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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 0-19193
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CAMBRIDGE NEUROSCIENCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3319074
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE KENDALL SQUARE, BUILDING 700, CAMBRIDGE, MA 02139
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 225-0600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange
Title of each class on which registered
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.001 per share
(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 for 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 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. [ ]
The aggregate market value of Common Stock held by non affiliates of
the Registrant as of February 28, 1999, was $9,798,920. At February 28, 1999,
there were issued and outstanding 18,099,785 shares of Common Stock, par value
$.001 per share.
A list of all Exhibits to this Form 10-K begins on page 29.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Cambridge NeuroScience, Inc. (the "Company") is a biopharmaceutical company
engaged in the discovery and development of proprietary pharmaceuticals to
prevent or treat severe disorders of, or injuries to, the nervous system. The
Company has not been profitable since inception and expects to continue to incur
operating losses for at least the next several years. To date, the Company has
funded its operations primarily through proceeds from public and private
offerings of equity securities, from payments received pursuant to
collaborations with pharmaceutical companies and from government grants.
Research and development revenue in 1998 was earned pursuant to the terms of
four collaborations agreements, each of which comprised more than 10% of total
revenue. Revenue earned pursuant to one collaborative agreement totaled 27% of
revenue in 1998, 71% in 1997 and 95% in 1996. Revenue earned pursuant to another
collaborative agreement totaled 23% and 25% of revenue in 1998 and 1997,
respectively. See "--Strategic Alliances." The Company has not received any
revenue from the sale of products. Research and development expenses were $6.0
million, $17.7 million and $14.0 million for the years ended December 31, 1998,
1997 and 1996, respectively. Research and development expenses represented 80%
of total operating expenses, excluding restructuring costs, in 1998, and
represented 87% and 84%, respectively, of total operating expenses in 1997 and
1996.
The Company is focused in two areas of research and development: (i)
ion-channel blockers to prevent or treat brain damage resulting from stroke and
other forms of brain ischemia, as well as for the treatment or prevention of
neuropathic pain, glaucoma, spinal cord injury, Parkinson's disease, multiple
sclerosis ("MS") and peripheral neuropathies, and (ii) growth factors for the
treatment of MS and peripheral neuropathies.
The Company's ion-channel blocker programs include aptiganel hydrochloride
("aptiganel"), formerly known as CERESTAT(R), for the treatment of stroke; CNS
5161 for the treatment and management of pain; a collaboration with Allergan for
the treatment of ophthalmic disorders; and an early-stage program which focuses
on the discovery of potassium-channel blockers for the treatment of
neuropathies, MS and spinal cord injury. In late 1997, the Company and its
collaborative partner, Boehringer Ingelheim International, GmbH ("BI")
discontinued enrollment into the clinical trials of aptiganel for stroke and
traumatic brain injury ("TBI") and, in November 1998, terminated the
collaboration agreement which began in March 1995. See "Strategic Alliances."
Based on the Company's review and analysis of the trial data and input from an
independent panel of stroke experts, which convened in October 1998, the Company
remains committed to the continued development of aptiganel for stroke. To that
end, the Company is pursuing options for funding such development through a new
corporate partnership and/or government funding and has collaborated with two
leading stroke research groups to design a new Phase III clinical trial for
aptiganel focused on a subset of the stroke patient population. However, there
can be no assurance that such funding will be available or that further
development of aptiganel will occur.
In November 1996, the Company entered into a collaboration with Allergan
for the development of NMDA ion-channel blockers, sodium-channel blockers and
combination ion-channel blockers, for the treatment of ophthalmic disorders,
including glaucoma. The Company is actively pursuing the possibility of
extending the term of this partnership, the initial term of which expires in
November 1999. The Company is also developing CNS 5161, an NMDA ion-channel
blocker compound, which has completed two Phase I clinical trials, including one
trial in a pain model, and may consider its development for certain chronic
neurodegenerative disorders, such as Parkinson's disease and MS. In conjunction
with a leading drug delivery company, the Company is exploring formulations of
CNS 5161 suitable for sustained drug administration. The Company is currently
seeking a partner to support the clinical development of CNS 5161 and the
Company's early-stage drug discovery efforts in novel analgesics. In 1997 the
Company also received a Phase I Small Business Innovation Research ("SBIR")
grant from the National Institutes of Health ("NIH") for the Company's project
to discover novel potassium ion-channel blockers to treat peripheral
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CERESTAT is a registered trademark of Boehringer Ingelheim International, GmbH.
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neuropathies and intends to submit a Phase II SBIR grant application to the NIH
in 1999 for continued support of this drug discovery project.
The Company's growth factor product candidate is recombinant human
Glial Growth Factor 2 ("GGF2"). In December 1998, the Company entered into a
licensing and research collaboration agreement with Bayer AG ("Bayer") for the
development of GGF2 for the treatment of MS and other neurodegenerative
diseases. The Company and Bayer will work together to accomplish the tasks
associated with preclinical development, with Bayer providing financial support
for this work. While Bayer will continue the clinical development of GGF2, the
Company expects that its research activity in the protein growth factor area
will decline to a low level when GGF2 enters the clinic. See "Strategic
alliances."
On March 9, 1998, the Company implemented a cost reduction plan which
included a reduction in headcount by 34 employees, consisting of 22 research,
four drug development and eight administrative and support employees. The
Company's Board of Directors declared an extraordinary dividend of $1.00 per
share, or $17.9 million, which was paid in April 1998. The Company does not
contemplate paying dividends in 1999. Following the reduction in headcount, in
June 1998, the Company entered into an agreement with a third party to sub-lease
approximately half of the Company's office and laboratory facilities, thereby
reducing facilities-related operating expenses.
The Company continues to explore opportunities to maximize shareholder
value. To that end, the Company has implemented cost containment measures to
manage its use of cash, is focusing its resources on its later-stage programs,
and is seeking opportunities for funding its programs through corporate
collaborations and government grants. The Company remains committed to the
further development of aptiganel in stroke and is actively pursuing funding for
this effort. The Company is continuing its earlier-stage research efforts in the
ion-channel blocker area, to the extent that funding is available from third
party sources, including the collaborative relationship with Allergan. The
Company may consider the sale of some or all of its technology assets. In
December 1998, the Company entered into a technology licensing agreement with
Creative Biomolecules, Inc. ("CBMI") whereby CBMI acquired the exclusive rights
to Growth/Differentiation Factor-1 ("GDF-1") in exchange for an up front
licensing fee and future royalties on sales. See "Strategic Alliances."
BACKGROUND
The central nervous system, composed of the brain and spinal cord, controls
cognitive functions, interprets incoming sensory information and organizes body
movements. The peripheral nervous system, composed of nerve fibers leading to
and from the central nervous system, carries information from body sensory
receptors and commands to muscles and glands. Two main cell types are found
throughout the nervous system: nerve cells, which generate and transmit
electrical signals, and glial cells, which provide nutrition and support
functions to nerve cells.
Nerve cells and glial cells communicate with one another through a wide
range of electrical and chemical signals to accomplish the normal development
and function of the nervous system. Disorders of the nervous system are
characterized by a change (usually a reduction) in an individual's ability to
perform normal voluntary or involuntary functions. These disorders result from
acute or chronic damage to nerve or glial cells or by abnormalities in the
electrical or chemical communication within and amongst nerve cells or glial
cells.
Ion channels are proteins found in nerve and glial cell membranes that
generate electrical signals in response to chemical signals received from other
cells or to chemical or electrical changes within a single cell. Drugs which
stimulate, enhance, reduce or suppress the activity of specific ion channels
have potential as treatments for nervous system disorders because they can
eliminate potentially damaging overstimulation of nerve cells or correct
dysfunctions in the processes of generating electrical signals in the nervous
system.
Acute damage to the central nervous system, such as occurs in stroke and
traumatic injuries to the head and spine, often results from a reduction in
blood flow (ischemia) to, and the premature death of, nerve cells and leads to
permanent disorders. Nerve cell death following an ischemic event in the brain
is triggered by the excessive
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release of a particular chemical signaling molecule, the excitatory
neurotransmitter, glutamate, from damaged nerve terminals. In the ischemic
brain, glutamate predominantly activates a receptor site on an ion channel known
as the N-methyl D-aspartate ("NMDA") ion channel. Activation of the NMDA ion
channel permits the massive entry of calcium into nerve cells. Overloading
nerve cells with calcium ions activates a number of processes that ultimately
result in cell death. In animal models of stroke and TBI, drugs that can inhibit
the activity of the NMDA ion channel have been shown to limit the extent of
brain damage and loss of function when administered after the onset of cerebral
ischemia.
Chronic degenerative disorders of the nervous system, such as MS and
peripheral neuropathies, also result from the death of nerve or glial cells.
Chronic nerve cell death does not necessarily result from ischemia but can
result from other metabolic causes, including the actions of endogenous and
exogenous toxic substances, some of which can mimic the effects of
overstimulation of NMDA ion channels ("excitotoxins"). Chronic nerve and glial
cell death can also result from inflammatory processes in the nervous system,
including the autoimmune destruction of oligodendrocytes (a type of glial cell)
that is the hallmark of MS.
In the development of the nervous system, the proliferation,
differentiation and survival of nerve and glial cells are controlled by a
variety of protein growth factors. These growth factors are produced by cells of
the nervous system and by their target cells. Growth factors also play important
roles during the normal regeneration of the nervous system following damage.
Animal studies suggest that one attractive therapeutic approach to replacing
damaged nerve and glial cells is to re-initiate the processes of early
development in the nervous system through the introduction of protein growth
factors. Therefore, protein growth factors offer significant potential as
treatments for a variety of neurological disorders.
PRODUCT CANDIDATES
The following table summarizes the primary indications, development status
and holder of commercial rights for each of the Company's ("CNSI") product
candidates. This table is qualified in its entirety by reference to the more
detailed descriptions appearing elsewhere in this document.
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DEVELOPMENT COMMERCIAL
PRODUCT CANDIDATE INDICATIONS STATUS(1) RIGHTS
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ION-CHANNEL BLOCKERS
Aptiganel Stroke Phase III (2) CNSI (3)
CNS 5161 Neuropathic pain Phase I (4) CNSI
NMDA, sodium, Ophthalmic disorders, including Preclinical Allergan (5)
potassium and glaucoma
combination
ion-channel blockers Brain or spinal cord ischemia; brain Research CNSI
or spinal cord trauma; pain;
peripheral neuropathies; Parkinson's
disease; Multiple Sclerosis
PROTEIN GROWTH FACTORS
GGF2 Multiple sclerosis Pre-IND Bayer (6)
Diabetic neuropathy; Preclinical Bayer (6)
chemotherapy-induced neuropathy
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(1) "Pre-IND" refers to toxicology and other regulatory studies for a
designated compound in anticipation of human clinical trials. "Preclinical"
refers to safety and efficacy studies conducted in animals. "Research"
refers to scientific activities to identify a specific molecule or to
select a specific clinical indication. "Phase I"
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refers to smaller-scale trials in human volunteers designed to provide
information about safety and dosage. "Phase III" refers to large-scale
clinical trials designed to provide statistically valid proof of efficacy
and safety in the target population. See "Government Regulation."
(2) The Phase III clinical trials were discontinued in mid-1997. The Company
and BI terminated their collaboration agreement for this product candidate
in November 1998. The Company remains committed to the continued
development of aptiganel for stroke and is pursuing options for funding
such development. See "Drug Discovery and Development - Ion-Channel
Blockers - Aptiganel: Stroke."
(3) Upon termination of the collaboration agreement with BI, in November 1998,
all rights to aptiganel were returned to the Company, in exchange for a
small royalty on future sales.
(4) The Company has completed two Phase I trials of CNS 5161. The first trial
was an escalating dose safety study. The second trial involved volunteers
who were exposed to placebo, morphine and two doses of CNS 5161 in a pain
model.
(5) Allergan has the right to develop certain NMDA ion-channel blockers, sodium
ion-channel blockers and combination ion-channel blockers for the treatment
of ophthalmic disorders, including glaucoma. See "Strategic Alliances."
(6) Pursuant to the collaboration agreement signed in December 1998, Bayer has
acquired the worldwide manufacturing and marketing rights for GGF2. See
"Strategic Alliances."
DRUG DISCOVERY AND DEVELOPMENT
The Company is concentrating its drug discovery and development efforts in
two main programs: ion-channel blockers to modify nerve cell signaling or to
prevent nerve cell death; and protein growth factors to prevent degeneration of,
or to regenerate, nerve and glial cells. With the out-licensing of GDF-1 to CBMI
and the commencement of a collaboration agreement with Bayer for GGF2, the
Company's drug discovery and development efforts will focus more on its
ion-channel blocker programs and less in the area of protein growth factors. See
"--Protein Growth Factors."
ION-CHANNEL BLOCKERS
The Company synthesizes and evaluates small organic molecules, known as
ion-channel blockers, that directly block passage of ions through the ion
channels, which control the activity of nerve cells. Ion-channel blocking
compounds have potential as novel drugs to treat a wide variety of acute and
chronic disorders of the nervous system through the inhibition of nerve cell
death caused by excessive amounts of glutamate or other excitotoxins or through
the correction of abnormal electrical signaling in the nervous system.
The Company's assets in its ion-channel blockers program include:
* Aptiganel, a treatment to limit the extent of brain damage in stroke and
other forms of acute brain ischemia;
* a collaboration funded by Allergan for the discovery of an ion-channel
blocker to treat ophthalmic disorders, including glaucoma;
* CNS 5161, a drug candidate which has completed two Phase I clinical trials,
including one trial in a pain model, for the treatment of chronic
neuropathic pain and, possibly, certain chronic neurodegenerative
disorders;
* a drug discovery project in potassium channel blockers for neuropathies,
multiple sclerosis and spinal cord injury;
* a patent portfolio, including 37 issued US patents and 30 pending US patent
applications plus corresponding foreign patents or applications;
* an ion-channel focused chemical library of approximately 2,000 molecules,
containing compounds designed to alter the activity of NMDA, sodium or
potassium channels; and,
* CNS 1261, a SPECT-imaging agent (a research tool) currently in clinical
trials for visualizing activated NMDA ion channels in the human brain.
As mentioned above, in brain and spinal cord ischemia, over-stimulation of
glutamate-activated NMDA ion channels is primarily responsible for flooding
nerve cells with calcium ions, which results in cell death. The
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Company is developing ion-channel blockers to selectively block the NMDA ion
channel and limit nerve cell death during acute cerebral ischemia as treatments
for stroke and other acute injuries to the nervous system.
Aptiganel: Background and Clinical Trial Status
Aptiganel, the Company's most advanced product candidate, has been the
subject of Phase III clinical trials for both TBI and stroke. Enrollment in both
of these Phase III trials was stopped prior to completion, based on the results
of scheduled interim analyses of the data in each trial. The development of
aptiganel was managed by the Company and its collaborative partner, BI until
November, 1998, when the parties terminated the agreements and all rights were
returned to the Company, subject to the Company's agreement to pay BI a royalty
on any future product sales. See "Strategic Alliances." The Company remains
committed to the continued development of aptiganel for stroke. Any further
clinical trial will require outside funding, either through a corporate
collaboration or a government grant.
A coordinated series of Phase I and Phase II clinical trials was undertaken
to ascertain the safety of aptiganel in over 400 volunteers and patients. These
clinical trials were conducted to determine the safe and tolerable doses and
dosing regimens that result in a plasma level of the compound equivalent to, or
higher than, the minimum plasma level of the compound that is associated with
the limitation of brain damage in animal models of cerebral ischemia. In TBI
patients, two studies were conducted to determine a dosing regimen that would
produce a plasma level of aptiganel three times the target plasma level.
Following the first study in which aptiganel was administered on a
weight-adjusted basis over a four-hour period, the second study demonstrated
that a non-weight-adjusted dosing regimen could safely maintain such a plasma
level for 72 hours. Non-weight-adjusted dosing regimens are more easily
administered in clinical trials and offer marketing advantages.
In stroke patients, three studies were undertaken to determine a dosing
regimen that would produce a plasma level of aptiganel equivalent to, or greater
than, the target plasma level. The first was used to determine the safety of
escalating doses of aptiganel over a four-hour treatment period. The second was
a dose-response trial. In the dose-response trial, at 90 days after treatment,
the improvement in neurological function (NIH Stroke Scale) of patients treated
with the highest dose tested was significantly better than that of
placebo-treated patients. A third study determined that a non-weight-adjusted
dosing regimen could safely maintain the target plasma level over a 12-hour
period. The Company commenced Phase III clinical trials with aptiganel in TBI in
March 1996 and in stroke in July 1996.
