the caption "Stock Ownership of Certain Beneficial Owners
and Management," which section is incorporated herein by this reference.
-49-
50
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the Definitive
Proxy Statement under the caption "Certain Relationships and Related
Transactions," which section is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as Appendix A hereto and are
included as part of this Annual Report on Form 10-K:
Financial Statements:
Report of Independent Public Accountants
Balance Sheet
Statements of Operations
Statements of Stockholders' Equity (Deficit)
Statements of Cash Flows
Notes to Financial Statements
(b) The Company is not filing any financial statement schedules as
part of this Annual Report on Form 10-K because they are not
required or because the required information is provided in
the financial statements or notes thereto.
(c) The list of Exhibits filed as a part of this Annual Report on
Form 10-K are set forth on the Exhibit Index immediately
preceding such exhibits, and is incorporated herein by this
reference.
(d) REPORTS ON FORM 8-K: No reports on Form 8-K were filed during
the last quarter of the Company's fiscal year ended December
31, 1997.
-50-
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: March 27, 1998 ASCENT PEDIATRICS, INC.
(Registrant)
By: /s/ Alan R. Fox
---------------------------------------
Alan R. Fox
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Alan R. Fox
- ----------------------------------------- President, Chief Executive Officer and March 27, 1998
Alan R. Fox Director (Principal Executive Officer)
/s/ John G. Bernardi
- ----------------------------------------- Vice President, Finance and Treasurer March 27, 1998
John G. Bernardi (Principal Financial and Accounting
Officer)
/s/ Emmett Clemente
- ----------------------------------------- Chairman March 27, 1998
Emmett Clemente, Ph.D.
/s/ Robert E. Baldini
- ----------------------------------------- Vice Chairman March 24, 1998
Robert E. Baldini
/s/ Raymond F. Baddour
- ----------------------------------------- Director March 27, 1998
Raymond F. Baddour, Ph.D.
/s/ Michael J.F. Du Cros
- ----------------------------------------- Director March 27, 1998
Michael J.F. Du Cros
/s/ Thomas W. Janes
- ----------------------------------------- Director March 27, 1998
Thomas W. Janes
/s/ Andre Lamotte
- ----------------------------------------- Director March 26, 1998
Andre Lamotte, Sc.D.
/s/ Terrance McGuire
- ----------------------------------------- Director March 24, 1998
Terrance McGuire
/s/ Lee J. Schroeder
- ----------------------------------------- Director March __, 1998
Lee J. Schroeder
-51-
52
APPENDIX A
----------
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Report of Independent Accountants...................................... A-2
Balance Sheets......................................................... A-3
Statements of Operations............................................... A-4
Statements of Stockholders' Equity (Deficit)........................... A-5
Statements of Cash Flows............................................... A-6
Notes to Condensed Financial Statements................................ A-7
A-1
53
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Ascent Pediatrics, Inc.:
We have audited the accompanying balance sheets of Ascent Pediatrics, Inc. as
of December 31, 1997 and 1996 and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in all
material respects the financial position of Ascent Pediatrics, Inc. as of
December 31, 1997 and 1996 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has suffered recurring losses from operations,
has an accumulated deficit and requires additional financing. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note A. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 23, 1998
A-2
54
ASCENT PEDIATRICS, INC.
BALANCE SHEETS
December 31,
----------------------------
1997 1996
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents ....................................... $ 11,700,612 $ 2,085,743
Current marketable securities ................................... 2,527,900 ---
Accounts receivable, less allowance for doubtful accounts of
$50,000 at December 31, 1997 .................................. 765,609 ---
Inventory ....................................................... 789,498 ---
Other current assets ............................................ 124,874 12,312
------------ ------------
Total current assets .......................................... 15,908,493 2,098,055
Fixed assets, net ................................................... 759,563 163,142
Debt issue costs, net ............................................... 436,515 ---
Intangibles, net .................................................... 11,215,506 261,874
Other assets ........................................................ 113,386 104,553
============ ============
Total assets .................................................. $ 28,433,463 $ 2,627,624
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable ................................................ $ 1,509,258 $ 496,655
Accrued expenses ................................................ 1,157,379 1,076,556
Promissory note ................................................. 5,500,000 ---
Subordinated secured notes, current portion ..................... 3,500,000 ---
------------ ------------
Total current liabilities ..................................... 11,666,637 1,573,211
Subordinated secured notes .......................................... 1,252,068 ---
------------ ------------
Total liabilities ............................................. 12,918,705 1,573,211
Series D redeemable convertible preferred stock, $.00004 par
value; 0 and 1,399,589 shares
authorized; 0 and 1,359,522 shares issued and outstanding at
December 31, 1997 and 1996, respectively ........................ --- 8,157,132
Series E redeemable convertible preferred stock, $.00004 par
value; 0 and 1,166,667 shares
authorized; 0 and 733,371 shares issued and outstanding at
December 31, 1997 and 1996, respectively ........................ --- 4,400,226
Series F redeemable convertible preferred stock, $.00004 par
value; 0 and 2,353,848 shares
authorized; 0 and 811,536 shares issued and outstanding at
December 31, 1997 and 1996, respectively ........................ --- 5,274,984
Commitments and contingencies (Note H)
Stockholders' Equity (Deficit)
Series A convertible preferred stock, $.00004 par value; 0 and
800,000 shares authorized; 0 and 800,000 shares issued and
outstanding at December 31, 1997 and 1996, respectively ....... --- 280,110
Series B convertible preferred stock, $.00004 par value; 0 and
399,999 shares authorized; 0 and 399,999 shares issued and
outstanding at December 31, 1997 and 1996, respectively ....... --- 2,574,993
Preferred stock, $.01 par value; 5,000,000 shares authorized;
none issued and outstanding at December 31, 1997 .............. --- ---
Common stock, $.00004 par value; 60,000,000 shares authorized;
6,893,332 and 198,155
shares issued and outstanding at December 31, 1997 and 1996,
respectively .................................................. 276 8
Additional paid-in capital ...................................... 47,891,846 ---
Accumulated deficit ............................................. (32,378,480) (19,633,040)
Unrealized gain on securities ................................... 1,116 ---
------------ ------------
Total stockholders' equity (deficit) .......................... 15,514,758 (16,777,929)
============ ============
Total liabilities and stockholders' equity (deficit) .......... $ 28,433,463 $ 2,627,624
============ ============
The accompanying notes are an integral part of the financial statements.
A-3
55
ASCENT PEDIATRICS, INC.