In June 1997, the Company announced that it was suspending enrollment into
the Phase III stroke trial following a planned interim analysis of the data on
368 patients. The interim analysis raised concerns over the benefit-to-risk
ratio of drug treatment. On December 16, 1997 the Company and BI announced that
they would not resume enrollment of new patients into the trial. This decision
followed a second interim analysis of the data on 628 patients who had been
enrolled prior to the temporary suspension of enrollment in June.
On September 16, 1997, the Company announced the discontinuation of its
Phase III trial of aptiganel for TBI because a planned interim analysis of the
data showed insufficient evidence of positive clinical impact. Analysis of the
data showed that on a wide variety of safety parameters, the drug was safe and
well tolerated. The companies announced that they would continue to collect
further data and conduct an in-depth analysis on the more than 500 patients
enrolled as of September 16, 1997.
In March 1998, the Company reported that further analysis of the Phase III
data indicated that aptiganel had: (i) an attractive safety profile at
relatively high doses in the TBI patient population, and (ii) a potential
therapeutic benefit in a subset of the stroke patient population. Based on input
from an independent panel of stroke experts, which convened in October 1998, and
the Company's review and analysis of the trial data, the Company remains
committed to the continued development of aptiganel for stroke. To that end, the
Company is pursuing options for funding such development and has collaborated
with two leading stroke research groups to design a new Phase III
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clinical trial for aptiganel focused on a subset of the stroke patient
population. However, there can be no assurance that such funding will be
available or that further development of aptiganel will occur.
Aptiganel: Stroke
In 1994, the American Heart Association estimated that there are
approximately 500,000 incidents of stroke in the United States each year and
that approximately 350,000 people survive the event. Currently, there are
approximately three million disabled stroke survivors in the United States, and
the annual economic cost of stroke to the United States has been estimated at
$40.6 billion. In July 1996, the U.S. Food and Drug Administration ("FDA")
approved the use of tissue plasminogen activator ("tPA") for the treatment of
patients who had suffered a stroke within the preceding three hours and for whom
a CT scan showed no evidence of hemorrhage. Intravenous tPA acts by dissolving
blood clots that might have led to a stroke. To date, there are no FDA-approved
treatments for stroke that act by any mechanism other than dissolving blood
clots.
The Company believes that aptiganel has the potential to improve outcome
for stroke victims by preventing glutamate-induced nerve cell death through the
blockade of the NMDA ion channel. In stroke patients, the central nervous system
side effects of aptiganel include sedation, paresthesias (numbness) and
occasional episodes of altered sensorium, including hallucinations. Increases in
blood pressure have also been observed and have been controlled, when necessary.
The Company believes that these side effects are transitory and manageable.
CNS 5161: Neuropathic Pain and Other Neuropathic Disorders
Despite the availability of a variety of therapeutic approaches to pain
relief, certain disorders are characterized by persistent pathological pain that
is refractory to conventional treatments. Persistent pain associated with
peripheral nerve trauma, neuropathies secondary to diabetes or acquired immune
deficiency syndrome ("AIDS"), amputations and shingles is classified as
neuropathic pain. Drug treatments for neuropathic pain represent a significant
area of unmet medical need and a growing market opportunity. Glutamate
(particularly NMDA) receptors have been implicated in the induction and
maintenance of neuropathic pain in animal models and NMDA antagonists have been
shown to be effective in animal models of persistent pain.
CNS 5161 is a blocker of the NMDA ion channel that was designed and
synthesized by the Company's chemists to be chemically distinct from aptiganel.
Based on its method of action and its pharmacokinetic profile in animals, CNS
5161 was advanced toward clinical evaluation for the treatment of neuropathic
pain. Animal studies have shown that CNS 5161 can prevent the development of a
delayed pain response, which is thought to be related to the development of
chronic neuropathic pain in humans.
The Company completed two Phase I studies of CNS 5161 in 1997. Both were
conducted in male volunteers. The first demonstrated the safety and tolerability
of selected doses of CNS 5161 given intravenously. Data from the first study
were used to choose potentially effective doses that produced little in the way
of side effects in the volunteers. The second study examined the reduction in
pain experienced after placebo, morphine and two separate doses of CNS 5161
(0.25mg and 0.5mg), administered on separate occasions to sixteen male
volunteers. CNS 5161 at 0.5mg was found to produce a statistically significant
reduction in perceived pain as compared to either morphine or placebo. The
Company is currently seeking a partner to support the clinical development of
CNS 5161 and the Company's early-stage drug discovery efforts in novel
analgesics and is unlikely to advance CNS 5161 in clinical trials until a
partnership agreement is reached. In conjunction with a leading drug delivery
company, the Company is exploring formulations of CNS 5161 suitable for
sustained drug administration. With a suitable formulation for chronic drug
administration in hand, and with support from a corporate partner, the Company
will be in a position to commence further clinical trials of CNS 5161, not only
in patients suffering from neuropathic pain but also in patients suffering from
chronic neurological disorders such as Parkinson's disease and MS.
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Ion-Channel Blockers for Ophthalmic Disorders
Glaucoma is the second leading cause of preventable blindness in the world,
with almost four million patients in the United States alone. The disease is
usually associated with increased pressure within the eye, which can damage the
retina and the optic nerve and eventually lead to blindness. In November 1996,
the Company entered into a collaboration with Allergan, a pharmaceutical company
specializing in ophthalmology. The Company and Allergan believe that it may be
possible to treat glaucoma by blocking ion channels and thereby protecting the
retina and the optic nerve from damage. This collaboration combines the
Company's proprietary technology in the area of ion-channel blockers and
Allergan's expertise in the global marketing of treatments for eye disease. In
this collaboration, the Company's molecules which block NMDA ion channels,
sodium ion channels or both ion channels simultaneously, are being evaluated for
their ability to prevent vision loss in animal models of retinal and optic nerve
degeneration which occurs in glaucoma. See "Strategic Alliances."
Other Ion-Channel Blockers for Nervous System Disorders
The Company has applied its expertise in discovering and developing NMDA
ion-channel blockers to the synthesis and testing of compounds that block other
ion channels, such as sodium and potassium ion channels, which can contribute to
nerve cell death or abnormal nerve cell electrical activity. The Company
believes that such molecules may have therapeutic utility in a number of acute
and chronic neurological disorders, including glaucoma, spinal cord injury,
Parkinson's disease, MS and peripheral neuropathies.
To discover new treatments for preventing disorders of the central nervous
system which arise from brain or spinal cord ischemia and trauma, the Company
has synthesized ion-channel blockers with enhanced potency in the environment of
ischemic tissues relative to their potency in the environment of normal tissues.
The Company believes that such targeted ion-channel blockers could achieve
efficacy with fewer unwanted side effects.
In addition to molecules which block NMDA ion channels, the Company has
created a library of small organic molecules which block the sodium ion channels
of nerve cells. In vitro and in vivo studies have demonstrated that sodium
ion-channel blockers can protect nerve cells from ischemic and traumatic damage
and can exert other beneficial effects, such as reducing responses to painful
stimuli and limiting the consequences of damage to nerve fiber bundles. The
Company believes that molecules which block neuronal sodium ion channels have
potential as treatments for various forms of acute and chronic disorders of the
nervous system, including stroke, brain and spinal cord injury and pain.
As an extension of its work in NMDA and sodium ion-channel blockers, the
Company has synthesized molecules which have the capacity to block both NMDA ion
channels and sodium ion channels. The Company is currently conducting in vitro
and in vivo studies to test the hypothesis that such combination compounds have
enhanced efficacy in treating neurological disorders when compared to the
efficacy of compounds which block only one of these classes of ion channels
In 1997 the Company received a Phase I Small Business Innovative Research
("SBIR") grant from the National Institutes of Health ("NIH") for the Company's
project to discover novel potassium ion-channel blockers to treat peripheral
neuropathies and intends to submit a Phase II SBIR grant application to the NIH
in 1999 for continued support of this drug discovery project.
PROTEIN GROWTH FACTORS
Growth factors are known to play an important role in the growth,
differentiation and distribution of nerve cells. They also are crucial to
maintaining the health and function of neurons. The Company has made significant
progress in the development of growth factor proteins as treatments for
disorders of the nervous system.
Recombinant human Glial Growth Factor 2 ("GGF2") is a potential treatment
for degenerative diseases of the nervous system, including multiple sclerosis
and peripheral neuropathies. Over the past five years, the Company has isolated,
cloned, expressed and produced GGF2 and, in collaboration with Bayer AG
("Bayer"), is currently
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focusing its investigation on the potential use of GGF2 as a therapeutic
intervention in the pathological processes involved in MS. See "Strategic
Alliances." Although the Company is actively participating in the pre-IND
development of GGF2 with Bayer, it is management's expectation that its research
activity in the protein growth factor area will decline to a low level when GGF2
enters the clinic. Pursuant to the collaboration agreement, Bayer has received
exclusive worldwide manufacturing and marketing rights to GGF2 and will be
responsible for all development activities and all associated costs.
The Company has also conducted research on other novel protein growth
factors. Growth/Differentiation Factor-1 ("GDF-1") is a nervous-system-specific
member of the Transforming Growth Factor-(beta) ("TGF-(beta)") protein family.
The Company believes that GDF-1 is likely to play a role in responses to injury,
ischemia and demyelination. The Company has shown that GDF-1 enhances the
neurite outgrowth activity of another known growth factor and also proliferated
cerebellar granule cells. Several members of the TGF-(beta) gene family have
biological activities that potentially can be employed for therapeutic effects
in the nervous system, including: the promotion of dopaminergic neuron survival,
which may be applicable as a treatment for Parkinson's disease; the promotion of
motor neuron survival, which may be applicable as a treatment for amyotrophic
lateral sclerosis; and immunosuppression, which may be applicable as a treatment
for MS. On December 31, 1998, the Company entered into a technology licensing
agreement with Creative Biomolecules, Inc., ("CBMI") whereby the Company
licensed its rights in GDF-1 to CBMI in exchange for an upfront licensing fee
and future royalties on sales. See "--Strategic Alliances." The Company also has
an option to license technology related to Cerebellum Derived Growth Factor
(also known as Neuregulin 2) from Harvard University. The technology licensed
from Harvard University will in all likelihood receive a low level of support
until a corporate partner is identified.
GGF2: Multiple Sclerosis
MS is a disease of the central nervous system that is characterized by
chronic inflammation and demyelination at multiple sites in the brain and spinal
cord. Approximately 350,000 people in the United States suffer from MS. The
Company is aware of four therapeutics currently being marketed to treat MS.
Betaseron(R) (Chiron Corporation/Schering AG), Avonex(R) (Biogen, Inc.),
Copaxone(R) (Teva Pharmaceutical Industries Ltd./Hoechst Marion Roussel Ltd.)
and Rebif (Serono) are all based on an immunosuppression approach to the
disease, rather than the growth factor approach being pursued by the Company.
Rebif has been excluded from the U.S. market until 2003.
GGF2 is a trophic factor for the glial cells that form and maintain the
myelin sheath insulating nerve axons in the central nervous system. These cells
are primary targets involved early in the pathogenesis of MS. The Company has
developed a manufacturing process for producing GGF2 and has demonstrated its
efficacy in animal models believed to be reflective of MS, including
experimental autoimmune encephalomyelitis ("EAE"). In the acute phase of this
model, GGF2 significantly reduced and delayed the clinical symptoms. In the
chronic, relapsing-remitting phase of EAE, GGF2 significantly reduced the
clinical effects of the disease as well as the number of observed relapses. In
December 1998, the Company entered into a collaborative agreement with Bayer AG
for the development of GGF2 for multiple sclerosis and peripheral neuropathies.
See "Strategic Alliances."
A series of pre-IND studies has been initiated, including toxicity studies
and other work required by the FDA to file an IND. Successful completion of
these studies will allow the Company and its collaborative partner to initiate
clinical trials. There can be no assurance, however, that GGF2 will not
demonstrate adverse toxicological effects in the planned studies, which results
could cause the partners to decide not to proceed with clinical trials.
GGF2: Peripheral Neuropathies
The Company believes that GGF2 may also be a potential treatment for
peripheral neuropathies as a result of its activity on peripheral glial cells.
Peripheral neuropathies comprise a collection of disorders that are
characterized by the degeneration of sensory and/or motor nerves. This
degeneration may be caused by injury, diabetes, chemotherapy, inherited
disorders and other factors. It was estimated in 1991 that in excess of one
million individuals in the United States suffered from some form of peripheral
neuropathy. The largest segments
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of this population are those with diabetic neuropathies and those with
chemotherapy-induced neuropathies. There are, at present, no FDA-approved
therapeutic agents for the prevention, reduction or reversal of the degeneration
and atrophy caused by these disorders and injuries.
The Company has tested GGF2 in animal models of peripheral neuropathies,
such as cancer-chemotherapy-induced neuropathy. In two different experimental
paradigms (cisplatin-induced and vincristine-induced neuropathies), GGF2
administration protected peripheral nerves from the effects of these
chemotherapies. The Company believes that GGF2 may also be a potential treatment
of other degenerative diseases of the peripheral nerves.
STRATEGIC ALLIANCES
The Company has formed collaborations with pharmaceutical companies to
assist in the development of its product candidates, provide capital for such
development and share development risk. The Company is actively pursuing
discussions with additional companies regarding collaborations, mergers,
acquisitions or product-licensing arrangements. No assurance can be given,
however, that any collaborations, mergers, acquisitions or licensing
arrangements will be completed in the foreseeable future or on terms that would
be favorable to the Company.
Allergan
In November 1996, the Company entered into a collaboration with Vision
Pharmaceuticals L.P. d/b/a Allergan Inc. ("Allergan") to jointly develop NMDA
ion-channel blockers, sodium ion-channel blockers and combination ion-channel
blockers, initially for the treatment of ophthalmic disorders, including
glaucoma. Upon signing the agreement, Allergan purchased 175,103 shares of
Common Stock from the Company for $3.0 million. Allergan is providing an
additional $3.0 million in research funding over a three-year period, through
1999, subject to certain provisions. A Research Management Committee, with equal
representation from both parties, supervises this collaboration. Allergan will
be responsible for the development of potential products and will bear all of
the development costs. Cambridge NeuroScience may receive up to an additional
$18.5 million in cash upon the achievement of certain milestones and will
receive royalties on any product sales.
Allergan will manufacture and market products developed under the
collaboration worldwide. Allergan has certain termination rights under the terms
of the agreement. Allergan may terminate the research phase of the collaboration
if the Research Management Committee determines that there is no reasonable
scientific basis for the commercialization of products covered by the
collaboration. Allergan may terminate the agreement at any time after May 1998
upon six months prior written notice. Either party may, in its sole discretion,
terminate the agreement upon 90 days prior written notice of a material breach
by the other party. The Company is actively pursuing the possibility of
extending the term of this partnership, the initial term of which expires in
November 1999. There can be no assurance, however, that the Company will
successfully negotiate an extension of this agreement.
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Bayer AG
In December 1998, the Company entered into a collaborative agreement with
Bayer for the development of GGF2 for the treatment of neurodegenerative
diseases such as MS. In exchange for the exclusive worldwide manufacturing and
marketing rights to the compound, the Company received an up front licensing fee
of $1.0 million and will receive reimbursement of up to $1.0 million of the
Company's research costs for GGF2 pursuant to a protocol covered by the
agreement. The Company may receive up to $24.0 million in milestone payments, as
well as royalties on sales of GGF2 products. There can be no assurance, however,
as to when or if these milestones will be met. Bayer will provide all material
needed in the conduct of the research and development activities and shall be
responsible for all associated costs. Either party may terminate this agreement
at any time for cause. Bayer may terminate this agreement at any time, upon 120
days written notice.
The J. David Gladstone Institutes
In December 1996, the Company, The J. David Gladstone Institutes
("Gladstone") and The Regents of the University of California (the "University")
entered into a collaboration for the development of treatments for Alzheimer's
disease and certain other neurological diseases, disorders or injuries. The
collaboration focuses on novel pharmaceuticals that inhibit the activity of a
form of apolipoprotein E ("apoE"), a molecule that has been widely linked to
Alzheimer's disease. Alzheimer's disease is a neurodegenerative disorder that
affects approximately four million people in the United States. The disease
destroys neurons in the brain, causing progressive dementia and eventually
death. There are currently no effective therapies that reverse or prevent this
disorder. In connection with this collaboration, in 1996 the Company formed a
subsidiary, Cambridge NeuroScience Partners, Inc. ("CNPI"). The Company
purchased 80% of the outstanding common stock of CNPI and made a capital
contribution of $1.25 million in CNPI. The University and Gladstone own 5% and
15%, respectively, of the outstanding shares of CNPI common stock.
Gladstone is conducting a research program over a three-year period, for
which CNPI is providing funding of at least $1.25 million per year, through
1999. In the event that CNPI is unable to raise the required funds to make its
research funding payments, the Company loans CNPI, interest-free, all amounts
necessary to enable CNPI to make such payments. Such will be convertible
into securities of CNPI under certain circumstances in accordance with the
stockholders' rights agreement. The University granted CNPI an exclusive
three-year option to negotiate an exclusive worldwide, royalty-bearing license
for patentable rights in intellectual property covered by or arising from the
research program within the field, subject to certain terms and conditions set
forth in the option agreement. CNPI paid the University an initial license
option fee and will make additional option fee payments during the term of the
research program and, if applicable, upon exercise of the option. The final
terms of such license have not been determined but will require ongoing
commitments and expenditures, in addition to royalty payments, by CNPI. There
can be no assurance that such commitments and other terms will be favorable to
CNPI and/or the Company.
The University and Gladstone also granted CNPI a right of first negotiation
for an exclusive license for inventions arising from the research program
outside of the field. The Company has guaranteed CNPI's obligations with respect
to the collaboration, including CNPI's financial obligations. Each of the
research agreement and option agreement is generally subject to termination upon
prior notice of a material breach by any of the parties thereto. As a result of
the restructuring implemented in March 1998 and a shift in focus in the
Company's research and development activities to later-stage or funded programs,
it is unlikely that the Company will continue to provide future funding
following the expiration of the agreement in 1999. CNPI is currently engaged in
a business development effort to out license its rights under the Gladstone
agreement or to find a collaboration to provide funding for further work in this
area. There can be no assurance, however, that such funding will be available.
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Creative Biomolecules, Inc.
On December 31, 1998, the Company entered into technology licensing
agreement with Creative Biomolecules, Inc. ("CBMI") whereby CBMI has acquired
the exclusive rights to GDF-1 in exchange for a cash payment and future
royalties on product sales. Either party may terminate this agreement upon a
material breach which is not cured within 60 days of written notice of such
breach.
Boehringer Ingelheim International GmbH
In March 1995, Cambridge NeuroScience and BI entered into agreements to
collaborate on the worldwide development and commercialization of aptiganel.
Under the terms of the agreements, BI was obligated to fund 75% of the
development costs for aptiganel in the United States and Europe and all of the
development costs in Japan. Upon signing the agreements, the Company received
$15.0 million, consisting of $5.0 million for expense reimbursement and $10.0
million for 1,250,000 shares of Common Stock. In September 1996, and in
connection with the commencement of the Phase III stroke trial by BI, the
Company received a milestone payment of $10.0 million for 1,237,624 shares of
Common Stock. The Company and BI conducted two Phase III trials of aptiganel. In
the second half of 1997, the companies announced the discontinuation of patient
enrollment into both trials after interim analyses indicated that continuation
of the trials was not justified. See "Drug Discovery and Development -
Ion-Channel Blockers - Aptiganel: Background and Clinical Trial Status." In
November 1998, the Company and BI terminated the collaboration and licensing
agreements for aptiganel and all rights were returned to the Company, subject to
a royalty of 3% of direct sales or 10% to 20% of royalties received from sales
by third parties. Pursuant to the termination agreement, BI retained the
trademark CERESTAT and the Company's lead ion-channel blocker compound is now
referred to as aptiganel.
MARKETING AND SALES
The Company does not currently sell any products and therefore has no
marketing, sales, or distribution organization. Cambridge NeuroScience believes
that, in the case of stroke, ion-channel blocker treatments would be
administered in the context of emergency medicine. Because these drug treatments
would be hospital-based, the Company believes that significant United States
sales of these product candidates could be generated with a moderately-sized
sales force, rather than the much larger sales force needed to sell products
directly to physicians.
MANUFACTURING
The Company has no manufacturing facilities and plans to rely upon outside
manufacturers to produce any near- or intermediate-term products. To date, the
Company has contracted with chemical synthesis companies to produce kilogram
quantities of several of its product candidates. The Company intends to
establish and maintain its own quality-control program for each line of
products. Such program will include a set of standard operating procedures
designed not only to assure that the Company's products are manufactured in
accordance with Good Manufacturing Practices ("GMP") guidelines and other
applicable regulations, but also to maintain consistent product quality.
However, no specific arrangements have been made, and there can be no assurance
that the Company will be able to establish such capabilities. Pursuant to the
research collaboration and licensing agreement for the development of GGF2,
Bayer will manufacture all material needed in the conduct of the development
activities and shall be responsible for all associated costs. Pursuant to the
termination of the collaboration agreements with BI, the Company has the right
to purchase 56kg of aptiganel from BI within two years from the date of the
termination agreement.
COMPETITION
The fields in which the Company is involved are characterized by rapid
technological progress. New developments are expected to continue at a rapid
pace in both industry and academia. There are many companies, both public and
private, including large pharmaceutical companies, chemical companies and
specialized genetic engineering companies, engaged in developing products
competitive with products under development by the Company. Many of these
companies have greater capital, human resources and research and development,
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manufacturing and marketing experience than the Company. Such companies may
succeed in developing products that are more effective or less costly than any
that may be developed by Cambridge NeuroScience and may also prove to be more
successful than Cambridge NeuroScience in production and marketing. Competition
may increase further as a result of potential advances in the commercial
applicability of biotechnology and greater availability of capital for
investment in these fields. In addition, academic, government and industry-based
research is intense, resulting in considerable competition in obtaining
qualified research personnel, submitting patent filings for protection of
intellectual property rights and establishing corporate strategic alliances.
There can be no assurance that research, discoveries and commercial developments
by others will not render any of the Company's programs or potential products
noncompetitive.
In July 1996, the FDA approved the use of rt-PA (Genentech Inc.) for the
treatment of patients who have suffered a stroke within the preceding three
hours and for whom a CT scan shows no evidence of hemorrhage. Intravenous rt-PA
dissolves blood clots that might have caused a stroke by blocking arteries
supplying brain tissue with oxygen and nutrients. Other drug treatments that
have the potential to restore blood flow to the brain and are in Phase III
clinical trials, are Ancrod(R) (Knoll AG) and Abbokinase(R) (Abbott
Laboratories). In addition, a number of companies are developing other drugs to
limit the extent of brain damage resulting from a stroke by protecting nerve
cells from the biochemical processes which are responsible for cell death. In
animal studies, these "neuroprotective" drugs have been shown to limit brain
damage even when blood supply to brain tissue is not restored. The Company
believes that the most significant competition for aptiganel will come from
neuroprotective drugs that limit nerve cell death by inhibiting responses
mediated via specific ion channels. There are ongoing Phase III clinical trials
in stroke patients for fos-phenytoin (Warner-Lambert Company) and GV150526
(Glaxo-Wellcome). Fos-phenytoin has actions on ion channels and is claimed to be
neuroprotective, but acts through mechanisms other than the NMDA ion-channel
complex. GV150526 is an antagonist of responses mediated via the NMDA
ion-channel complex, but acts through a mechanism distinct from the mechanism of
action of aptiganel. The Company believes that aptiganel is the only
neuroprotective drug candidate at its stage of development for stroke that acts
by directly blocking the ion channel of the NMDA ion-channel complex. In 1997,
Interneuron Pharmaceuticals, Inc. submitted an NDA to the U.S. FDA for CerAxon
(citicoline sodium) to treat patients with ischemic stroke. In 1998, Interneuron
withdrew its application and commenced an additional clinical trial of CerAxon
in ischemic stroke. The Company believes that CerAxon does not act on ion
channels but on other biochemical mechanisms of nerve cell death or recovery
from injury. The Company believes that, if approved for marketing, aptiganel
will be used in conjunction with tPA, or other approved drugs that can restore
tissue blood flow. Furthermore, even if other neuroprotective compounds prove to
be efficacious and are approved for marketing, those that act on mechanisms of
cell death other than inhibition of responses mediated by the NMDA ion-channel
complex will be used in conjuction with, rather than as alternatives to
aptiganel.
The Company is aware of four therapeutics currently being marketed to treat
MS. Betaseron(R) (Chiron Corporation/Schering AG), Avonex(R) (Biogen, Inc.),
Copaxone(R) (Teva Pharmaceuticals Industries Ltd./Hoechst Marion Roussel Ltd.)
and Rebif(R) (Serono) are all based on an immunosuppression approach to the
disease, rather than the growth factor remyelination approach being pursued by
the Company. Rebif has been excluded from the U.S. market until 2003. There can
be no assurance that these products or the introduction of other products that
the Company is unaware of, will not have an adverse effect on the Company's
business, financial condition and results of operations.
The Company will, for the foreseeable future, rely on strategic partners
for certain preclinical evaluation and clinical development of its product
candidates and manufacturing and marketing of any products. In addition, the
Company relies on its strategic partners, in part, for support in its drug
discovery operations. The pharmaceutical companies with which the Company has
collaborations are in some cases attempting to develop other products to treat
diseases within the fields of the collaborations with the Company. Generally,
the Company's agreements with its strategic partners do not prohibit the
strategic partners from engaging in competitive activities with the Company. Any
product candidate of the Company, therefore, may be subject to competition with
a potential product under development by the pharmaceutical company with which
the Company is collaborating in connection with such product candidate.
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Biotechnology and related pharmaceutical technology have undergone rapid
and significant change. The Company expects the technology associated with the
Company's research and development will continue to develop rapidly, and the
Company's future success will depend in large part on its ability to maintain a
competitive position with respect to this technology. Rapid technological
development by the Company or others may result in compounds, products or
processes becoming obsolete before the Company recovers any expenses it incurs
in connection with developing such products.
PATENTS AND PROPRIETARY TECHNOLOGY
Proprietary protection for the Company's products, technology and processes
is essential to its business. The Company's policy is to protect its technology
by, among other things, filing or causing to be filed patent applications for
technology that it considers important to the development of its business. As of
December 31, 1998, Cambridge NeuroScience had licensed or owned rights in 49
issued U.S. patents. Research and development efforts by the Company and its
collaborators led to the issuance of nine U.S. patents and the allowance of four
others in 1998. In addition, four U.S. patent applications were filed in 1998 on
behalf of the Company and its collaborators, bringing the total number of
pending U.S. applications to 56. These U.S. filings have corresponding patent
filings in other countries as well. Of the 12 issued U.S. patents covering the
NMDA ion-channel blockers and their use, none will expire prior to 2007. In the
U.S., the last issued patent covering the therapeutic use of aptiganel will
expire in 2015. The Company is awaiting action on various patent applications
that have either been filed by it or by academic institutions with which it
collaborates.
The Company intends to file, or cause to be filed, additional patent
applications, where appropriate, relating to new product discoveries or
improvements. The use of patents to protect proprietary positions for synthetic
chemicals is well established within the pharmaceutical industry. While the
precedents for gaining patent protection for biologically derived or produced
products through recombinant DNA technology are not as well developed, many
patents have been issued for products of this technology. There can be no
assurance, however, that patents will provide meaningful proprietary protection
to the Company, given the uncertain and complex legal and factual questions
relating to their breadth and enforceability.
There are patents held by third parties that relate to the manufacture,
development and use of the Company's product candidates for which the Company
has licenses. There can be no assurance that the Company will not in the future
require licenses to additional patents or that such licenses will be available
on commercially reasonable terms, if at all. In addition, there can be no
assurance that existing or future licenses will not be terminated or that any
such termination or failure to obtain a license will not have a material adverse
effect on the Company's business, financial condition or results of operations.
The Company has licensed rights to inventions relating to GGF2, which are
covered by eight issued U.S. patents, several allowed U.S. patent applications
and other pending patent applications in the United States and foreign
countries. The Company believes that its employees and those of its licensor are
the original inventors and that the Company and its licensor are entitled to
patent protection in the United States. However, the Company is aware of a
third-party patent and pending patent applications in the United States and
corresponding patent applications pending in some foreign countries that, if
issued and valid, may be construed to cover aspects of the Company's GGF2
product candidates. There can be no assurance that the Company will not
infringe any such issued US third-party patents, and that the claims of future
patents issuing from the third-party patent applications, if any, will not be
infringed by the Company's proposed manufacture, use or sale of products based
on the GGF2 technology. There can be no assurance that the Company would prevail
in any legal action seeking damages or injunctive relief for infringement of the
existing third-party patent or any patent that might issue from such third-party
applications or that any license required under such patent would be available
or, if available, would be available on commercially reasonable terms. Failure
to obtain a required license or to successfully establish non-infringement of,
or the invalidity or unenforceability of, such third-party patents could
preclude the manufacture, sale and use of the Company's products based on such
GGF2 technology.
Patents granted to the Company in any areas of the Company's technology may
be subject to interference proceedings in the United States or opposition
proceedings in foreign countries brought by third parties. There can
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be no assurance that the Company would prevail in any such proceedings or that
such proceedings would not result in a material adverse effect on the Company's
business, financial condition or results of operations. An unfavorable decision
in an interference or opposition proceeding may have a material adverse effect
on the business, financial condition and results of operations of the Company.
The Company also relies upon trade secrets, know-how and continuing
technological advances to develop and maintain its competitive position. To
maintain the confidentiality of trade secrets and proprietary information, the
Company maintains a policy of requiring employees, Science Advisory Board
members, consultants and collaborators to execute confidentiality and invention
assignment agreements upon commencement of a relationship with the Company.
These agreements are designed both to enable the Company to protect its
proprietary information by controlling the disclosure and use of technology to
which it has rights and to provide for ownership by the Company of proprietary
technology developed at the Company. There can be no assurance, however, that
these agreements will provide meaningful protection for the Company's trade
secrets in the event of unauthorized use or disclosure of such information. In
addition, whenever the U.S. government funds research programs, it may obtain
nonexclusive rights to patented subject matter otherwise subject to exclusive
rights.
GOVERNMENT REGULATION
The manufacture and marketing of pharmaceutical products in the United
States require the approval of the FDA under the Federal Food, Drug and Cosmetic
Act. Similar approvals by comparable agencies are required in most foreign
countries. The FDA has established mandatory procedures and safety standards
that apply to the preclinical testing and clinical trials, as well as to the
manufacture and marketing of pharmaceutical products. Pharmaceutical
manufacturing facilities are also subject to the regulations of state, local and
other authorities.
As an initial step in the FDA regulatory approval process, preclinical
studies are typically conducted in animal models to assess a drug's efficacy and
to identify potential safety problems. The results of these studies must be
submitted to the FDA as part of an Investigational New Drug ("IND") application,
which must be reviewed by the FDA before proposed clinical testing can begin in
the United States. Typically, clinical testing involves a three-phase process.
Phase I clinical trials are conducted with a small number of subjects and are
designed to provide information about both product safety and the expected dose
of the drug. Phase II clinical trials are designed to provide additional
information on dosing and safety in a limited patient population; on occasion,
they may provide evidence of product efficacy. Phase III clinical trials are
large-scale studies designed to provide statistically valid proof of efficacy as
well as safety in the target patient population. The results of the preclinical
testing and clinical trials of a pharmaceutical product are then submitted to
the FDA in the form of a New Drug Application ("NDA"), or for a biological
product in the form of a Product License Application ("PLA"), for approval to
commence commercial sales. Preparing such applications involves considerable
data collection, verification, analysis, and expense. In responding to an NDA or
a PLA, the FDA may grant marketing approval, request additional information, or
deny the application if it determines that the application does not satisfy its
regulatory approval criteria.
Prior to marketing, any product developed by the Company must undergo an
extensive regulatory approval process, which includes preclinical testing and
clinical trials of such product to demonstrate safety and efficacy. This
regulatory process can require many years and the expenditure of substantial
resources. Data obtained from preclinical testing and clinical trials are
subject to varying interpretations, which can delay, limit, or prevent FDA
approval. In addition, changes in FDA approval policies or requirements may
occur or new regulations may be promulgated that may result in delay or failure
to receive FDA approval. Similar delays or failures may be encountered in
foreign countries. Delays and costs in obtaining regulatory approvals would have
a material adverse effect on the Company's business, financial condition and
results of operations. In late 1997, the Company and its collaborative partner
BI discontinued enrollment into the Phase III clinical trials for its lead
product candidate aptiganel and, in November 1998, terminated the collaboration
agreement. See "--Drug Discovery and Development - Ion-Channel Blockers -
Aptiganel: Background and Clinical Trial Status."
Among the conditions for NDA or PLA approval is the requirement that the
prospective manufacturer's quality-control and manufacturing procedures conform
on an ongoing basis with GMP. In complying with GMP,
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manufacturers must continue to expend time, money, and effort in the area of
production and quality control to ensure full technical compliance. After the
establishment is licensed, it is subject to periodic inspections by the FDA.