STATEMENTS OF OPERATIONS
Year ended December 31,
----------------------------------------------------
1997 1996 1995
---- ---- ----
Product revenue, net ....................... $ 2,073,458 $ --- $ ---
Licensing revenue .......................... --- --- 303,949
------------ ------------ ------------
Total Revenue ........................ 2,073,458 --- 303,949
Costs of sales ............................. 951,513 --- ---
------------ ------------ ------------
Gross margin ............................... 1,121,945 --- 303,949
Costs and expenses:
Selling, general and administrative .. 8,538,308 2,805,352 1,531,924
Research and development ............. 4,437,627 3,760,948 2,986,044
------------ ------------ ------------
Total costs and expenses ............. 12,975,935 6,566,300 4,517,968
Loss from operations .............. (11,853,990) (6,566,300) (4,214,019)
Interest income ............................ 693,019 79,084 113,124
Interest expense ........................... (1,358,850) --- ---
Other income ............................... 21,742 --- ---
------------ ------------ ------------
Net loss .......................... (12,498,079) (6,487,216) (4,100,895)
Accretion to redemption value of
preferred stock ...................... 247,361 137,783 62,604
------------ ------------ ------------
Net loss to common stockholders ... $(12,745,440) $ (6,624,999) $ (4,163,499)
============ ============ ============
Basic and diluted net loss per common
share ................................ $ (3.08) $ (33.44) $ (21.05)
============ ============ ============
Weighted average shares outstanding ........ 4,134,068 198,091 197,837
============ ============ ============
The accompanying notes are an integral part of the financial statements.
A-4
56
ASCENT PEDIATRICS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Number of shares
---------------------- Par
Preferred Common Preferred Preferred Value
Stock Stock Series A Series B Common
---------- --------- --------- ---------- --------
Balance, December 31, 1994 ............ 1,199,999 197,837 $280,110 $2,574,993 $ 8
Issuance costs of Series E
redeemable convertible
preferred stock ........
Net loss ..............................
---------- --------- --------- ---------- -------
Balance, December 31, 1995 ............ 1,199,999 197,837 280,110 2,574,993 8
Common stock issued upon
option exercise at $2.35
per share ........ 318
Warrant proceeds ......................
Issuance costs of Series F
redeemable convertible
preferred stock ........
Net loss ..............................
---------- --------- --------- ---------- -------
Balance, December 31, 1996 ............ 1,199,999 198,155 280,110 2,574,993 8
Issuance costs of Series F
redeemable convertible
preferred stock ........
Issuance of common stock
pursuant to an initial public
offering net of issuance costs
of $2,630,751 ....... 2,240,000 90
Conversion of preferred stock ......... (1,199,999) 4,440,559 (280,110) (2,574,993) 178
Cashless exercise of warrants ......... 13,296 ---
Warrants issued to Subordinated
Secured Noteholders ................
Common stock issued upon option
exercise at $2.35 per share ........ 1,275 ---
Common stock issued for sales force ... 47 ---
Change in unrealized gain on securities
Net loss ..............................
---------- --------- --------- ---------- -------
Balance, December 31, 1997 ............ 0 6,893,332 $ --- $ --- $ 276
========== ========= ========= ========== =======
Additional Unrealized Stockholders'
Paid-In Accumulated gain on Equity
Capital Deficit securities (Deficit)
------------ ----------- ---------- ------------
Balance, December 31, 1994 ............ $ 500 $(8,850,592) $ --- $(5,994,981)
Issuance costs of Series E
redeemable convertible
preferred stock ........ (500) (62,104) (62,604)
Net loss .............................. (4,100,895) (4,100,895)
------------ ----------- ---------- ------------
Balance, December 31, 1995 ............ --- (13,013,591) --- (10,158,480)
Common stock issued upon
option exercise at $2.35
per share ........ 750 750
Warrant proceeds ...................... 4,800 4,800
Issuance costs of Series F
redeemable convertible
preferred stock ........ (5,550) (132,233) (137,783)
Net loss .............................. (6,487,216) (6,487,216)
------------ ----------- ---------- ----------
Balance, December 31, 1996 ............ --- (19,633,040) --- (16,777,929)
Issuance costs of Series F
redeemable convertible
preferred stock ........ (247,361) (247,361)
Issuance of common stock
pursuant to an initial public
offering net of issuance costs
of $2,630,661 ....... 17,529,249 17,529,339
Conversion of preferred stock ......... 27,853,861 24,998,936
Cashless exercise of warrants ......... --- ---
Warrants issued to Subordinated
Secured Noteholders ................ 2,505,740 2,505,740
Common stock issued upon option
exercise at $2.35 per share ........ 2,996 2,996
Common stock issued for sales force ... --- ---
Change in unrealized gain on securities 1,116 1,116
Net loss .............................. (12,498,079) (12,498,079)
----------- ------------ ------- -----------
Balance, December 31, 1997 ............ $47,891,846 $(32,378,480) $ 1,116 $15,514,758
=========== ============ ======= ===========
The accompanying notes are an integral part of the financial statements.
A-5
57
ASCENT PEDIATRICS, INC.
STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------------------------
1997 1996 1995
---- ---- ----
Cash flows for operating activities:
Net loss $(12,498,079) $(6,487,216) $(4,100,895)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 630,253 52,833 45,349
Non-cash interest expense 1,132,808 --- ---
Provision for bad debts 50,000 --- ---
Gain on sales of fixed assets (9,242) --- ---
Changes in operating assets and liabilities:
Accounts receivable (815,609) --- ---
Inventory (379,046) --- ---
Other assets (121,395) (73,193) 55,944
Accounts payable 1,012,603 384,312 50,614
Accrued expenses 80,823 837,903 (3,577)
------------ ----------- ----------
Net cash used for operating activities (10,916,884) (5,285,361) (3,952,565)
Cash flows used for investing activities:
Purchase of property and equipment (804,896) (59,694) (17,774)
Proceeds from sale of fixed assets 38,050 --- ---
Payments related to acquisition (6,155,145) (250,000) ---
Purchase of marketable securities (2,526,784) --- ---
------------ ----------- ----------
Net cash used for investing activities (9,448,775) (309,694) (17,774)
Cash flows from financing activities:
Proceeds from sale of common stock, net of issuance costs 17,529,339 750 ---
Proceeds from sale of preferred stock, net of issuance costs 6,922,229 5,137,201 4,337,622
Proceeds from issuance of debt and related warrants 7,000,000 --- ---
Repayment of debt (875,000) --- ---
Debt issue costs (596,040) --- ---
Proceeds from exercise of warrants --- 4,800 ---
------------ ----------- ----------
Net cash provided by financing activities 29,980,528 5,142,751 4,337,622
Net increase in cash and cash equivalents 9,614,869 (452,304) 367,283
Cash and cash equivalents, beginning of period 2,085,743 2,538,047 2,170,764
------------ ----------- ----------
Cash and cash equivalents, end of period $ 11,700,612 $ 2,085,743 $2,538,047
============ =========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 175,000 $ --- $ ---
Noncash transactions:
Conversion of Series A convertible preferred stock,
Series B convertible preferred stock, Series D
redeemable convertible preferred stock, Series E
redeemable convertible preferred stock, Series F
redeemable convertible preferred stock to common stock 27,854,039 --- ---
The accompanying notes are an integral part of the financial statements.
A-6
58
ASCENT PEDIATRICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
A. NATURE OF BUSINESS
Ascent Pediatrics, Inc. (the "Company"), formerly Ascent Pharmaceuticals,
Inc., incorporated in Delaware on March 16, 1989, is a drug development and
marketing company focused exclusively on the pediatric market. Since its
inception, until July 9, 1997, the Company operated as a development
stage enterprise devoting substantially all of its efforts to establishing a
new business and to carrying on development activities. Accordingly, the
Company was considered a development stage enterprise as defined in Statement
of Financial Accounting Standard No. 7 and the audited financial statements
through December 31, 1996 represent those of a development stage enterprise.
On July 10, 1997, the Company closed the acquisition of the Feverall line of
acetaminophen rectal suppositories from Upsher-Smith Laboratories, Inc.
("Upsher-Smith"), pursuant to an Asset Purchase Agreement dated as of March
25, 1997 (the "Asset Purchase Agreement") between the Company and
Upsher-Smith and subsequently commenced sales of the Feverall line of
products. The Company also commenced sales of Pediamist nasal saline spray.
The Company has incurred net losses since its inception and expects to incur
additional operating losses in the future as the Company continues its
product development programs, maintenance of sales and marketing organization
and introduces its products to the market. The Company is subject to a number
of risks similar to other companies in the industry, including rapid
technological change, uncertainty of market acceptance of products,
uncertainty of regulatory approval, limited sales and marketing experience,
competition from substitute products and larger companies, customers'
reliance on third-party reimbursement, the need to obtain additional
financing, compliance with government regulations, protection of proprietary
technology, dependence on third-party manufacturers, distributors,
collaborators and limited suppliers, product liability, and dependence on key
individuals.
PLAN OF OPERATIONS
Ascent has incurred net operating losses since its inception. At December 31,
1997, the Company's cumulative deficit was approximately $32,378,000. Such
losses have resulted primarily from costs incurred in the Company's product
development programs, general and administrative costs associated with the
Company's product development and costs associated with raising equity
capital and the establishment of the Company's sales force.
The Company expects to incur additional operating losses as it continues its
product development programs and incurs the costs of maintaining its
marketing and sales capabilities, and expects cumulative losses to increase.
The Company has no committed external sources of capital. Based on its 1998
operating plan, the Company anticipates that it will require approximately
$8,000,000 of additional funds from external sources no later than the
beginning of the third quarter of 1998 to meet its capital requirements and
continue its operations for the balance of the third quarter and the
remainder of 1998. The Company is currently negotiating with a number of
potential sources of financing to obtain additional funding.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plan to continue operations is
principally based on increased net sales combined with reduced expenditures
and obtaining additional financing. However, there can be no assurance that
the Company will obtain necessary financing or increase net sales to fund
operations. The financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts and the
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from the estimates and
assumptions used by management.
A-7
59
Cash and Cash Equivalents
Cash equivalents consist of money market mutual funds and other highly liquid
investments with original maturities of three months or less.
Marketable Securities
Current marketable securities include only investments with remaining
maturities of twelve months or less. At December 31, 1997, the Company
classified all securities as available-for-sale. These securities are
reported at fair value as of the balance sheet date with net unrealized
holding gains and losses included in stockholders' equity. Gains and losses
on sales of securities are calculated using the specific identification
method.
Financial Instruments
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash
equivalents, current marketable securities and accounts receivable.
Inventory
Inventories, consisting of raw materials, work-in-process and finished goods,
are stated at the lower of costs (determined on a first-in, first-out basis)
or market.
Fixed Assets
Fixed assets are recorded at cost. Equipment and furniture and fixtures are
depreciated on a straight-line basis over the useful life of the asset,
typically five or seven years. Leasehold improvements are depreciated on a
straight-line basis over the shorter of the life of the lease or the useful
life of the asset. The costs and accumulated depreciation of fixed assets
sold are removed from the accounts and the related gains or losses, if any,
are reflected in earnings or loss for the period.
Revenue Recognition
Product revenue is recognized upon shipment of product provided that no
significant obligations remain outstanding and the resulting receivable is
deemed collectible by management. License revenue is recognized under a
collaborative license agreement as earned based upon the performance
requirements of such agreement.
Research and Development Expenses
Research and development costs are expensed as incurred.
Advertising Expenses
Costs for catalogs and other media are expensed as incurred. For the years
ended December 31, 1997, 1996 and 1995, costs were $1,615,318, $423,656 and
$21,090, respectively.
Income Taxes
The Company accounts for income taxes under Financial Accounting Standards
No. 109, "Accounting for Income Taxes," which requires recognition of
deferred tax assets and liabilities for the expected future tax consequences
of events that have been included in the financials or tax returns.
A-8
60
Accounting for Stock-Based Compensation
The Company continues to apply the provisions of Accounting Principles Board
("APB") Opinion No. 25 and has elected the disclosure-only alternative
permitted under the Statement of Financial Accounting Standards ("SFAS") No.
123, Accounting for Stock-Based Compensation. The Company has disclosed
herein pro forma net income and pro forma net income per share in the
footnotes using the fair value based method beginning in fiscal year 1997
with comparable disclosures for fiscal years 1996 and 1995.
Net Loss Per Common Share
The Company has adopted Statement of Financial Accounting Standard ("SFAS")
No. 128, "Earnings Per Share," which specifies the computation, presentation
and disclosure requirements for net income (loss) per common share. Basic net
income (loss) per common share is computed based on the weighted average
number of common shares outstanding during the period. Diluted net income
(loss) per common share gives effect to all dilutive potential common shares
outstanding during the period. Under SFAS No. 128, the computation of diluted
earnings per share does not assume the issuance of common shares that have an
antidilutive effect on net income per common share. In accordance with Staff
Accounting Bulletin 98 issued by the Securities and Exchange Commission in
February 1998, the Company restated loss per share for prior periods without
including certain awards of stock and warrants issued within a one-year
period prior to the initial filing of an Initial Public Offering of common
stock.