The requirements which the Company must satisfy to obtain regulatory
approval by governmental agencies in other countries prior to commercialization
of its products in such countries can be as rigorous and costly as those
described above.
The Company is also subject to various laws and regulations relating to
safe working conditions, laboratory and manufacturing practices, the
experimental use of animals, and the use and disposal of hazardous or
potentially hazardous substances, including radioactive compounds and infectious
disease agents used in connection with the Company's research. Compliance with
laws and regulations relating to the protection of the environment has not had a
material effect on capital expenditures or the competitive position of the
Company. However, the extent of government regulation, which might result from
any legislative or administrative action, cannot be accurately predicted.
REIMBURSEMENT
The Company's ability to commercialize pharmaceutical products may depend
in part on the extent to which reimbursement for the costs of such products and
related treatments will be available from government health administration
authorities, private health insurers and other third-party payors. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and third-party payors are increasingly challenging the prices charged
for medical products and services. There can be no assurance that any
third-party insurance coverage will be available to patients for any products
developed by the Company. Government and other third-party payors are
increasingly attempting to contain health care costs by limiting both coverage
and the level of reimbursement for new therapeutic products. In some cases, such
payors are refusing to provide coverage for uses of approved products for
disease indications for which the FDA has not granted marketing approval. In
particular, the Company anticipates that a large percentage of patients who may
receive aptiganel for the treatment of stroke will be covered by Medicare and be
subject to limitations on reimbursement. If adequate coverage and reimbursement
levels are not provided by government and third-party payors for the Company's
products, the market acceptance of these products would be adversely affected.
The Company's business may be materially adversely affected by the
continuing efforts of governmental and third-party payors to contain or reduce
the costs of health care through various means. For example, in certain foreign
markets, pricing or profitability of prescription pharmaceuticals is subject to
government control. In the United States, there have been, and the Company
expects that there will continue to be, a number of federal and state proposals
to implement similar government control. In addition, an increasing emphasis on
managed care in the United States has and will continue to put pressure on
pharmaceutical pricing. Such initiatives and proposals, if adopted, could
decrease the price that the Company receives for any products it may develop and
sell in the future and thereby have a material adverse effect on the Company's
business, financial condition and results of operations. Further, to the extent
that such proposals or initiatives have a material adverse effect on other
pharmaceutical companies that are collaborators or prospective collaborators for
certain of the Company's potential products, the Company's ability to
commercialize its potential products may be adversely affected.
EMPLOYEES
As of December 31, 1998, the Company had 17 full-time employees, of whom 11 were
engaged in research and development and 6 in administration and finance.
Doctorates or other advanced degrees are held by 9 of the Company's employees.
Each of the Company's employees has signed a confidentiality agreement. The
Company's employees are not covered by a collective bargaining agreement. The
Company considers its employee relations to be good. Due to the small number of
employees at the Company, the loss of several employees could have an adverse
affect on the Company's ability to meet its obligations to its collaborative
partners and on the progress of its own scientific programs.
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ITEM 1 (a). EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
NAME AGE POSITION
---- --- --------
Harry W. Wilcox, III 44 President; Chief Executive Officer;
Director
Robert N. McBurney 51 Senior Vice President, Research; Chief
Scientific Officer
David I. Gwynne 47 Vice President, Biotechnology and
Business Development
Laima I. Mathews 51 Vice President, Drug Development
Glenn A. Shane 36 Controller; Treasurer; Chief
Accounting Officer
HARRY W. WILCOX, III, joined the Company as Senior Vice President,
Finance and Business Development and Chief Financial Officer in December 1995
and was named President and Chief Executive Officer and Director of the Company
in May 1998. Prior to joining the Company, Mr. Wilcox served as Vice President,
Finance and Chief Financial Officer of Cellcor, Inc., a biotechnology company,
since 1990. While at Cellcor, Mr. Wilcox was also named Treasurer and Senior
Vice President of Business Development. From 1988 to 1990, he was a founder and
general partner and Chief Financial Officer of Highland Capital Partners, L.P.,
a venture capital firm. From 1983 to 1987, Mr. Wilcox was Controller, Vice
President of Finance and Chief Financial Officer at Charles River Ventures, Inc.
a venture capital firm. Mr. Wilcox earned an M.B.A. degree from Boston
University and a B.A. degree in Finance from the University of Arizona. Mr.
Wilcox is a Certified Public Accountant.
ROBERT N. MCBURNEY, PH.D., joined the Company as Director of
Electrophysiology and Cell Biophysics in December 1987, and served as Vice
President, Research from June 1990 through December 1993, at which time he
became Senior Vice President, Research and Chief Scientific Officer. Prior to
joining Cambridge NeuroScience, Dr. McBurney served from 1984 to 1987 as the
Assistant Director of the Medical Research Council Neuroendocrinology Unit in
Newcastle upon Tyne, England. Dr. McBurney earned B.Sc. and Ph.D. degrees in
Physiology from the University of New South Wales, and conducted postdoctoral
studies in Neurophysiology at Cambridge University and the National Institutes
of Health. Dr. McBurney has had numerous articles published on neurophysiology
in various scientific journals.
DAVID I. GWYNNE, PH.D. joined the Company in 1991 as Director,
Biotechnology and became Senior Director of Biotechnology in 1996. In May 1998
he was named Vice President of Biotechnology and Business Development. Dr.
Gwynne leads the Company in the development of growth factors for the treatment
of neurological disorders. Prior to joining the Company, Dr. Gwynne served as
Director of Scientific Affairs at Allelix Biopharmaceuticals, Inc. where he led
the development effort for growth factors in the treatment of inflammatory
disorders and tissue repair. Dr. Gwynne earned a B.Sc. and an M.Sc. in biology
from the University of Toronto. He completed a Ph.D. in molecular biology at
McGill University and conducted post-doctoral studies at the University of
California, Davis in the area of regulation of gene expression.
LAIMA I. MATHEWS joined the Company in September 1992 as Director of
Regulatory Affairs and served in that capacity until March 1997, when she was
appointed Vice President of Drug Development. Prior to joining the Company, Mrs.
Mathews held various positions at G.D. Searle/The NutraSweet Company (Monsanto
Companies) from 1972 through 1992. Her experience includes all aspects of
international development and registration for ethical and consumer
pharmaceutical products, medical devices and food additives. She earned a B.A.
from Loyola University of Chicago.
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GLENN A. SHANE joined the Company as Accounting Manager in April 1992
and served in that capacity until May 1998, at which time he was appointed
Controller and Treasurer of the Company. Prior to joining the Company, Mr. Shane
was the Accounting Manager at Boston Business Group from 1989 to 1991. From 1985
to 1989, Mr. Shane was employed by Deloitte & Touche LLP. Mr. Shane earned a
Bachelors of Business Administration from the University of Massachusetts,
Amherst and is a Certified Public Accountant.
ITEM 2. PROPERTIES
The Company's sole facility is located in Cambridge, Massachusetts, where
it leases approximately 41,000 square feet of space. In June 1998, the Company
entered into an arrangement with a third party whereby the Company sub leased
approximately half of the space in its facility to such third party. The Company
currently occupies approximately 20,000 square feet of space, including
approximately 13,000 square feet of laboratory space. The description of the
lease terms is incorporated by reference from Note I to the Consolidated
Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor its subsidiary is a party to any legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Effective January 22, 1999, the Company's Common Stock, $.001 par value
("Common Stock"), began trading on the OTC Bulletin Board ("OTC") under the
symbol "CNSI." Prior to that date, the Company's common stock was traded on the
Nasdaq National Market System ("Nasdaq"). The following table sets forth the
high and low sales prices for the Company's Common Stock for the periods
indicated:
High Low
------- --------
January 1 - March 31, 1997 $14-5/8 $10-1/2
April 1 - June 30, 1997 12 3-5/8
July 1 - September 30, 1997 5-1/8 2-1/8
October 1 - December 31, 1997 2-3/4 1-15/32
January 1 - March 31, 1998 2-5/8 1-5/8
April 1 - June 30, 1998 2-1/2 19/32
July 1 - September 30, 1998 1-3/16 13/32
October 1 - December 31, 1998 2 3/8
There were approximately 175 holders of record of Common Stock and
approximately 4,100 beneficial owners as of December 31, 1998. Prior to March 9,
1998, the Company had never declared nor paid any cash dividends on its capital
stock. On March 9, 1998 the Company's Board of Directors declared an
extraordinary dividend on its capital stock of $1.00 per share of outstanding
Common Stock, which was paid on April 14, 1998. Future cash dividends, if any,
will be paid at the discretion of the Company's Board of Directors and will
depend, among other things, upon the Company's future operations, capital
requirements, general financial condition and such other factors as the Board of
Directors may deem relevant.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA (1)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- --------- --------- -------- ---------
STATEMENT OF OPERATIONS DATA: (in thousands, except per-share amounts)
Revenues $ 4,303 $ 4,035 $ 2,396 $ 8,218 $ 299
Operating expenses:
Research and development 5,984 17,650 13,978 13,850 12,722
General and administrative 1,472 2,616 2,585 2,158 2,863
Restructuring costs 921 -- -- -- --
-------- --------- --------- -------- ---------
Total operating expenses 8,377 20,266 16,563 16,008 15,585
-------- --------- --------- -------- ---------
Loss from operations (4,074) (16,231) (14,167) (7,790) (15,286)
Interest income, net 1,180 2,393 1,178 736 401
-------- --------- --------- -------- ---------
Net loss $ (2,894) $ (13,838) $ (12,989) $ (7,054) $ (14,885)
======== ========= ========= ======== =========
Net loss per share (2) $ (0.16) $ (0.79) $ (0.93) $ (0.59) $ (1.46)
======== ========= ========= ======== =========
Weighted average shares
outstanding 17,976 17,518 13,980 11,927 10,230
======== ========= ========= ======== =========
DECEMBER 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- --------- --------- ---------
BALANCE SHEET DATA: (in thousands)
Cash and cash equivalents $ 4,863 $ 12,020 $ 26,664 $ 21,937 $ 6,269
Marketable Securities 7,037 26,561 -- -- --
Working capital 13,353 33,588 18,362 17,651 3,493
Total assets 15,617 40,891 29,220 24,321 9,330
Total liabilities 1,887 6,568 9,573 4,793 3,149
Accumulated deficit (106,376) (103,482) (89,644) (76,655) (69,601)
Stockholders' equity 13,730 34,323 19,647 19,528 6,181
- --------------------------------------------------------------------------------
(1) The selected financial data set forth above should be read in conjunction
with the consolidated financial statements of the Company and related notes
thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this document.
(2) See Note B of Notes to the Consolidated Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Since inception, the Company has been primarily engaged in research and
development. To date, revenue has been derived from collaborations with
pharmaceutical companies and from government grants. The Company has not
received any revenue from the sale of products. The Company has not been
profitable since inception and expects to incur substantial operating losses for
at least the next several years.
The Company has financed its operations through proceeds from an initial
public offering in 1991 and follow-on public offerings in 1991 and 1997, and
various private placements of preferred equity securities prior to the initial
public offering. In addition, the Company completed a private placement of the
Company's common stock to institutional investors in 1994 and two directed
public offerings in 1995. The Company has also received funding pursuant to its
research and development collaborations, research grants and from investment
income earned on its cash and short-term investments.
In November 1998, the Company and Boehringer Ingelheim International GmbH,
("BI") terminated the collaboration for the development and commercialization of
aptiganel, formerly known as CERESTAT, which commenced in 1995. All rights to
aptiganel were returned to the Company, subject to a royalty on future sales.
Pursuant to the terms of the collaboration, the Company was obligated to fund
approximately 25% of the development costs for aptiganel in the United States
and Europe. BI was obligated to pay the remaining 75% of such costs and all of
the development costs in Japan. The Company and BI collaborated on two Phase III
trials of aptiganel. In the second half of 1997, the Company and BI announced
the discontinuation of patient enrollment into both trials after interim
analyses indicated that continuation of the trials was not justified.
Revenue earned pursuant to the BI agreements represents reimbursement by BI
of expenditures by the Company in excess of its contractual obligations, subject
to an annual reconciliation of costs for each contract year. The agreements
provided that BI would advance cash to the Company in the event that the
Company's expenditures were expected to exceed its contractual obligation. The
Company received such advances in 1995 and 1996. The advances received through
1996 exceeded the actual reimbursable amounts as of December 31, 1996 and 1997
and the excess amounts were accounted for as research and development advances
and included in current liabilities at those dates. Therefore, no advances were
received in 1997 and revenue was recognized in 1997, as earned, thereby reducing
the accrual for research and development advances. As of December 31, 1997, the
Company had $2.7 million of research and development advances included in
current liabilities, representing advances received from BI in excess of revenue
recognized pursuant to the collaboration agreement. Upon termination of the
collaboration agreements, the Company and BI reached a final settlement of costs
subject to the collaboration and, in 1998, the Company repaid to BI $1.5 million
in excess advances received in prior years. The Company recognized $1.2 million
of revenue earned, representing the remainder of excess advances received in
prior periods. The Company will recognize no further revenue pursuant to this
collaboration.
In March 1998, the Company reported that further analysis of the Phase III
data indicated that aptiganel had: (i) an attractive safety profile in the TBI
patient population, and (ii) a potential therapeutic benefit in a subset of the
stroke patient population. Based on input from an independent panel of stroke
experts, which convened in October 1998, and the Company's review and analysis
of the trial data, the Company remains committed to the continued development of
aptiganel for stroke. To that end, the Company is pursuing options for funding
such development, including corporate partnership arrangements or government
funding. However, there can be no assurance that further development of
aptiganel will continue or that the Company will succeed in finding a source of
funding for such development.
In November 1996, the Company entered into a collaboration with Allergan
for the development of NMDA ion-channel blockers, sodium ion-channel blockers
and combination ion-channel blockers for the treatment of
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ophthalmic disorders, including glaucoma. In conjunction with the signing of
this agreement, the Company received $3.0 million for 175,103 shares of the
Company's Common Stock. Pursuant to this agreement, Allergan is providing an
additional $3.0 million in research funding over a three-year period, through
1999. Allergan will bear all of the development costs for potential products
arising from the collaboration, and the Company is entitled to receive royalties
on any product sales.
In December 1996, the Company entered into a collaboration with the J.
David Gladstone Institutes ("Gladstone") and the Regents of the University of
California, for the development of treatments for Alzheimer's disease and other
neurological disorders. In connection with this collaboration, the Company
formed a subsidiary, Cambridge NeuroScience Partners, Inc. ("CNPI"). Pursuant to
the terms of the collaboration, Gladstone is conducting a research program over
a three-year period, through 1999, for which CNPI provides funding of at least
$1.25 million per year. The Company owns 80% of the outstanding stock of CNPI
and has guaranteed CNPI's obligations with respect to its collaboration with
Gladstone.
On March 9, 1998, the Company's Board of Directors declared an
extraordinary dividend in the amount of $1.00 per share, or $17.9 million, which
was paid on April 14, 1998. As a result of the setback in the clinical
development of Aptiganel, in March 1998 the Company implemented a cost reduction
plan that included a reduction in headcount by 34 employees, consisting of 22
research, four drug development and eight administrative and support employees.
Included in operating expenses for the year ended December 31, 1998 is a
one-time restructuring cost of $921,000, consisting primarily of severance and
related benefits associated with this reduction in staff which were paid in full
in 1998. In June 1998, the Company entered into an agreement with a third party
to sub-lease approximately half of the Company's office and laboratory
facilities, thereby reducing facilities-related operating expenses.
In December 1998, the Company entered into a collaborative agreement with
Bayer AG ("Bayer") for the development of recombinant human Glial Growth Factor
2 ("GGF2") for the treatment of neurodegenerative diseases such as multiple
sclerosis ("MS"). In exchange for the exclusive worldwide manufacturing and
marketing rights to the compound, the Company received an up front licensing fee
of $1.0 million and will receive reimbursement of up to $1.0 million for costs
incurred pursuant to a research protocol covered by the agreement. The Company
may also receive up to $24.0 million in milestone payments and will receive
royalties on sales of GGF2 products. There can be no assurance, however, as to
when or if these milestones will be met. Bayer will be responsible for all
development costs. In 1998, the Company recognized revenue pursuant to this
agreement of $1.6 million, representing the up front licensing fee and
reimbursable research costs incurred in 1998. This amount was included as a
receivable from collaboration agreements at December 31, 1998. In January 1999,
the Company received $1.5 million from Bayer and will receive reimbursement for
the remaining reimbursable research costs.