For the years ended December 31, 1997, 1996 and 1995 the Company had stock
options and stock warrants outstanding (see Notes K and L). For the years
ended December 31, 1996 and 1995 the Company also had convertible preferred
stock and redeemable convertible preferred stock outstanding. These
securities could potentially dilute basic EPS in the future and were not
included in the computation of diluted EPS because to do so would have been
anti-dilutive for the periods presented. Consequently there were no
differences between basic and diluted EPS for these periods.
Recent Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement requires that changes in comprehensive income to be shown in a
financial statement that is displayed with the same prominence as other
financial statements. The statement will be effective for annual periods
beginning after December 15, 1997 and the Company will adopt its provisions
in fiscal year 1998. Reclassification for earlier periods is required for
comparative purposes. The Company is currently evaluating the impact this
statement will have on its financial statements; however, because the
statement requires only additional disclosure, the Company does not expect
the statement to have a material impact on its financial position or results
of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." This statement
includes requirements to report selected segment information quarterly and
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenues. The
statement will be effective for annual periods beginning after December 15,
1997 and the Company will adopt its provisions in fiscal year 1998.
Reclassification for earlier periods is required, unless impracticable, for
comparative purposes. The Company is currently evaluating the impact this
statement will have on its financial statements; however, because the
statement requires only additional disclosure, the Company does not expect
the statement to have a material impact on its financial position or results
of operations.
A-9
61
C. MARKETABLE SECURITIES
Investments in marketable securities consisted of the following at December
31, 1997:
Cost Fair Value
---------- ----------
U.S. Government & Agency Obligations $2,526,784 $2,527,900
========== ==========
The net unrealized gain at December 31, 1997 was $1,116.
D. INVENTORIES
Inventories consist of the following:
December 31,
------------
1997
--------
Raw materials ....................... $455,663
Work in Process ..................... 35,110
Finished goods ...................... 298,725
--------
Total................................ $789,498
========
E. FIXED ASSETS
Fixed assets consisted of the following:
December 31,
------------------------
1997 1996
----------- ---------
Equipment ........................ $ 780,704 $ 220,983
Furniture and fixtures ........... 212,557 106,871
Leasehold Improvements ........... 54,517 0
----------- ---------
Total Equipment .................. $ 1,047,778 $ 327,854
Less:
Accumulated depreciation ...... (288,215) (164,712)
----------- ---------
Total ............................ $ 759,563 $ 163,142
=========== =========
Depreciation expense amounted to $179,669, $51,582 and $44,101 for the years
ended December 31, 1997, 1996 and 1995, respectively.
F. LICENSE AGREEMENTS
During the year ended December 31, 1990, the Company entered into an
agreement with an unaffiliated entity, pursuant to which the Company was
granted a worldwide, exclusive license pursuant to certain patent
applications. The license agreement calls for royalties to be paid based on a
percentage of net sales of licensed product using the technology covered by
the patent, and additional royalties to be paid upon any sublicensing income
earned. No royalties have been accrued to date.
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62
During 1995, the Company entered into a licensing agreement with a different
unaffiliated entity, pursuant to which the Company granted such party an
exclusive license to make, use and sell the license product in Japan. The
Company received approximately $202,000 as a non-refundable technology
transfer fee under the license agreement and recognized it as revenue in
1995. In the event the licensee commercializes a product utilizing the
licensed technology, the licensee will pay a royalty based on a percentage of
net sales as described in the agreement. The Company has performed all of its
material obligations under this agreement. For the year ended December 31,
1995, the Company recorded revenue of approximately $102,000 related to
research and development activities performed on behalf of the licensee. The
Company did not record any revenue for 1996 or 1997 in connection with this
license.
G. INCOME TAXES
The provision for income taxes consists of the following:
Years Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
Deferred tax expenses/(benefits):
Federal ................................ (4,276,253) (1,996,116) (1,261,845)
State .................................. (345,344) (616,286) (389,585)
Change in Valuation Allowance .......... 4,621,597 2,612,402 1,651,430
----------- ----------- -----------
Total Deferred ................... 0 0 0
----------- ----------- -----------
Total Provision .................. $ 0 $ 0 $ 0
=========== =========== ===========
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 deferred tax assets are as follows:
December 31,
---------------------------
1997 1996
------------ -----------
Net operating loss carryforwards ........... $ 5,215,788 $ 2,022,680
Credit carryforward ........................ 489,623 198,411
Capitalized expenses:
Research and development ................ 3,712,694 2,389,726
G&A ..................................... 3,046,812 3,323,794
Other ...................................... 91,292 0
------------ -----------
Total deferred tax assets .................. 12,556,209 7,934,611
Valuation allowance ........................ (12,556,209) (7,934,611)
------------ -----------
Net deferred tax asset (liability) ......... $ --- $ ---
============ ===========
A-11
63
The provision for income taxes differs from the Federal statutory rate due to
the following:
Years Ended December 31,
----------------------------
1997 1996 1995
------ ------ ------
Tax at statutory rate .......................... (34.0)% (34.0)% (34.0)%
State taxes - net of federal benefit ........... (1.8) (6.3) (6.3)
Other .......................................... (1.2) 0.0 0.0
Change in valuation allowance .................. 37.0 40.3 40.3
------ ------ ------
Effective tax rate ............................. 0.0% 0.0% 0.0%
At December 31, 1997 the Company had net operating loss carryforwards of
$14,393,000 and $5,140,000 for federal and state income tax purposes,
respectively. The federal net operating losses expire beginning December 31,
2004 through 2012. The state net operating losses expire beginning December
31, 1998 through 2002. The use of these losses may be limited due to
ownership change limitations under Section 382 of the Internal Revenue Code
of 1986.
The research and experimental credit carryforward at December 31, 1997 was
$348,000 for federal income tax purposes.
Management of the Company has evaluated the positive and negative evidence
impacting the realizability of its deferred tax assets, which are comprised
principally of net operating loss carryforwards, tax credits and capitalized
expenses, as required by Statement of Financial Accounting Standards No.