.
On December 31, 1998, the Company entered into a technology licensing
agreement with Creative Biomolecules, Inc. ("CBMI") whereby CBMI acquired the
exclusive rights to GDF-1 in exchange for an up front cash payment and future
royalties on product sales.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues
Research and development revenue increased to $4.3 million for the year
ended December 31, 1998, compared to $3.9 million in the same period in 1997.
This increase was due to the recognition of revenue in the fourth quarter of
1998 relating to the agreements signed in December 1998 with Bayer and CBMI.
Offsetting in part the revenue recognized in 1998 under these two new
agreements, revenue earned pursuant to the BI agreement decreased to $1.2
million, compared to $2.9 million in 1997. The Company will recognize no further
revenue or expense pursuant to the BI agreement, which was terminated in
November 1998. See "--Overview." Revenue recognized under the Allergan agreement
was $1.0 million in each of 1998 and 1997.
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In 1998, the Company earned $50,000 from a government grant which expired
in the first quarter of 1998. In 1997, the Company had $150,000 of revenue from
two government grants, which expired in 1997 and the first quarter of 1998.
Operating Expenses
Operating expenses decreased by $11.9 million to $8.4 million in 1998,
compared to $20.3 million in 1997. This decrease reflects the discontinuation of
the clinical trials of aptiganel in the second half of 1997 and the impact of
the restructuring plan that was implemented in March 1998. Research and
development expenses decreased by $11.7 million to $6.0 million in 1998,
compared to $17.7 million in 1997. General and administrative expenses decreased
by $1.1 million, to $1.5 million in 1998, compared to $2.6 million in 1997.
These decreases reflect a $7.7 million reduction in costs associated with the
discontinuation of the clinical trials of aptiganel and a decrease of $5.1
million in other operating costs as a result of the workforce reduction and
other cost containment measures implemented in March 1998 as part of the
restructuring plan. See "--Liquidity and Capital Resources." Operating expenses
in 1998 also included a one-time restructuring cost of $921,000, consisting of
salaries and benefits relating to the reduction in workforce in March 1998,
which were paid in full in 1998.
Interest Income
The Company had interest income in 1998 of $1.2 million, compared to $2.4
million in 1997. Interest income decreased in 1998 due to a decrease in the
funds available for investment during the year, primarily as a result of the
payment of the dividend totaling $17.9 million in April 1998, as well as the use
of funds for operating purposes during the year, including the repayment to BI
of excess advances received of $1.5 million.
Net Loss per Share
For the year ended December 31, 1998, the Company had a net loss of $2.9
million, or ($0.16) per share, compared to $13.8 million or ($0.79) per share
for the year ended December 31, 1997. This decrease in net loss and net loss per
share reflects the decrease in total operating expenses in 1998, as a result of
the discontinuation of the clinical trials of aptiganel in the second half of
1997 and the restructuring plan implemented in March 1998.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues
Research and development revenue increased $1.5 million to $3.9 million for
the year ended December 31, 1997, from $2.4 million for the year ended December
31, 1996. Research and development revenue in 1997 included $2.9 million
pursuant to the collaboration agreement with BI, compared to $2.3 million in the
same period in 1996. See "-- Overview." Also included in research and
development revenue in 1997 was $1.0 million pursuant to the collaboration with
Allergan, which began in November 1996, compared to $114,000 in 1996. In 1997,
the Company had $150,000 in revenue from two Phase I Small Business Innovation
Research grants from the National Institutes of Health.
Operating Expenses
Operating expenses increased to $20.3 million for the year ended December
31, 1997, compared to $16.6 million in 1996, an increase of $3.7 million.
Research and development expenses increased by $3.7 million to $17.7 million in
1997, from $14.0 million in 1996. This increase reflects the increase in costs
associated with the Phase III clinical trials of aptiganel as well as the cost
associated with the funding of the collaboration between CNPI and Gladstone,
which began in December 1996. Research and development expenses comprised 87% of
total operating expenses in 1997, compared to 84% in 1996.
General and administrative expenses of $2.6 million in 1997 were comparable to
those incurred in 1996.
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Interest Income
Interest income was $2.4 million for the year ended December 31, 1997,
compared to $1.2 million for 1996, an increase of $1.2 million. This increase
was due to the higher cash balances available for investment in 1997, as a
result of the public offering of stock in February 1997 and the second equity
investment by BI in September 1996.
Net Loss Per Share
For the year ended December 31, 1997, the Company had a net loss of $13.8
million or ($0.79) per share, compared to $13.0 million or ($0.93) per share for
the year ended December 31, 1996. The decrease in net loss per share reflects an
increase in the weighted average shares outstanding in 1997, compared to 1996,
due to the sale of 2,760,000 shares of common stock in a public offering in
February 1997, the issuance of 1,237,624 shares of common stock in September
1996 in exchange for the BI milestone payment and the sale of 175,103 shares of
common stock to Allergan in November 1996, pursuant to the commencement of the
collaboration agreement.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had cash, cash equivalents and
investments in marketable securities of $11.9 million, compared to $38.6 million
at December 31, 1997. The Company had cash and cash equivalents of $26.7 million
at December 31, 1996. The decrease in cash and investments in 1998 is due
primarily to the payment, in April 1998, of an extraordinary dividend of $1.00
per share, totaling $17.9 million. In addition, the Company used $8.9 million
for operating purposes in 1998, including the repayment to BI of $1.5 million of
excess advances received in prior years, upon the termination of the
collaboration agreement in November 1998. In January 1999, the Company received
$1.5 million from Bayer as payment for the up front licensing fee and a portion
of reimbursable costs incurred in 1998 pursuant to the collaboration agreement.
At February 28, 1999, the Company had cash, cash equivalents and investments in
marketable securities of $12.7 million.
Following the discontinuation of the clinical trials in the second half of
1997, in November 1998, the Company and BI terminated the collaboration
agreements for the development of aptiganel. Upon the termination of the
collaboration agreements, the Company and BI reached a final settlement of costs
subject to the collaboration. (See "--Overview.") As of December 31, 1997, the
Company had $2.7 million of research and development advances included in
current liabilities, representing advances received from BI in excess of revenue
recognized pursuant to the collaboration agreement. Upon the final settlement of
costs in connection with the termination of the collaboration agreement, the
Company repaid to BI $1.5 million in excess advances received in prior periods
and recognized $1.2 million of revenue earned, representing the remainder of
excess advances received. The Company will not receive any additional funding
and will recognize no further revenue or expense pursuant to this collaboration.
Pursuant to the collaboration agreement signed in November 1996 with
Allergan, the Company may receive up to $3.0 million in research and development
funding through 1999. Through December 31, 1998, the Company had received $2.4
million pursuant to this funding arrangement, of which $1.0 million was
recognized as revenue in each of 1998 and 1997 and $114,000 was recognized in
1996. Under the agreement, Allergan is responsible for the development of
potential products and will bear all associated costs. The collaboration also
provides that the Company may receive up to an additional $18.5 million upon the
achievement of certain milestones. However, there can be no assurance as to when
or if these milestones will be achieved.
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Pursuant to the collaboration agreement between CNPI and Gladstone, CNPI
will provide funding of at least $1.25 million per year over three years,
through 1999. Through December 31, 1998, CNPI made payments to Gladstone
totaling $3.1 million. The Company owns 80% of the outstanding stock of CNPI and
has guaranteed CNPI's obligations with respect to its collaboration with
Gladstone. To-date, the minority shareholders have not made equity investments
in the subsidiary. As a result, the entire net loss from CNPI has been
attributed to the Company.
On December 31, 1998, the Company entered into a technology licensing
agreement with CBMI whereby CBMI acquired the exclusive rights to GDF-1 in
exchange for an up front cash payment and future royalties on product sales.
In January 1999, pursuant to the collaboration agreement with Bayer, the
Company received $1.5 million, including an up front licensing fee of $1.0
million and reimbursement for costs incurred in 1998 pursuant to the covered
research protocol. The up front licensing fee and reimbursable costs incurred in
1998 of $580,000 were recognized as revenue in 1998 and included as a receivable
from research and development collaborations at December 31, 1998. Pursuant to
the agreement, the Company will receive up to a total of $1.0 million for
reimbursable research costs. Bayer will be responsible for all development costs
and will manufacture all GGF2 to be used in the conduct of the development
activities. The Company may receive up to $24.0 million in milestone payments,
and will receive royalties on sales of GGF2 products. There can be no assurance,
however, as to when or if these milestones will be achieved.
The Company believes that cash and cash equivalents and investments in
marketable securities at February 28, 1999, will be sufficient to maintain
operations through 2000. The Company's primary expenditures are expected to be
in the areas of research and development and general and administrative
expenses. Based on input from an independent panel of stroke experts, which
convened in October 1998, and the Company's review and analysis of the trial
data, the Company remains committed to the continued development of aptiganel
for stroke. To that end, the Company is pursuing options to fund such
development, including corporate partnership arrangements or government funding.
However, there can be no assurance that further development of aptiganel will
continue or that the Company will succeed in finding a source of funding for
such development. The Company may require substantial additional funds to
further its research and product development programs and for other operating
activities.
In March 1998, the Company implemented a series of cost containment
measures, including a reduction in headcount by 34 employees, or approximately
half. In June 1998, the Company entered into an agreement with a third party to
sub-lease approximately half of the Company's office and laboratory facilities,
thereby reducing the facilities-related operating expenses. The Company is
continuing to evaluate alternatives for maximizing shareholder value by focusing
resources on its later-stage programs, and validating and funding these programs
through collaborative agreements with third parties, grants or out-licensing
arrangements. Despite the potential future milestone payments under the Bayer
and Allergan agreements, adequate funds for these purposes may not be available
when needed on terms acceptable to the Company. The reduction in workforce in
March 1998 and the dividend payment in April 1998 have resulted in fewer
resources being devoted to the Company's research and development programs.
Insufficient funds may require the Company to delay, scale back or eliminate
certain of its research and product development programs or to license to third
parties the rights to commercialize products or technologies that the Company
might otherwise undertake itself. At December 31, 1998, the Company did not have
any material commitments for capital expenditures.
On January 22, 1999, the Company's common stock was delisted from the
Nasdaq National Market System due to a failure to maintain a minimum bid price
per share of $1.00. Immediately following the delisting, the Company began
trading on the Over the Counter Bulletin Board ("OTCBB"). The delisting of the
Company's stock could have an adverse effect on the liquidity of the common
stock held by investors and on the Company's ability to raise equity in the
future.
At December 31, 1997, the Company had cash, cash equivalents and
investments in marketable securities of $38.6 million, compared to cash and cash
equivalents of $26.7 million at December 31, 1996. This increase was due to the
receipt of $28.5 million in proceeds, before related costs of $400,000, from a
public offering of 2,760,000 shares of Common Stock at $11.00 per share in
February 1997. In 1997, the Company used $16.1 million for operating purposes
and $301,000 for the purchase of equipment, furniture and fixtures. In mid-1997,
following the receipt of proceeds from the public offering in February 1997, the
Company invested approximately
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$35.6 million in marketable securities. Prior to December 31, 1997, the Company
sold approximately $9.0 million of its investments in marketable securities to
fund operating activities.
At December 31, 1996, the Company had cash and cash equivalents of $26.7
million, compared to $21.9 million at December 31, 1995. Pursuant to the
collaboration agreement with BI and in connection with the commencement of the
Phase III stroke trial by BI in 1996, the Company received a milestone payment
in September 1996 of $10.0 million, before related costs of $300,000, in
exchange for 1,237,624 shares of the Company's common stock. In November 1996,
upon signing the collaboration agreement with Allergan, the Company received
$3.0 million in exchange for 175,103 shares of the Company's common stock.
During 1996, the Company received $6.8 million in advances against reimbursable
expenses pursuant to the BI collaboration agreement, of which $2.3 million was
recognized as research and development revenue in 1996. The Company received
$364,000 pursuant to the collaboration agreement with Allergan, of which
$114,000 was recognized as revenue in 1996. The difference between the cash
received pursuant to these two agreements and revenue recognized was recorded as
research and development advances and included in current liabilities at
December 31, 1996. During 1996, the Company used $7.7 million for operating
purposes and $467,000 for the purchase of equipment, furniture and fixtures.
The Company does not believe that inflation has had a material impact on
its results of operations.
YEAR 2000 READINESS
The Company is aware of the issues that many computer systems will face
as the year 2000 approaches. These issues are the result of computer programs
having been written using two digits rather than four digits to define the
applicable year. Any of the Company's and its service providers' hardware and
software ("Information Technology" or "IT"), and computer-aided systems
("Non-IT") that have time-sensitive operating data may recognize a date of "00"
as the year 1900 rather than the year 2000, resulting in system failures or
miscalculations.
Internal Systems: The Company's internal IT and Non-IT systems are as follows:
-Accounting and administrative software and hardware
-Computer-aided laboratory equipment
-Office equipment, telephones and security systems
Service Providers: The Company's main service providers that utilize IT and
Non-IT systems are as follows:
-Banks and financial institutions
-Administrative services - Transfer agent, payroll agency, shareholder
services
-Utility services - Electricity, heat, water and phone and data services
-External research and development
STATE OF READINESS
The following paragraphs address the Company's state of readiness
relating to the year 2000 issue, including the Company's plan to address the
year 2000 issues associated with the Company's and its service providers' IT and
Non-IT systems, and the status of each phase in the Company's plan. The
Company's plan to evaluate and resolve the year 2000 problem encompasses three
phases: inventory and assessment; remediation; and testing and implementation.
Inventory and Assessment:
The inventory and assessment phase of this process involves the
identification of all of the Company's IT and Non-IT systems and the
determination of which systems may be impacted by the year 2000 problem. This
entails testing each system and/or contacting each manufacturer and service
provider, obtaining and reviewing any written documentation about the year 2000
problem and plan for resolution, and identifying which systems require upgrade,
repair or replacement to become compliant.
At December 31, 1998, the Company was approximately 90% complete with
this phase of the year 2000 project. The Company has completed the inventory of
its accounting and administrative software, its computer-
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aided office equipment and software, telephones and security systems,
administrative service providers, banks and financial institutions and utility
services. The Company has completed an inventory and has essentially completed
the assessment of its computer-aided laboratory equipment. The inventory and
assessment of all systems is expected to be completed by March 31, 1999, with
the exception of certain third party service providers which assessment is
expected to be completed by the third quarter of 1999. (See "--Third Party
Service Providers," below.)
Remediation:
Upon completion of the assessment of these systems, the Company will
adopt a formal plan to address internal year 2000 problems and to obtain
assurance of compliance from all IT and Non-IT service providers. Remediation of
any year 2000 problems identified may include the upgrade of computer operating
systems, the upgrade or replacement of certain software programs and the
replacement of equipment. The Company has begun the remediation phase for
certain of its in-house systems by scheduling upgrades or replacements. The
Company expects to have completed the remediation phase of its internal systems
by June 1999, and to have assurance of compliance from its service providers by
September 1999.
The Company believes, by reference to vendor information and by conducting
testing in-house, that all desk-top computers currently in use by the Company
are year 2000 compliant. In some instances, non-compliant versions of office
software have been noted to be in use. The upgrade of such software, at minimal
cost to the Company, will be completed as part of the remediation phase of this
project. The Company has identified two pieces of equipment used in the conduct
of its research activities for which the vendor is not yet able to provide
information about compliance. For one of these pieces of equipment, the Company
has determined that an inability to recognize the year 2000 as a valid date will
not impact the functionality of the software or the attached equipment. In the
event that the program cannot produce the correct dating and the problem is not
resolved before the year 2000, alternative acceptable methods for dating data
produced are available.
Testing and implementation:
This plan will include testing all repaired, replaced and new internal
systems and software, to ensure that they are working properly and adequately
address the year 2000 issues identified. The Company expects to have completed
testing of its internal systems and software and have all systems fully
operational by September 1999.
Third-Party Service Providers:
To evaluate the readiness of its third-party service providers, including
utility providers, financial institutions, vendors and other service providers,
the Company is in the process of phoning, writing and/or reviewing written
literature from each provider to ascertain whether the services they provide are
at risk of being non-compliant, whether the providers are addressing this issue
and what their plans are for resolving this issue. To date, the Company has
completed the assessment of approximately 90% of these third-party service
providers, but is still awaiting letters of compliance from some. The Company
expects to complete this initial assessment of its third-party providers by
March 1999 and will monitor the progress of each service provider during 1999.
The identification of alternative vendors of services will be considered in the
course of this process and in the development and implementation of a
contingency plan.
COSTS
Based on the assessment to date of existing systems, which is approximately
90% complete, the Company does not expect to incur material costs to evaluate
and resolve any year 2000 problems. The Company may contract with outside
consultants at various times during this process to ensure the timely completion
of the project. The Company expects to upgrade or replace certain systems
supporting the administrative functions and facilities and may have to replace
some of the software or equipment used in its research operations. Based on
information available at this time, the Company estimates that it will spend
between $25,000 and $50,000 to complete the process of resolving the year 2000
problem. These expenditures will be funded from existing cash resources and will
not have a material impact on the amount of funds available for other operating
purposes. The Company has not incurred any outside costs to date related to
repairing, upgrading or replacing equipment to become compliant. The actual
costs to be incurred by the Company will depend on a number of factors which
cannot be accurately
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predicted, including the availability and cost of consultants and the extent and
difficulty of the remediation and other work to be done.
RISKS
In the event that the Company does not complete any additional tasks
relating to the year 2000 issue, the Company will experience interruptions or
inaccuracies in the processing of financial information. The Company's
accounting software is not currently year 2000 compliant. The Company has
scheduled an upgrade of this software for the second quarter of 1999, at a
minimal cost to the Company. The Company would have to rely on manual and less
efficient means of accumulating and recording data and would experience delays
in processing financial data. In the event that no further progress is made on
the remediation of any year 2000 problems, the Company may experience
interruptions in the processing of certain data generated by the Company's
research activities. The Company is aware of certain pieces of computer-aided
research and discovery equipment that are not, or may not be compliant, which
could cause the Company to revert to manual laboratory testing procedures and/or
the outsourcing of automated procedures. Certain of the Company's personal and
network computers may fail, resulting in the need to abandon those systems,
which could potentially adversely impact the Company's ability to operate its
internal computer network. However, the Company believes, by reference to vendor
information and by conducting testing in-house, that all desk-top computers
currently in use by the Company are year 2000 compliant. In some instances,
non-compliant versions of office software have been noted to be in use. The
upgrade of such software, at minimal cost to the Company, will be completed as
part of the remediation phase of this project
The Company expects to have completed all phases of this project before the
end of 1999 and does not believe that the existence of significant unresolved
year 2000 problems will result in the prolonged and material interruption of its
daily operations, including the conduct of its research and development
activities. However, there can be no assurance that the Company will complete
the remediation of any year 2000 problems on a timely basis or that any
unresolved problems would not have an adverse impact on the Company's ability to
continue operations and fulfill its obligations pursuant to research and
development collaboration agreements.
The Company has certain relationships with third parties, including utility
providers, financial institutions, vendors and other service providers. The
Company believes that with the exception of its utility providers, its
relationships with vendors and service providers are not exclusive or material.
Consequently, the Company believes that, in the event of a failure on the part
of these third parties to become year 2000 compliant on a timely basis, the
Company would be able to continue to maintain operations, including the conduct
of most of its research and development activities, utilizing alternative
vendors where necessary. An interruption of the Company's utility services could
materially affect the Company's research, development and administrative
operations until such time that those utility services are resumed. There can be
no assurance that any third party service provider engaged by the Company will
achieve year 2000 compliance on a timely basis, or that any lack of compliance
on the part of such provider will not materially affect the Company's
operations. The identification of alternative vendors of services and supplies
will be considered in the course of this process and in the development and
implementation of a contingency plan.
CONTINGENCY PLAN
The determination of the necessity for a contingency plan will be made once
the assessment and remediation phases of this project have been completed. Any
contingency plan implemented would include, to the extent deemed necessary, the
identification of alternative third-party service providers and vendors, the
availability of equipment to enable the Company to continue operations and the
availability of vendors for outsourcing research and development activities. The
Company expects to have identified and resolved any year 2000 problems by
September 1999 and to have established and tested a formal contingency plan, to
the extent deemed necessary, before the end of 1999.
The discussion contained in this section as well as elsewhere in this
Annual report on Form 10-K may contain forward-looking statements based on the
current expectations of the Company's management. See "Important Factors
Regarding Forward-Looking Statements" attached hereto as Exhibit 99.1 and
incorporated by reference into this Form 10-K. The Company cautions readers that
there can be no assurance that the actual results or
27
28
business conditions will not differ materially from those projected or suggested
in the forward-looking statements as a result of various factors, including, but
not limited to, the following: uncertainties relating to the conduct and
completion of clinical trials of the Company's product candidates, particularly
with respect to aptiganel; uncertainties as to the Company's ability to continue
operations and achieve profitability; the early stage of development of all of
the Company's product candidates; the Company's reliance on current and
prospective collaborative partners to supply funds for research and development
and to commercialize its products; intense competition related to the research
and development of products competitive with products under development by the
Company; uncertainties as to the protection of proprietary rights relating to
the Company's products; the Company's lack of experience in manufacturing and
the Company's reliance on contract manufacturers for the production of products
for development and commercial purposes; the Company's lack of marketing and
sales experience and the risk that any products the Company develops may not
receive commercial acceptance in the markets that the Company expects to target;
uncertainty as to whether there will exist adequate reimbursement for the
Company's products from government, private health insurers and other
organizations; uncertainties as to the extent of future government regulation of
the Company's business; and potential year 2000 problems. As a result, all of
the Company's future development efforts involve a high degree of risk. Readers
are cautioned not to place undue reliance on the forward-looking statements
contained in this section or elsewhere in this Annual Report on Form 10-K which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release the result of any revisions to the forward-looking statements
that may be made to reflect events or circumstances occurring after the date
hereof or to reflect the occurrence of unanticipated events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7A is not provided as the disclosure
requirements are not applicable to the Company pursuant to Item 305(e) of
Regulation S-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is contained on pages F-2 through F-15
of this Report on Form 10-K.
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 response to this item is contained in part under the caption "Executive
Officers of the Company" in Part I, Item 1(a) hereof, and the remainder is
incorporated herein by reference from the discussion responsive thereto under
the caption "Election of Directors" in the Company's definitive Proxy Statement
relating to the 1999 Annual Meeting of Stockholders (the "1999 Proxy
Statement"), to be filed with the Securities and Exchange Commission not later
than April 30, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Executive Compensation" in the
1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Principal Stockholders" in the
1999 Proxy Statement.
28
29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated by reference from the
discussion responsive thereto under the captions "Employment Agreements" and
"Compensatory Arrangements" in the 1999 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following Financial Statements of the Company are included in response
to Item 8 of this report:
PAGE
----
Index to Consolidated Financial Statements F-1
Report of Independent Auditors F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
(a)(2) FINANCIAL STATEMENT SCHEDULES
No financial statement schedules are included since they are either not
required, not applicable, or the information is otherwise included.
(a)(3) EXHIBITS
3.1 Restated Certificate of Incorporation of Registrant. Filed as Exhibit
4.1 to Registration Statement on Form S-8, File No. 33-42933, and
incorporated herein by reference.
3.3 By-laws of Registrant. Filed as Exhibit 4.2 to Registration Statement
on Form S-8, File No. 33-42933, and incorporated herein by reference.
4.1 Specimen Stock Certificate for Common Stock, $.001 par value. Filed as
Exhibit 4.1 to Registration Statement on Form S-1, File No. 33-40078,
and incorporated herein by reference.
10.1 Stockholders' Agreement dated December 29, 1988 among the Company and
certain investors, as amended by Waiver and Consent dated as of
February 5, 1991. Filed as Exhibit 10.3 to Registration Statement on
Form S-1, File No. 33-40078, and incorporated herein by reference.
10.2 Scientific Advisor Agreement dated September 10, 1986 and amendment
dated December 6, 1986 between the Company and Dr. Joseph Martin. Filed
as Exhibit 10.5 to Registration Statement on Form S-1, File No.
33-40078, and incorporated herein by reference.
29
30
10.3 Form of Stockholders' Agreement dated March 19, 1987 among the Company
and certain stockholders. Filed as Exhibit 10.6 to Registration
Statement on Form S-1, File No. 33-40078, and incorporated herein by
reference.
10.4 Form of Restricted Stock Purchase Agreement with a certain Director
and executive officers. Filed as Exhibit 10.8 to Registration
Statement on Form S-1, File No. 33-40078, and incorporated herein by
reference.
10.5 Common Stock Purchase Warrant dated February 15, 1991 with Aeneas
Venture Corporation. Filed as Exhibit 10.9 to Registration Statement
on Form S-1, File No. 33-40078, and incorporated herein by reference.
10.6 Form of Waiver, Consent and Agreement dated as of April 22, 1991
between the Company and certain investors. Filed as Exhibit 10.10 to
Registration Statement on Form S-1, File No. 33-40078, and
incorporated herein by reference.
10.9* Letter Agreement dated June 5, 1990 between the Company and Elkan R.
Gamzu, Ph.D. Filed as Exhibit 10.13 to Registration Statement on Form
S-1, File No. 33-40078, and incorporated herein by reference.
10.11* 1991 Equity Incentive Plan, as amended. Filed as Exhibit 99.1 to the
Registration Statement on Form S-8, File No. 333-05431, as filed with
the Commission on June 7, 1996, and incorporated herein by reference.
10.12* 1992 Director Stock Option Plan, as amended. Filed as exhibit 10.12 to
the Annual Report on Form 10-K for the period ended December 31, 1997,
as filed with the Commission on March 30, 1998, and incorporated
herein by reference.
10.13 Lease for One Kendall Square dated July 16, 1992 between the Company
and the Trustees of Old Kendall Realty Trust and addendum dated as of
September 22, 1992 (the "Lease"). Filed as Exhibit 10.13 to the Annual
Report on Form 10-K for the period ended December 31, 1992, as filed
with the Commission on March 28, 1993, and incorporated herein by
reference. Addendum dated September 22, 1993, filed as Exhibit 10.13 to
the Annual Report on Form 10-K for the period ended December 31, 1993,
as filed with the Commission on February 14, 1994, and incorporated
herein by reference. Addendum dated March 11, 1996, as filed with the
Commission on March 24, 1997, and incorporated herein by reference.
Addendum dated June 17, 1997, filed as Exhibit 10.13 to the Annual
Report on Form 10-K for the period ended December 31, 1997, as filed
with the Commission on March 30, 1998 and incorporated herein by
reference.
10.15* Form of Indemnification agreement between the Company and Directors and
executive officers. Filed as Exhibit 10.15 to the Annual Report on Form
10-K for the period ended December 31, 1992, as filed with the
Commission on March 28, 1993, and incorporated herein by reference.
10.16+ Stock Purchase Agreement dated as of March 21, 1995 between the Company
and Boehringer Ingelheim International GmbH. Filed as Exhibit 10.16 to
the Annual Report on Form 10-K for the period ended December 31, 1994,
as filed with the Commission on March 31, 1995, and incorporated herein
by reference.
10.17+ License Agreement dated as of March 21, 1995 between the Company and
Boehringer Ingelheim International GmbH. Filed as Exhibit 10.17 to the
Annual Report on Form 10-K for the period ended December 31, 1994, as
filed with the Commission on March 31, 1995, and incorporated herein by
reference.
10.18+ Amendment to Stock Purchase Agreement and License Agreement between the
Company and Boehringer Ingelheim International GmbH dated as of August
19, 1996. Filed as Exhibit 99.4 to Amendment No. 1
30
31
to the Current Report on Form 8-K/A dated August 19, 1996, as filed
with the Commission on January 29, 1997, and incorporated herein by
reference.
10.19+ Collaborative Research, Development and Marketing Agreement dated as of
November 20, 1996 between the Company and Vision Pharmaceuticals L.P.
Filed as Exhibit 99.1 to Amendment No. 1 to the Current Report on Form
8-K/A dated August 19, 1996, as filed with the Commission on January
29, 1997, and incorporated herein by reference.
10.2+ Stock Purchase Agreement dated as of November 20, 1996 between the
Company and Vision Pharmaceuticals L.P. Filed as Exhibit 99.2 to
Amendment No. 1 to the Current Report on Form 8-K/A dated August 19,
1996, as filed with the Commission on January 29, 1997, and
incorporated herein by reference.
10.21+ Credit Agreement dated as of November 20, 1996 between the Company and
Vision Pharmaceuticals L.P. Filed as Exhibit 99.3 to Amendment No. 1 to
the Current Report on Form 8-K/A dated August 19, 1996, as filed with
the Commission on January 29, 1997, and incorporated herein by
reference.
10.22+ Sponsored Research and Collaborative Agreement dated as of December 23,
1996 between Cambridge NeuroScience Partners, Inc. and The J. David
Gladstone Institutes. Filed as Exhibit 99.1 to Amendment No. 1 to the
Current Report on Form 8-K/A dated December 23, 1996, as filed with the
Commission on January 29, 1997, and incorporated herein by reference.
10.23+ Option Agreement dated as of December 23, 1996 by and among The Regents
of the University of California, Cambridge NeuroScience Partners, Inc.,
and the Company. Filed as Exhibit 99.2 to Amendment No. 1 to the
Current Report on Form 8-K/A dated December 23, 1996, as filed with the
Commission on January 29, 1997, and incorporated herein by reference.
10.24+ Stockholders' Rights Agreement dated as of December 23, 1996 by and
among the Company, Cambridge NeuroScience Partners, Inc., The J. David
Gladstone Institutes and The Regents of the University of California.
Filed as Exhibit 99.3 to Amendment No. 1 to the Current Report on Form
8-K/A dated December 23, 1996, as filed with the Commission on January
29, 1997, and incorporated herein by reference.
10.25* Compensatory arrangement with certain executive officers and other
members of management. Filed as Exhibit 10.25 to the Annual Report on
Form 10-K for the period ended December 31, 1997, filed with the
Commission on March 30, 1998 and incorporated herein by reference.
10.26 Termination agreement, dated November 4, 1998, between the Company and
Boehringer Ingelheim International, GmbH. Filed as exhibit 10.28 to the
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998,
as filed with the Commission on November 12, 1998, and incorporated
herein by reference.
10.27+ Research Collaboration and License Agreement dated as of December 23,
1998 between the Company and Bayer AG. Filed herewith.
21.1 Subsidiaries of the Company. Filed herewith.
23.1 Consent of Ernst & Young LLP, independent auditors. Filed herewith.
31
32
24.1 Powers of Attorney. Contained on signature page hereto.
27.1 Financial Data Schedule for the year ended December 31, 1998
(for electronic filing only).
99.1 Important Factors Regarding Forward-Looking Statements. Filed herewith.
___________________
* Identifies a management contract or compensatory plan or agreement in
which an executive officer or Director of the Company participates.
+ Confidential information contained in this Exhibit has been omitted and
filed separately with the Securities and Exchange Commission.
(b) REPORTS ON FORM 8-K
December 21, 1998: Issuance of a news release announcing that the Company had
entered into an agreement with Bayer AG to develop the
Company's recombinant Glial Growth Factor 2 ("GGF2") for the
treatment of neurodegenerative diseases such as Multiple
Sclerosis.
32
33
CAMBRIDGE NEUROSCIENCE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
34
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
CAMBRIDGE NEUROSCIENCE, INC.
We have audited the accompanying consolidated balance sheets of
Cambridge NeuroScience, Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Cambridge NeuroScience, Inc. at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
February 10, 1999
F-2
35
CAMBRIDGE NEUROSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
DECEMBER 31,
----------------------------
1998 1997
---------- ----------
ASSETS
Current Assets
Cash and cash equivalents $ 4,863 $ 12,020
Marketable securities 7,037 26,561
Receivables from collaboration agreements 2,080 --
Prepaid expenses and other current assets 1,260 1,575
---------- ----------
Total Current Assets 15,240 40,156
Equipment, Furniture and Fixtures, net 377 735
---------- ----------
Total Assets $ 15,617 $ 40,891
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 1,637 $ 3,668
Research and development advances 250 2,900
---------- ----------
Total Current Liabilities 1,887 6,568
Stockholders' Equity
Preferred stock, par value $.01, 10,000
shares authorized; none issued -- --
Common stock, par value $.001, 30,000
shares authorized; 18,085 and 17,858 shares issued and
outstanding at December 31, 1998 and 1997, respectively 18 18
Additional paid-in capital 120,088 137,787
Accumulated deficit (106,376) (103,482)
---------- ----------
Total Stockholders' Equity 13,730 34,323
---------- ----------
Total Liabilities and Stockholders' Equity $ 15,617 $ 40,891
========== ==========
See accompanying notes.