109. Management has considered the Company's history of annual and
cumulative losses and concluded, in accordance with the applicable
accounting standards, that it is more likely than not that it will not
generate future taxable income prior to the expiration of these items. Based
on the weight of the available evidence, it is more likely than not that all
of the deferred tax assets will not be realized, and accordingly, the
deferred tax assets have been fully reserved.
H. COMMITMENTS
The Company leases office space and equipment under noncancelable leases
expiring through the year 2002. Rent expense was $233,043, $55,878, $52,000
for fiscal years 1997, 1996 and 1995, respectively.
Future minimum lease commitments are as follows:
Years ended December 31,
1998............................................ $ 327,383
1999............................................ 329,086
2000............................................ 329,654
2001............................................ 326,800
2002............................................ 7,975
----------
Total........................................... $1,320,898
==========
The Company is a party to a supply agreement with a third party manufacturer
under which the third party manufacturer has agreed to manufacture Primsol
trimethoprim solution for the Company, and the Company has agreed to purchase
all amounts of such product as it may require for the sale in the United
States from that third party manufacturer in accordance with an agreed upon
price schedule. The agreement may be terminated by either party on three
months notice any time after October 17, 2004.
In addition, the Company has entered into several agreements with
unaffiliated entities for the performance of research and clinical trial
studies. These commitments are ongoing, and the Company expects to spend
approximately $453,000 toward these commitments in 1998.
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64
I. ACCRUED EXPENSES
Accrued expenses consisted of the following:
December 31,
-----------------------
1997 1996
---------- ----------
Employee compensation expenses ....... $ 109,887 $ 109,268
Clinical study expenses .............. 0 156,134
Advertising expenses ................ 198,599 364,692
Product development expenses ......... 25,000 0
Other ................................ 823,893 446,462
---------- ----------
$1,157,379 $1,076,556
========== ==========
J. STOCKHOLDERS' EQUITY AND PREFERRED STOCK
On February 3, 1997, February 19, 1997 and February 28, 1997, the Company
completed a third, fourth and fifth closing of its Series F redeemable
convertible preferred stock financing, respectively, resulting in the
issuance of 1,104,229 shares at $6.50 per share and net proceeds of
$6,922,229. Pursuant to the Series F redeemable convertible preferred stock
financing the Company granted the purchasers of the third, fourth and fifth
closing of Series F redeemable convertible preferred stock financing,
warrants to purchase an aggregate of 362,152 shares of common stock (See
Note K).
On May 27, 1997, the Company effected a 0.85-for-one reverse stock split of
its outstanding common stock. The authorized number of shares of common stock
was increased to 60,000,000. Accordingly, all shares and per share data have
been restated to reflect the reverse stock split as though it had occurred at
the beginning of the initial period presented.
In June 1997, the Company completed its initial public offering ("Public
Offering") of 2,240,000 shares of Common Stock, raising approximately $17.5
million of net proceeds after deducting offering costs. A significant portion
of these proceeds was invested in one money market mutual fund. Concurrent
with the closing of the initial public offering, all 5,208,657 shares of
Series A convertible preferred stock, Series B convertible preferred stock,
Series D redeemable convertible preferred stock, Series E redeemable
convertible preferred stock and Series F redeemable convertible preferred
stock were converted into 4,440,559 shares of common stock.
After the closing of the initial public offering, the Company was authorized
to issue up to 5,000,000 shares of Preferred Stock, $0.01 par value per
share, in one or more series. Each such series of Preferred Stock shall have
such rights, preferences, privileges and restrictions, including voting
rights, dividend rights, conversion rights, redemption privileges and
liquidation preferences, as shall be determined by the Board of Directors.
K. STOCK PURCHASE WARRANTS
Pursuant to a Stock Purchase Agreement dated June 18, 1992 and amended March
4, 1993, the Company granted an unaffiliated entity and an individual
stockholder warrants to purchase 17,420 and 1,000 shares, respectively, of
Series D preferred stock in exchange for services. The warrants were
exercisable at $15.44 per share on or before June 18, 1996 and were
exercisable at $19.30 per share on or before June 18, 1997. These warrants
expired unexercised during fiscal year 1997.
On June 18, 1995, the Company issued warrants exercisable for an aggregate of
21,647 shares of Series D Convertible Preferred Stock in replacement of
warrants exercisable for the same number of shares of Series D Convertible
Preferred Stock which expired on such date. These warrants have an exercise
price of $9.00 per share and expire on June 18, 1997. In June 1996, the
Company received $4,800 in connection with the issuance of 4,000 of these
warrants. The remaining 17,647 warrants expired unexercised during fiscal
year 1997.
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65
Pursuant to a Stock Purchase Agreement dated March 4, 1993, as amended
September 9, 1993, the Company granted to several holders of Series D
redeemable convertible preferred stock, warrants to purchase an aggregate of
202,781 shares of common stock. The warrants, none of which were exercised in
1997, are exercisable at $10.59 per share for a period of five years from the
date of grant. These warrants expired unexercised on March 4, 1998.
Pursuant to the Stock Purchase Agreement dated July 12, 1995, as amended
August 16, 1995, the Company granted the purchasers of Series E redeemable
convertible preferred stock, warrants to purchase an aggregate of 103,891
shares of common stock. These warrants, none of which were exercised in
1997, are exercisable at $10.59 per share for a period of five years from
the date of grant.
Pursuant to the Stock Purchase Agreement dated June 28, 1996, as amended
December 18, 1996 and February 28, 1997, the Company granted the purchasers
of Series F redeemable convertible preferred stock, warrants to purchase an
aggregate of 651,334 shares of common stock. These warrants were exercisable
at $7.65 per share for a period of five years from the date of grant. Prior
to the closing of the public offering, a cashless exercise of 102,387
warrants resulted in the issuance of 13,296 shares of common stock. Upon the
closing of the public offering, the aggregate number of shares available
decreased from 548,947 to 466,604 and the per share exercise price increased
from $7.65 to $9.00, pursuant to the terms of such warrants. These warrants,
none of which were exercised in 1997, retained the cashless exercise feature
after the closing of the public offering.
On February 28, 1997, the Company issued warrants exercisable for an
aggregate of 48,449 shares of common stock at a weighted average exercise
price of $4.61 per share to certain financial advisors. These warrants, none
of which were exercised in 1997, contain a cashless exercise feature.
In 1997 the Company also issued warrants to Subordinated Secured Note holders
(see Note M).