F-3
36
CAMBRIDGE NEUROSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
-------- --------- ---------
Revenues:
Research and development $ 4,253 $ 3,885 $ 2,396
Government grants 50 150 --
-------- --------- ---------
4,303 4,035 2,396
Operating expenses:
Research and development 5,984 17,650 13,978
General and administrative 1,472 2,616 2,585
Restructuring costs 921 -- --
-------- --------- ---------
8,377 20,266 16,563
-------- --------- ---------
Loss from operations (4,074) (16,231) (14,167)
Interest income 1,180 2 ,393 1,178
-------- --------- ---------
Net loss $ (2,894) $ (13,838) $ (12,989)
======== ========= =========
Basic and diluted net loss per common share $ (0.16) $ (0.79) $ (0.93)
======== ========= =========
Shares used in computing basic and diluted
net loss per share 17,976 17,518 13,980
======== ========= =========
See accompanying notes.
F-4
37
CAMBRIDGE NEUROSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
COMMON STOCK ADDITIONAL TOTAL
-------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ---------- ----------- -------------
Balance at December 31, 1995 13,539 $ 14 $ 96,169 $ (76,655) $ 19,528
Common stock issued pursuant to
stock purchase agreements, net of
costs of $300 1,413 1 12,699 -- 12,700
Common stock issued pursuant to
employee benefit plans 28 -- 243 -- 243
Exercise of stock options 30 -- 165 -- 165
Net loss -- -- -- (12,989) (12,989)
------ ---- --------- ---------- ---------
Balance at December 31, 1996 15,010 15 109,276 (89,644) 19,647
Sale of common stock, net of
offering costs of $2,221 2,760 3 28,136 -- 28,139
Common stock issued pursuant to
employee benefit plans 77 -- 321 -- 321
Exercise of stock options 11 -- 54 -- 54
Net loss -- -- -- (13,838) (13,838)
------ ---- --------- ---------- ---------
Balance at December 31, 1997 17,858 18 137,787 (103,482) 34,323
Common stock issued pursuant to
employee benefit plans 227 -- 208 -- 208
Cash dividend ($1.00 per share) -- -- (17,907) -- (17,907)
Net loss -- -- -- (2,894) (2,894)
------ ---- --------- ---------- ---------
Balance at December 31, 1998 18,085 $ 18 $ 120,088 $ (106,376) $ 13,730
====== ==== ========= ========== =========
See accompanying notes.
F-5
38
CAMBRIDGE NEUROSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- --------- ---------
Operating Activities
Net loss $ (2,894) $ (13,838) $ (12,989)
Items not requiring cash:
Gain on sale of equipment, furniture and fixtures (38) -- --
Depreciation and amortization 337 851 1,059
Common stock issued pursuant to an
employee benefit plan 151 230 194
-------- --------- ---------
(2,444) (12,757) (11,736)
Changes in current assets and liabilities:
Receivables from collaboration agreements (2,080) -- --
Prepaid expenses and other current assets 315 (304) (764)
Accounts payable and accrued expenses (2,031) (121) (9)
Research and development advances (2,650) (2,884) 4,789
-------- --------- ---------
(6,446) (3,309) 4,016
-------- --------- ---------
Cash used for operating activities (8,890) (16,066) (7,720)
Investing Activities
Sales of marketable securities 33,194 9,000 --
Purchases of marketable securities (13,670) (35,561) --
Purchases of equipment, furniture and fixtures (18) (301) (467)
Disposals of equipment, furniture and fixtures 77 -- --
-------- --------- ---------
Cash provided by (used for) investing activities 19,583 (26,862) (467)
Financing Activities
Dividends paid (17,907) -- --
Sales of common stock, net of offering
costs of $2,221 in 1997 57 28,284 214
Issuance of common stock pursuant to stock
purchase agreements, net of costs of $300 in 1996 -- -- 12,700
-------- --------- ---------
Cash (used for) provided by financing activities (17,850) 28,284 12,914
-------- --------- ---------
Net (Decrease) Increase in Cash and
Cash Equivalents (7,157) (14,644) 4,727
Cash and Cash Equivalents at Beginning of Year 12,020 26,664 21,937
-------- --------- ---------
Cash and Cash Equivalents at End of Year $ 4,863 $ 12,020 $ 26,664
======== ========= =========
See accompanying notes.
F-6
39
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BUSINESS
Cambridge NeuroScience, Inc. (the "Company") is a
biopharmaceutical company engaged in the discovery and development of
proprietary pharmaceuticals to prevent or treat severe disorders of, or injuries
to, the nervous system. The Company is focused in two areas of research and
development: (i) ion-channel blockers to prevent or treat brain damage resulting
from stroke and other forms of brain ischemia, as well as for the treatment or
prevention of neuropathic pain, glaucoma, spinal cord injury, Parkinson's
disease, multiple sclerosis ("MS") and peripheral neuropathies, and (ii) growth
factors for the treatment of MS and peripheral neuropathies. To date, the
Company has funded its operations primarily through proceeds from public and
private offerings of equity securities and from payments received pursuant to
research and development collaborations. The Company has not been profitable
since inception and has not received any revenue from the sale of products.
On March 9, 1998, the Company announced the implementation of a cost
reduction plan that included a reduction in headcount by 34 employees,
consisting of 22 research, four drug development and eight administrative and
support employees. Included in operating expenses for the year ended December
31, 1998, is a one-time cost of $921,000 associated with this reduction in
staff, consisting primarily of severance and related benefits which were paid in
full in 1998. Following the reduction in headcount, in June 1998, the Company
entered into an agreement with a third party to sub-lease approximately half of
the Company's office and laboratory facilities, thereby reducing
facilities-related operating expenses.
On March 9, 1998, the Company's Board of Directors declared an
extraordinary dividend on its Common Stock of $1.00 per share of outstanding
stock, or $17.9 million. This dividend, which was paid on April 14, 1998,
represented a return of capital to shareholders. Prior thereto, the Company had
never declared nor paid dividends on any of its capital stock. Future cash
dividends will be paid at the discretion of the Board of Directors and will
depend, among other things, upon the Company's future operations, capital
requirements, general financial condition and such other factors as the Board of
Directors may deem relevant. The Company does not contemplate paying dividends
in 1999.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements
include the accounts of Cambridge NeuroScience, Inc. and its wholly-owned and
majority-owned subsidiaries. To date, the minority shareholders have not made
equity investments in the subsidiary. As a result, the entire net loss from the
majority-owned subsidiary has been attributed to the Company. All inter-company
accounts and transactions have been eliminated in consolidation. See Note H.
Use of Estimates. The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Adoption of New Accounting Principle. In June 1997, the Financial
Accounting Standards Board ("FASB") issued Statement No. 130, Reporting
Comprehensive Income, which establishes standards for the reporting and display
of comprehensive income and its components. On January 1, 1998, the Company
adopted FAS 130. The adoption of FAS 130 had no impact on the Company's
financial statements.
Cash and Cash Equivalents. The Company's policy regarding investments
is to ensure safety, liquidity, and capital preservation while obtaining a
reasonable rate of return. The Company considers all highly liquid instruments
with a maturity of three months or less at the date of purchase to be cash
equivalents, which are invested primarily in high quality corporate bonds and
commercial paper, U.S. Government and agency obligations and repurchase
agreements. At December 31, 1998 and 1997, the cost of these investments
approximated fair market value.
Marketable Securities. At December 31, 1998 and 1997, the Company had
$7.0 million and $26.6 million, respectively, invested in marketable securities
with original maturities of greater than 90 days, consisting of high quality
F-7
40
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
corporate bonds, commercial paper, certificates of deposit and variable rate
insurance contracts (see Note C). As the Company intends that these investments
be available for use in the Company's current operations, these amounts are
classified as "available-for-sale" and are included in current assets.
Management determines the appropriate classification of its securities at the
time of purchase and reevaluates such classification at each balance sheet date.
Available-for-sale securities are carried at fair market value, based on quoted
market prices, and unrealized gains or losses are reported as a separate
component of stockholders' equity. The cost of securities is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortizations, interest income and realized gains and losses are included in
interest income. At December 31, 1998 and 1997, the adjusted cost of these
investments approximated fair market value. The cost of securities sold is based
on specific identification. Gross realized gains or losses for the years ended
December 31, 1998, 1997 and 1996 were not material.
Equipment, Furniture and Fixtures. Equipment, furniture and fixtures
are recorded at cost. Depreciation is provided using the straight-line method
over the following estimated useful lives:
Equipment, furniture and fixtures ................... 3 - 5 years
Leasehold improvements .......................... Term of the lease
Stock Based Compensation. The Company accounts for its stock based
compensation arrangements under the provisions of Accounting Principles Board
Opinion 25, Accounting for Stock Issued to Employees, and related
interpretations (see Note G).
Revenue Recognition. Research and development revenue is recognized as
earned and represents payments received pursuant to a technology licensing
agreement and reimbursement of the Company's expenditures pursuant to the terms
of its collaboration agreements. Research and development revenue is earned when
all obligations of the Company relating to the revenue have been met, the
amounts are not refundable irrespective of whether the research efforts are
unsuccessful and the Company is not obligated to meet future milestones. For
further discussion of the Company's revenue recognition policies pursuant to
these agreements, see Note H. Revenue from government grants is recorded as
earned based on the performance requirements of the grant. Expenses relating to
the collaboration agreements and to the performance requirements of government
grants are recorded as research and development expenses. Payments received in
advance of research and development performed pursuant to the Company's research
and development agreements are designated as research and development advances
and are included in current liabilities.
Income Taxes. The liability method is used to account for income taxes.
Deferred tax assets and liabilities are determined based on differences between
financial reporting and income tax bases of assets and liabilities as well as
net operating loss carryforwards and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
Deferred tax assets may be reduced by a valuation allowance to reflect the
uncertainty associated with their ultimate realization.
Significant Customers. Revenue in 1998, 1997 and 1996 consisted
primarily of revenue arising from collaborative agreements. Revenue from these
sources in 1998 was earned pursuant to agreements with four companies, each of
which comprised more that 10% of total revenue. Revenue earned pursuant to one
collaborative agreement totaled 27% of such revenue in 1998, 71% in 1997 and 95%
in 1996. Revenue earned pursuant to another collaboration agreement totaled 23%
and 25% of revenue in 1998 and 1997, respectively (see Note H).
Net loss per share. Net loss per share is based on the weighted-average
number of common shares outstanding during each of the periods presented. Due to
the fact that the Company continues to be in a net loss position, common
equivalent shares from stock options are excluded as their effect is
antidilutive
F-8
41
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C - MARKETABLE SECURITIES
Investments in marketable securities consist of the following at December 31,
1998 and 1997 (in thousands):
CONTRACTUAL MATURITIES
---------------------------------------
1998 1997
-------- -----------------------
LESS LESS DUE IN
THAN THAN 1-2
ONE YEAR ONE YEAR YEARS
-------- -------- -------
Corporate bonds $ 6,037 $ 11,569 $ 3,020
Certificates of deposit 1,000 5,999 --
Variable rate insurance contracts -- 3,000 --
Commercial paper -- 2,973 --
------- -------- -------
$ 7,037 $ 23,541 $ 3,020
======= ======== =======
NOTE D - EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures consist of the following (in
thousands):
DECEMBER 31,
------------------
1998 1997
------- -------
Equipment $ 4,181 $ 4,586
Furniture and fixtures 151 453
Leasehold improvements 2,264 2,264
------- -------
6,596 7,303
Less accumulated depreciation and amortization 6,219 6,568
------- -------
Equipment, furniture and fixtures, net $ 377 $ 735
======= =======
NOTE E - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
-----------------
1998 1997
------- -------
Accounts payable $ 454 $ 273
Accrued salaries and benefits 293 289
Accrued research and development expense 290 2,466
Accrued professional fees 150 219
Sublease advances 234 --
Accrued other 216 421
------- -------
$ 1,637 $ 3,668
======= =======
NOTE F - INCOME TAXES
At December 31, 1998, the Company has a potential tax benefit of
approximately $43.8 million, resulting primarily from approximately $103.1
million in net operating loss carryforwards and $4.2 million of tax credits,
which expire through 2013. Since the Company has incurred only losses since
inception and due to the degree of uncertainty related to the ultimate
utilization of the loss and credit carryforwards, the Company has fully reserved
this tax benefit. Additionally, the
F-9
42
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
future utilization of net operating loss carryforwards may be subject to
limitations under the change in stock ownership rules of the Internal Revenue
Code of 1986, as amended. During 1998, the valuation allowance decreased by
approximately $2.0 million due primarily to the expiration of state net
operating loss carryforwards
Significant components of the Company's deferred tax assets are as follows (in
thousands):
DECEMBER 31,
------------------------
1998 1997
--------- ---------
Deferred tax assets
Net operating loss carryforwards $ 39,600 $ 41,500
Tax credits 4,175 4,250
--------- ---------
Total deferred tax assets 43,775 45,750
Valuation allowance (43,775) (45,750)
--------- ---------
Net deferred tax assets $ -- $ --
========= =========
NOTE G - STOCKHOLDERS' EQUITY
Preferred Stock. The Board of Directors is authorized to fix
designations, relative rights, preferences and limitations on the preferred
stock at the time of issuance.
Equity Incentive Plans. The Company has a 1991 Equity Incentive Plan
(the "Plan") which provides for the granting of options to purchase 2,100,000
shares of the Company's Common Stock. The Plan provides for the issuance or
award of incentive stock options at no less than the fair market value at the
date of the grant, non-qualified stock options, stock appreciation rights,
performance shares, restricted Common Stock, and stock units at prices to be
determined by the Board of Directors. All employees and, in the case of awards
other than incentive stock options, consultants to the Company are eligible for
awards under the Plan.
In addition, the Company has a 1992 Director Stock Option Plan (the
"Director Plan") pursuant to which non-qualified stock options to purchase
20,000 shares of the Company's Common Stock are automatically granted to outside
directors at fair market value upon their initial election to the Board of
Directors. Additional grants of options may be made to eligible Directors at the
discretion of the Board of Directors. The Director Plan has reserved an
aggregate of 100,000 shares for this purpose. At December 31, 1998, options to
purchase 78,000 shares have been granted under the plan, of which 58,875 are
exercisable.
The term of all stock options granted may not exceed ten years, and
vesting generally is over a four-year period.
F-10
43
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents the combined activity of the two option
plans for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996
----------------------- ----------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- -------- --------- -------- --------- --------
Outstanding at beginning
of year 1,662,727 $ 7.71 1,493,953 $ 6.92 1,258,973 $ 6.61
Granted 432,000 0.84 293,450 11.56 272,650 8.20
Exercised -- -- (10,684) 5.03 (29,988) 5.50
Canceled (911,471) 7.72 (113,992) 7.51 (7,682) 6.67
--------- ------- --------- ------- --------- -------
Outstanding at end of
year 1,183,256 $ 5.20 1,662,727 $ 7.71 1,493,953 $ 6.92
========= ======= ========= ======= ========== ======
Exercisable at year end 686,204 $ 6.87 1,079,048 $ 7.09 822,347 $ 6.91
========= ======= ========= ======= ========= =======
Weighted average grant date fair
value per share of options granted
during the year $ 0.66 $ 8.15 $ 4.64
======= ======= =======
The following table presents weighted average price and life
information about significant option groups outstanding at December 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------------------------- --------------------------------
Weighted Weighted Weighted
Range of Number Average Remaining Average Number Average
Exercise Prices Outstanding Contractual Life (yrs) Exercise price Exercisable Exercise Price
- ---------------- -------------- ---------------------- -------------- ------------ --------------
$ 0.84 - 0.84 429,375 9.4 $ 0.84 54,000 $ 0.84
3.13 - 6.13 243,057 5.4 5.36 222,275 5.36
6.50 - 8.00 230,574 5.6 7.27 192,475 7.13
8.13 - 9.75 174,000 4.8 8.72 157,125 8.75
11.25 - 13.00 106,250 6.9 12.22 60,329 12.12
--------- -------
1,183,256 686,204
========= =======
Employee Stock Purchase Plan. The 1993 Employee Stock Purchase Plan
(the "ESPP") provides for the grant of rights to eligible employees to purchase
up to 250,000 shares of the Company's Common Stock at the lesser of 85% of the
fair market value at the beginning or the end of the established offering
period. During 1996, 4,068 shares were issued at $4.99 per share and 4,118 were
issued at $7.01 per share. During 1997, 6,570 shares were issued at $6.59 per
share and 13,762 were issued at $3.51 per share. During 1998, 23,065 shares were
issued at $1.67 per share and 37,222 were issued at $0.50 per share. At December
31, 1998, subscriptions were outstanding for 14,313 shares at $0.50 per share.
FAS 123 Disclosures. The Company has adopted the disclosure provisions
only of Statement of Financial Accounting Standards No. 123, Accounting for
Stock-based Compensation ("FAS 123"), and accounts for its stock option plans in
accordance with the provisions of APB 25, Accounting for Stock Issued to
Employees. The exercise price of grant awards made under the Company's stock
option plans is equal to the fair market value at the date of grant.