L. INCENTIVE PLANS
1992 Equity Incentive Plan
On September 15, 1992, the Board of Directors adopted the 1992 Equity
Incentive Plan (the "1992 Plan") which was approved by the shareholders on
March 4, 1993. Under the 1992 Plan, The Board of Directors or a Committee
appointed by the Board of Directors is permitted to award shares of
restricted common stock or to grant stock options for the purchase of common
stock to employees, consultants, advisors, and members of the Board of
Directors, up to a maximum of 722,500 shares. The 1992 Plan terminates on the
earlier of (i) the day after the tenth anniversary of its adoption, or (ii)
upon issuance of all available shares.
In connection with the closing of the initial public offering, the 1992 Plan
was amended to increase the number of shares of common stock issuable upon
the grant of awards or upon exercise of stock options granted under the 1992
Plan to 1,350,000 and to provide that the maximum number of shares with
respect to which awards and options may be granted to any employee during any
calendar year be 500,000 shares.
The 1992 Plan provides for the granting of incentive stock options (ISOs),
nonqualified stock options (NSOs) and awards. In the case of ISOs and NSOs,
the exercise price shall not be less than 100% (110% in certain cases for
ISOs) of the fair market value per share of the common stock on the date of
grant. In the case of awards, the purchase price will be determined by the
Board of Directors.
A-14
66
Each option granted under the 1992 Plan shall be exercisable either in full
or in installments as set forth in the option agreement. Each option and all
rights shall expire on the date specified by the Board of Directors or the
Committee, but not more than ten years after the date on which the option is
granted in the case of ISOs (five years in certain cases). Options vest
between zero and five years. The fair value of options issued to
non-employees is recorded as a charge to earnings over the shorter of the
service period or the vesting period.
In the case of awards of restricted common stock, the Board of Directors or
the Committee determines the duration of certain restrictions on transfer of
such stock.
A summary of the Company's stock option activity for the three years ended
December 31, 1997 is as follows:
Weighted
Number of Average
Options Exercise Price
--------- --------------
Outstanding at December 31, 1994 ......... 287,938 $3.39
Terminated, 1995 ....................... (17,000) 7.06
--------- -----
Outstanding at December 31, 1995 ......... 270,938 $3.16
Granted, 1996 .......................... 381,648 2.35
Exercised, 1996 ........................ (318) 2.35
Terminated, 1996 ....................... (18,594) 2.35
--------- -----
Outstanding at December 31, 1996 ......... 633,674 $2.40
Granted, 1997 .......................... 463,512 8.34
Exercised, 1997 ........................ (1,275) 2.35
Terminated, 1997 ....................... (850) 2.35
--------- -----
Outstanding at December 31, 1997 ......... 1,095,061 $4.92
========= =====
Summarized information about stock options outstanding at December 31, 1997
is as follows:
Exercisable
Weighted -------------------
Average Weighted Weighted
Number of Remaining Average Average
Range of Options Contractual Exercise Number of Exercise
Exercise Prices Outstanding Life (Years) Price Options Price
--------------- ----------- ------------ -------- --------- --------
$1.18-1.76 46,750 5.3 $ 1.34 46,750 $ 1.34
2.35 568,861 8.0 2.35 292,883 2.35
6.88-7.50 191,750 9.5 7.22 17,000 7.05
9.00-9.13 287,700 9.6 9.04 0 0.00
1.18-9.13 1,095,061 8.6 4.92 356,633 2.44
Options exercisable at December 31, 1996 and 1995 were 244,343 and 200,791,
respectively.
The weighted average fair value at date of grant for options granted during
1997 and 1996 were $3.20 and $0.54, respectively, per option.
Total proceeds from the exercise of all vested options at December 31, 1997
would be $871,649.
A-15
67
1997 Employee Stock Purchase Plan
In March 1997, the Company adopted the 1997 Employee Stock Purchase Plan (the
"Purchase Plan"), effective upon the closing of the initial public offering,
pursuant to which rights are granted to purchase shares of common stock at
85% (or such other higher percentage as the Board of Directors determines to
be appropriate) of the lesser of the fair market value of such shares at
either the beginning or the end of each six month offering period. The
Purchase Plan permits employees to purchase common stock through payroll
deductions which may not exceed 10% of an employees compensation as defined
in the plan. Under the Purchase Plan, the Company has reserved 500,000 shares
of common stock for issuance to eligible employees. The first offering period
commenced on August 1, 1997, and ended on January 31, 1998. Accordingly, the
Company had not issued any shares under the Purchase Plan as of December 31,
1997.
1997 Director Stock Option Plan
In March 1997, the Company adopted the 1997 Director Stock Option Plan (the
"Director Plan"). Under the terms of the Director Plan, options to purchase
15,000 shares of common stock were granted to each of the non-employee
directors upon the closing of the initial public offering at $9.00 per
option. A total of 105,000 options were granted during the year ended
December 31, 1997. Options to purchase 15,000 shares of common stock will be
granted to each new director upon his or her initial election to the Board of
Directors. Annual options to purchase 5,000 shares of common stock will be
granted to each non-employee director on May 1 of each year commencing in
1998. All options will vest on the first anniversary of the date of grant.
However, the exercisability of these options will be accelerated upon the
occurrence of a change in control of the Company (as defined in the Director
Plan). A total of 300,000 shares of common stock may be issued upon the
exercise of stock options granted under the Director Plan. With the exception
of the options granted on the Public Offering, the exercise price of all
options granted under the Director Plan will equal the closing price of the
common stock on the date of grant.
401(k) Savings and Retirement Plan
On August 28, 1996 the Company adopted a 401(k) Savings and Retirement Plan
(the "401(k) Plan"), a tax-qualified plan covering all of its employees who
are at least 20.5 years of age and who have completed at least three months
of service to the Company. Each employee may elect to reduce his or her
current compensation by up to 15%, subject to the statutory limit (a maximum
of $9,500 in 1997) and have the amount of the reduction contributed to the
401(k) Plan. The 401(k) Plan provides that the Company may, as determined
from time to time by the Board of Directors, provide a matching cash
contribution. In addition, the Company may contribute an additional amount to
the 401(k) Plan, as determined by the Board of Directors, which will be
allocated based on the proportion of the employee's compensation for the plan
year to the aggregate compensation for the plan year for all eligible
employees. Upon termination of employment, a participant may elect a lump sum
distribution or, if his or her total amount in the 401(k) Plan is greater
than $3,500, may elect to receive benefits as retirement income. Through
December 31, 1997, the Company has not matched any cash contributions made
by employees to the 401(k) plan.
A-16
68
Stock-Based Compensation Plans
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for the 1992 Plan and the Purchase Plan and no compensation
expense has been recognized for options granted to employees and shares
purchased under these plans. Had compensation expense for the stock-based
compensation plans been determined based on the fair value at the grant dates
for the options granted and shares purchased under the plan consistent with
the method of SFAS 123, Accounting for Stock-Based Compensation, the net
income and net income per share would have been as follows:
1997 1996 1995
-------------------------- ------------------------- -------------------------
Basic and Basic and Basic and
Net Loss to Diluted Net Loss to Diluted Net Loss to Diluted
Common Net Loss Common Net Loss Common Net Loss
Stockholders Per Share Stockholders Per Share Stockholders Per Share
------------- --------- ------------ --------- ------------ ---------
As Reported $(12,745,440) $(3.08) $(6,624,999) $(33.44) $(4,163,449) $(21.05)
Pro Forma (13,014,737) (3.15) (6,653,966) (33.59) (4,163,449) (21.05)
The effects of applying SFAS 123 in this pro forma disclosure are not likely
to be representative of the effects on reported net loss to common
stockholders for future years. SFAS 123 does not apply to awards granted
prior to fiscal year 1995 and additional awards are anticipated in future
years.
The fair value of options and other equity instruments at the date of grant
was estimated using the Black-Scholes option pricing model for 1997 and
Minimum Value Method for 1996, with the following assumptions:
1997 1996
---- ----
Expected life (years) - stock options 2.5 - 4.0 years 5 years
Expected life (years) - Purchase Plan .5 -
Risk-free interest rate 5.55 - 6.22% 6.50%
Volatility 47% 0
Dividend yield 0 0
Expected forfeiture rate 10% -
No options were granted in 1995.
The Black-Scholes option pricing model was developed for use in estimating
the fair value of options that have no vesting restrictions and are fully
transferable. In addition, option pricing models require the use of highly
subjective assumptions, including the expected stock price volatility and
expected forfeiture. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective assumptions can materially affect the fair
value estimates, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock-based compensation.
A-17
69
M. SUBORDINATED SECURED NOTES AND RELATED WARRANTS
On January 31, 1997, the Company executed a securities purchase agreement
that provided for the issuance of Subordinated Secured Notes (the "Notes") in
the aggregate amount of $2,000,000 ("First Closing"). On June 4, 1997, the
Company executed a securities purchase agreement to issue additional Notes in
the amount of $5,000,000 ("Second Closing"). The Company may redeem the Notes
by paying 100% of the outstanding principal and accrued interest at any time.
Upon a change in control of the Company, as defined in the agreement, the
holders of the Notes may elect to have the Notes purchased by the Company at
100% of the outstanding principal plus accrued interest. The Notes are
collaterized by all of the Company's assets, prohibit the payment of
dividends by the Company and, subject to certain exceptions, (including for
up to $6,000,000 of senior secured bank financing) prohibit the incurrence of
additional indebtedness. The Notes are payable in eight equal quarterly
principal payments and require quarterly interest payments on the unpaid
principal balance, at a rate equal to the lesser of 10% or 3.5% over the
prime rate, with the first quarterly payment due in December 1997.
Accordingly, in December 1997, the Company paid an aggregate of $1,050,000 to
the holders of the Notes as the first quarterly payment. The Notes mature on
September 2, 1999. In addition, until September 1999, the holders of the
Notes have the right to convert the Notes into such number of shares of
common stock as is equal to the outstanding principal of such Notes divided
by $9.00 (the price to the public at the offering) per share (subject to
certain requirements as to the minimum amount to be so converted as provided
in the Agreement).
Under the terms of the securities purchase agreement for the Notes, based on
a certain formula outlined therein, at the First Closing, the Company issued
Series A warrants, to purchase an aggregate of 224,429 shares of common stock
and at the Second Closing, issued Series A warrants to purchase an aggregate
of 336,644 shares of common stock and Series B warrants to purchase an
aggregate of 218,195 shares of common stock, to the Note investors. The
Series A warrants are exercisable at $0.01 per share for a period of seven
years from the grant date and the Series B warrants are exercisable at $5.29
per share over the same period. None of these warrants were exercised in
1997. The fair market value of the warrants issued on January 31, 1997 was
recorded as a discount of $836,994 to the Notes issued at such closing.
Consequently, such Note was recorded at $1,163,006. Similarly, the fair
market value of the warrants (as of January 31, 1997) issued on June 4, 1997
was recorded at a discount of $1,668,746 to the Notes issued on such date.
Consequently, such Notes were recorded at $3,331,254. Accordingly,
approximately $2,506,000 of accretion will be charged to interest expense, in
addition to the stated interest rates, over the terms of the Notes. For the
year ended December 31, 1997, the accretion charges were $1,132,808 which
were included in interest expense on the statements of operations. The
Company capitalized $596,040 of issuance costs related to the Notes which
will be amortized over the term of the Notes.
Payments of principal of the subordinated secured notes are as follows:
Years ended December 31,
------------------------
1998................................... $3,500,000
1999................................... 2,625,000
----------
$6,125,000
==========
N. FEVERALL ACQUISITION
On July 10, 1997, the Company completed the acquisition of the Feverall
acetaminophen suppository product line and certain related assets, including
the Feverall trademark and the Feverall Sprinkle Caps powder and
Acetaminophen Uniserts suppository product lines (the "Product Lines") from
Upsher-Smith Laboratories, Inc. ("Upsher-Smith"). The purchase price of
$11,905,145, including related costs of $183,880, consisted of cash of
$6,405,145 and a promissory note issued to Upsher-Smith for $5,500,000
maturing on February 20, 1998 bearing no interest. The Company paid this
note in February 1998.
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70
The purchase price was allocated to the assets acquired based on their
estimated respective fair values on the date of acquisition as follows:
Useful
Amount Lives
(in millions) (in years)
------------- ----------
Inventory $ 0.4 --
Trademark 4.5 20
Manufacturing agreement 5.0 15
Goodwill 2.0 20
-----
Total $11.9
=====
Accumulated amortization of intangible assets as of December 31, 1997 was
$289,812.
The Feverall Trademark was valued using the Relief from Royalty Method, using
a risk adjusted cash flow model under which future cash flows were
discounted, taking into account risks relating to existing and future markets
and assessments of the life expectancy of the Feverall products. The
manufacturing agreement with Upsher-Smith was valued using a risk adjusted
cash flow model under which future cash flows were discounted, taking into
account risks relating to existing and future markets and the expected
economic life of the agreement. Intangible assets are amortized over the
useful lives on a straight line basis.
Pursuant to the acquisition of the product lines, the Company entered into a
manufacturing agreement with Upsher-Smith. The initial term of the agreement
is five years with an option for two additional five-year terms. Optional
term potential price increases are capped at 5% per option. The Company pays
Upsher-Smith on the basis of the fully absorbed costs plus ten percent.
The following unaudited pro forma information combines the results of
operations of the Company and Feverall Product Line as if the purchase of the
Feverall Product Line occurred at the beginning of each of the periods
presented below. These unaudited pro forma information were prepared after
giving effect to certain adjustments, including amortization of tangible
assets and certain incremental expenses the Company would have incurred if
the acquisition had occurred on those dates. The unaudited pro forma
information is shown for comparative purposes only and does not reflect the
synergies expected to result from the integration of the Feverall Product
Line into the Company's business.
Year ended Year ended
December 31, December 31,
1997 1996
(unaudited) (unaudited)
(Pro forma) (Pro forma)
------------ ------------
Revenues $ 3,560,000 $ 3,877,000
Operating loss (12,243,000) (6,460,000)
Net loss to common
stockholders (13,135,000) (6,987,000)
Loss per share to $ (3.18) $ (35.27)
common stockholders
O. SUBSEQUENT EVENT
On February 6, 1998, the Company entered into an agreement with
Bristol-Myers Squibb U.S. Pharmaceutical Group to exclusively promote Duricef(R)
(cefadroxil monohydrate) oral suspension to Pediatricians in the U.S. The
copromotion agreement has a four-year term. As compensation for the Company
copromotional efforts, Bristol-Myers Squibb has agreed to pay the Company a
specified percentage of net sales of the product attributed to pediatricians
(as defined in the agreement) on sales above a specified number of
prescriptions for the product. In addition, Bristol-Myers Squibb has agreed to
reimburse the Company for a specified amount of the Company's marketing costs
during each year of the agreement.
A-19
71
EXHIBIT INDEX
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Exhibit
Number Description
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3.1 (1) Amended and Restated Certificate of Incorporation of the
Registrant.
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3.2 (1) Amended and Restated By-Laws of the Registrant.
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4.1 (1) Specimen Certificate for shares of Common Stock, $.00004 par
value, of the Registrant.
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4.2 (1) Form of Subordinated Secured Note of the Registrant.
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10.1 (1)(3) Amended and Restated 1992 Equity Incentive Plan.
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10.2 (1)(3) 1997 Director Stock Option Plan.
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10.3 (1)(3) 1997 Employee Stock Purchase Plan.
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10.4 (1) Lease dated November 21, 1996 between the Registrant and New
Boston Wilmar Limited Partnership.
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10.5 (1)(3) Employment Agreement dated as of March 15, 1994 between the
Registrant and Emmett Clemente.
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10.6 (1)(3) Consulting Agreement dated as of April 1, 1996 between the
Registrant and Robert E. Baldini.
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10.7 (1)(5) Development and License Agreement dated as of October 8,
1996 by and between the Registrant and Recordati S.A.
Chemical and Pharmaceutical Company ("Recordati").
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10.8 (1)(5) Manufacturing and Supply Agreement dated as of October 8,
1996 by and between the Registrant and Recordati.
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10.9 (1)(5) Supply Agreement dated as of October 12, 1994 by and between
the Registrant and Lyne Laboratories, Inc.
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10.10(1) Securities Purchase Agreement dated as of January 31, 1997
among the Registrant, Triumph-Connecticut Limited
Partnership and other purchasers identified therein (the
"Triumph Agreement").
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10.11(1) Waiver and Amendment to the Triumph Agreement dated as of
March 13, 1997.
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10.12(1) Series F Convertible Preferred Stock and Warrant Purchase
Agreement dated as of June 28, 1996 between the Registrant
and certain purchasers identified therein as amended by
Amendment No. 1 dated as of June 28, 1996 and Amendment No.
2 dated February 3, 1997.
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10.13(1) Form of Common Stock Purchase Warrant issued to Chestnut
Partners, Inc. on February 28, 1997.
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10.14(1) Common Stock Purchase Warrant issued to Banque Paribas on
February 28, 1997.
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10.15(1) Form of Common Stock Purchase Warrant with an exercise price
of $.01 per share issued to designees of Bentley Securities
on February 28, 1997.
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10.16(1) Form of Common Stock Purchase Warrant with an exercise price
of $5.91 per share issued to designees of Bentley Securities
on February 28, 1997.
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72
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10.17(1) Amendment No. 1 dated February 28, 1997 to the Development
and License Agreement dated as of October 8, 1996 by and
between the Registrant and Recordati.
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10.18(1)(5) Asset Purchase Agreement dated as of March 25, 1997, between
the Registrant and Upsher-Smith (the "Asset Purchase
Agreement"), which includes the form of Promissory Note of
the Registrant in the face amount of $5,500,000 as Exhibit A
thereto and the form of Manufacturing Agreement between the
Registrant and Upsher-Smith as Exhibit E thereto.
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10.19(2)(5) Addendum to Asset Purchase Agreement dated as of July 10,
1997, between the Registrant and Upsher-Smith.
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10.20(4) Copromotion Agreement dated as of February 1, 1998, between
the Registrant and Bristol-Myers Squibb (US) Pharmaceuticals
Group.
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11.1 Computation of historical and pro forma net loss per common
share.
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23.1 Consent of Coopers & Lybrand L.L.P., independent accountants
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27.1 Financial Data Schedule (Year Ended December 31, 1996)
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27.2 Financial Data Schedule (Three Months Ended March 31, 1997)
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27.3 Financial Data Schedule (Three Months Ended June 30, 1997)
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27.4 Financial Data Schedule (Six Months Ended June 30, 1997)
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27.5 Financial Data Schedule (Nine Months Ended September 30,
1997)
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27.6 Financial Data Schedule (Year Ended December 31, 1997)
(1) Incorporated herein by reference to Exhibits to the Company's
Registration Statement on Form S-1 (File No. 333-23319).
(2) Incorporated herein by reference to Exhibits to the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission (the "Commission") on July 25, 1997.
(3) Management contract or compensatory plan or arrangement required to
be filed as an Exhibit to this Annual Report on Form 10-K.
(4) Confidential treatment requested as to certain portions, which
portions are omitted and filed separately with the Commission.
(5) Confidential treatment granted as to certain portions, which
portions were omitted and filed separately with the Commission.