F-11
44
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pursuant to APB 25, the Company applies the intrinsic value method to grant
awards. Accordingly, no compensation cost has been recognized in relation to the
stock option plans or the ESPP.
Pursuant to the requirements of FAS 123, the following are the pro
forma net loss and net loss per share for 1998, 1997 and 1996, as if the
compensation cost for the option plans and the ESPP had been determined based on
the fair value at the grant date for grants in 1998, 1997 and 1996, consistent
with the provisions of FAS 123:
1998 1997 1996
------------------- ---------------------- ---------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- -------- --------- --------- --------- ---------
Net loss (in thousands) $ (2,894) $ (2,777) $ (13,838) $ (15,583) $ (12,989) $ (13,784)
Net loss per share $ (0.16) $ (0.16) $ (0.79) $ (0.89) $ (0.93) $ (0.99)
The 1998 impact of the pro forma adjustment to reflect compensation
cost under FAS 123 was to reduce the net loss and net loss per share. This
occurred primarily as a result of the cancellation of options to purchase
911,471 shares due to the reduction of the Company's workforce during 1998.
Outstanding options held by terminated employees which are not exercised are
forfeited upon termination.
The fair value of options and shares issued pursuant to the ESPP at the
date of grant were estimated using the Black-Scholes model with the following
weighted average assumptions:
Options ESPP
-------------------- --------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Expected life (years) 6.5 5.2 4.5 .5 .5 .5
Interest rate 5.6% 6.3% 6.6% 5.4% 5.5% 5.3%
Volatility 90.0% 83.0% 65.0% 92.0% 83.0% 65.0%
Prior to April 1998, the Company had never declared nor paid dividends
on any of its common stock. Future cash dividends will be paid at the discretion
of the Board of Directors and will depend, among other things, upon the
Company's future operations, capital requirements, general financial condition
and such other factors as the Board of Directors may deem relevant. For the
purposes of calculating fair value pursuant to FAS 123, the Company has assumed
that no dividends will be paid.
The Black-Scholes model was developed for use in estimating the fair
value of traded options, which have no vesting restrictions and are fully
transferable. In addition, such models require the use of subjective
assumptions, including expected stock price volatility. In management's opinion,
such valuation models do not necessarily provide a reliable single measure of
the fair value of its employee stock options. The effects on 1997 and 1996 pro
forma net loss and net loss per share of expensing the estimated fair value of
stock options and shares issued pursuant to the ESPP are not necessarily
representative of the effects on reporting the results of operations for future
years as the periods presented include only three and two years, respectively,
of option grants under the Company's plans.
Benefit Plan. The Company has an employee savings plan that qualifies
under Section 401(k) of the Internal Revenue Code of 1986, as amended, in which
all eligible employees may participate. For the plan years ended December 31,
1998, 1997 and 1996, the Company matched 100% of all qualified employee
contributions with Company Common Stock. As of December 31, 1998, the Board of
Directors had authorized 300,000 shares of common stock for issuance pursuant to
this plan. On January 5, 1999, the Board of Directors of the Company voted to
increase the number of shares available for issuance under this plan to 330,000.
At December 31, 1998 329,115 shares were issued and outstanding pursuant to this
plan.
F-12
45
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The aggregate number of shares of Common Stock reserved and available for
issuance under all stock plans was 1,024,407 at December 31, 1998.
NOTE H - COLLABORATIVE AGREEMENTS
The Company has collaborative agreements with certain strategic
partners. These arrangements are as follows:
Allergan. In November 1996, the Company entered into a collaboration
agreement with Allergan Inc. ("Allergan") to develop certain of the Company's
NMDA ion-channel blockers, sodium ion-channel blockers and combination
ion-channel blockers for the treatment of ophthalmic disorders, including
glaucoma. Upon signing the agreement, Allergan purchased 175,103 shares of the
Company's Common Stock for $3.0 million. Allergan is providing an additional
$3.0 million in research funding over a three-year period, through 1999.
Allergan also established a $2.0 million line of credit for the Company, which
expired in May 1998. Allergan will be responsible for the development of
potential products and will bear all of the development costs. Allergan will
manufacture and market products developed under the collaboration worldwide. The
Company may receive up to an additional $18.5 million in cash upon the
achievement of certain milestones and will receive a royalty on product sales.
There can be no assurance as to when or if these milestones will be achieved.
Allergan has certain termination rights, including the right, which is shared by
the Company, to terminate the agreement upon 90 days' prior written notice of an
uncured material breach by the other party. Pursuant to the funding agreement,
Allergan had provided $2.4 million to the Company as of December 31, 1998, of
which $1.0 million was included in Research and development revenue in each of
1998 and 1997 and $114,000 was included in research and development revenue in
1996. The Company is not obligated to meet future milestones under this
agreement to earn this revenue and the funds received and recognized as revenue
are not refundable in the event that research efforts are not successful.
Bayer AG. In December 1998, the Company entered into a collaborative
agreement with Bayer AG ("Bayer") for the development of recombinant Glial
Growth Factor 2 ("GGF2") for the treatment of neurodegenerative diseases such as
multiple sclerosis ("MS"). In exchange for exclusive worldwide manufacturing and
marketing rights to the compound, the Company received an up front licensing fee
of $1.0 million and will receive reimbursement for costs relating to a research
protocol covered by the agreement of up to $1.0 million. The up front licensing
fee and reimbursable costs incurred in 1998 of $580,000 were recognized as
revenue in 1998 and were included in receivables from collaboration agreements
at December 31, 1998. Bayer will be responsible for all development costs, will
provide all material needed in the conduct of the development activities and
shall be responsible for all associated costs. The Company may receive up to
$24.0 million in milestone payments, and will receive royalties on sales of GGF2
products. There can be no assurance, however, as to when or if these milestones
will be achieved. Either party may terminate this agreement at any time for
cause. Bayer may terminate this agreement at any time, upon 120 days written
notice.
Boehringer Ingelheim International, GmbH. In March 1995, the Company
entered license and stock purchase agreements with Boehringer Ingelheim
International GmbH ("BI") to collaborate on the development and
commercialization of the Company's product candidate, aptiganel, formerly known
as CERESTAT. On the signing of these agreements, the Company received proceeds
of $15.0 million, before related costs of $1.0 million, consisting of $10.0
million for the purchase of 1,250,000 shares of the Company's Common Stock and
$5.0 million for the reimbursement of previously incurred aptiganel-related
costs. There are no future obligations relating to this reimbursement of
previously incurred costs, which was recognized as revenue in 1995. Pursuant to
the terms of these agreements and in connection with the commencement of the
Phase III stroke trial by BI, the Company received a milestone payment in
September 1996 of $10.0 million, before related costs of $300,000, in exchange
for 1,237,624 shares of Common Stock. Pursuant to the terms of the agreements,
the Company was obligated to fund approximately 25% of the development costs for
aptiganel in the United States and Europe. BI was obligated to pay the remaining
75% of such costs and all of the development costs in Japan. The Company and BI
collaborated on two Phase III trials of aptiganel. In the second half of 1997,
the partners announced the
F-13
46
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
discontinuation of patient enrollment into both trials after interim analyses
indicated that continuation of the trials was not justified. In November, 1998,
the Company and BI terminated the collaboration and licensing agreements for
aptiganel and all rights were returned to the Company, subject to a royalty on
future sales.
Revenue earned pursuant to the BI agreement represents reimbursement by
BI of expenditures by the Company in excess of its contractual obligations
(generally, 25% of total spent by both parties). Under the terms of the
agreements, an accounting of annual total costs incurred by both parties was to
take place 120 days after the end of each contract year. Any costs incurred in
excess of one party's contractual obligation was reimbursed by the other party.
The calculation of revenue recognized by the Company for the years ended
December 31, 1997 and 1996 was based in part upon an estimate of costs incurred
by BI during the related contract periods. The Company estimated costs incurred
by BI based upon the budget provided for that year and periodic discussions with
BI as to patient enrollment in the clinical trials and the associated costs. At
each year-end, the Company confirmed with BI the reasonableness of the estimated
total costs incurred by BI for the year. Immaterial differences between the
estimated revenue recognized and the actual reimbursable expenses resulting from
the annual reconciliation were either included in current liabilities as
research and development advances or recognized in the period in which they were
determined. Research and development revenue in 1997 and 1996 included $2.9
million and $2.3 million, respectively, earned pursuant to the BI collaboration.
The agreements provided that BI would advance cash to the Company in
the event that the Company's expenditures were expected to exceed its
contractual obligation. Such advances were received by the Company in 1995 and
1996. The advances received through 1996 exceeded the actual reimbursable
amounts as of December 31, 1996 and 1997 and were accounted for as research and
development advances and included in current liabilities at those dates. At
December 31, 1997 and 1996, the difference between cash advances received and
revenue recognized of $2.9 million and $5.8 million, respectively, was recorded
as research and development advances. Therefore, no advances were received in
1997 and revenue was recognized in 1997, as earned, thereby reducing the accrual
for research and development advances. In November 1998, the two companies
signed a termination agreement and reached a final settlement of costs subject
to the collaboration. As a result, in 1998, the Company repaid to BI $1.5
million in excess advances received in prior years. The Company recognized $1.2
million of revenue earned, representing the remainder of excess advances
received in prior periods. The Company is not obligated to meet future
milestones to earn this revenue. The Company will recognize no further revenue
pursuant to these agreements.
Cambridge NeuroScience Partners, Inc. In December 1996, the Company
entered into a collaboration agreement with The J. David Gladstone Institutes
("Gladstone") and The Regents of the University of California (the "University")
for the development of treatments for Alzheimer's disease and other neurological
diseases, disorders or injuries. In connection with the collaboration, the
Company formed a subsidiary, Cambridge NeuroScience Partners, Inc. ("CNPI").
Cambridge NeuroScience made a $1.25 million equity investment in CNPI upon the
consummation of the collaboration and, as a result, owns 80% of the outstanding
common stock of CNPI, with Gladstone and the University owning 15% and 5%,
respectively, of the remaining outstanding shares of CNPI common stock.
Pursuant to the terms of the collaboration, Gladstone is conducting a
research program over a three-year period, for which CNPI provides funding of at
least $1.25 million per year. Through December 31, 1998, CNPI made payments to
Gladstone totaling $3.1 million. In the event that CNPI is unable to raise the
required funds to make its research funding payments, Cambridge NeuroScience
loans CNPI, interest-free, all amounts necessary to enable CNPI to make such
payments. Such debt will be convertible into securities of CNPI under certain
circumstances in accordance with the stockholders' rights agreement. The Company
has guaranteed CNPI's obligations with respect to the collaboration, including
CNPI's financial obligations. CNPI has a three-year option to acquire an
exclusive royalty-bearing license to intellectual property developed in the
field of research under the collaboration. Expenses relating to this agreement
included in research and development expense totaled $1.4 million in 1998 and
1997 and $51,000 in 1996. The agreement is generally subject to termination upon
60 days' prior written notice of an uncured material breach.
F-14
47
CAMBRIDGE NEUROSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Creative Biomolecules, Inc. On December 31, 1998, the Company entered
into a technology licensing agreement with Creative Biomolecules, Inc. ("CBMI")
whereby CBMI has acquired the exclusive rights to GDF-1 in exchange for an up
front cash payment and future royalties on product sales. Either party may
terminate this agreement upon a material breach which is not cured within 60
days of written notice of such breach.
NOTE I - COMMITMENTS
The Company leases its office and research facilities under the terms
of an agreement, which expires July 2000. The agreement contains an option to
extend the lease for an additional five-year period. Under the terms of this
lease, the Company pays the property taxes, insurance, maintenance, and expenses
related to the leased property. Rent expense relating to this lease was
approximately $1.3 million in the year ended December 31, 1998 and approximately
$1.1 million in each of the years ended December 31, 1997 and 1996.
In June 1998, the Company entered into an agreement with a third party
to sub-lease approximately half of its office and laboratory facilities. Under
the terms of the sub-lease agreement, which expires in July 2000, the sub-lessee
pays a pro-rata amount of the insurance, maintenance, utilities and other
operating expenses relating to the facilities in addition to a minimum base rent
amount. Offsetting, in part, rent expense in 1998, the Company received $392,000
in minimum sub-lease rentals pursuant to this agreement.
Minimum future obligations and rentals under the terms of the facilities lease
and sub-lease agreement are (in thousands):
Future Future
Minimum Lease Minimum
Obligations Rentals
------------- -------
1999 $1,129 $ 864
2000 658 504
====== =======
Total $1,787 $ 1,368
====== =======
In connection primarily with the Company's guarantee of the obligations
of its majority-owned subsidiary, CNPI (see Note H), the Company has total
non-cancelable commitments of approximately $700,000 at December 31, 1998.
F-15
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 19, 1999 CAMBRIDGE NEUROSCIENCE, INC.
By: /s/ HARRY W. WILCOX
------------------------------------------
Harry W. Wilcox, III
President and Chief Executive Officer
By: /s/ GLENN A. SHANE
------------------------------------------
Glenn A. Shane
Principal Accounting Officer
POWER OF ATTORNEY
We, the undersigned Directors of Cambridge NeuroScience, Inc., hereby
severally constitute and appoint Robert N. McBurney, Harry W. Wilcox, III and
William T. Whelan and each of them singly, our true and lawful
attorneys-in-fact, with full power to them and each of them to sign for us, in
our names and in the capacity indicated below, the Annual Report on Form 10-K of
Cambridge NeuroScience, Inc., for fiscal year 1998, and any and all amendments
thereto, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission hereby
ratifying and confirming all that each of said attorneys-in-fact may lawfully do
or cause to be done by virtue hereof.
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.
WITNESS our hands on the dates set forth below:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ HARRY W. WILCOX President, Principal March 19, 1999
- -------------------------- Executive Officer and Director
Harry W. Wilcox, III
/s/ NANCY S. AMER Director March 19, 1999
- --------------------------
Nancy S. Amer
/s/ BURKHARD BLANK Director March 19, 1999
- --------------------------
Burkhard Blank
/s/ Ira A. Jackson
- -------------------------- Director March 19, 1999
Ira A. Jackson
/s/ JOSEPH B. MARTIN Director March 19, 1999
- --------------------------
Joseph B. Martin
/s/ PAUL C. O'BRIEN Director March 19, 1999
- --------------------------
Paul C. O'Brien
48
49
EXHIBIT INDEX
NUMBER DESCRIPTION
- ------ -----------
3.1 Restated Certificate of Incorporation of Registrant. Filed as Exhibit
4.1 to Registration Statement on Form S-8, File No. 33-42933, and
incorporated herein by reference.
3.3 By-laws of Registrant. Filed as Exhibit 4.2 to Registration Statement
on Form S-8, File No. 33-42933, and incorporated herein by reference.
4.1 Specimen Stock Certificate for Common Stock, $.001 par value. Filed as
Exhibit 4.1 to Registration Statement on Form S-1, File No. 33-40078,
and incorporated herein by reference.
10.1 Stockholders' Agreement dated December 29, 1988 among the Company and
certain investors, as amended by Waiver and Consent dated as of
February 5, 1991. Filed as Exhibit 10.3 to Registration Statement on
Form S-1, File No. 33-40078, and incorporated herein by reference.
10.2 Scientific Advisor Agreement dated September 10, 1986 and amendment
dated December 6, 1986 between the Company and Dr. Joseph Martin.
Filed as Exhibit 10.5 to Registration Statement on Form S-1, File No.
33-40078, and incorporated herein by reference.
10.3 Form of Stockholders' Agreement dated March 19, 1987 among the Company
and certain stockholders. Filed as Exhibit 10.6 to Registration
Statement on Form S-1, File No. 33-40078, and incorporated herein by
reference.
10.4 Form of Restricted Stock Purchase Agreement with a certain Director
and executive officers. Filed as Exhibit 10.8 to Registration
Statement on Form S-1, File No. 33-40078, and incorporated herein by
reference.
10.5 Common Stock Purchase Warrant dated February 15, 1991 with Aeneas
Venture Corporation. Filed as Exhibit 10.9 to Registration Statement
on Form S-1, File No. 33-40078, and incorporated herein by reference.
10.6 Form of Waiver, Consent and Agreement dated as of April 22, 1991
between the Company and certain investors. Filed as Exhibit 10.10 to
Registration Statement on Form S-1, File No. 33-40078, and
incorporated herein by reference.
10.9* Letter Agreement dated June 5, 1990 between the Company and Elkan R.
Gamzu, Ph.D. Filed as Exhibit 10.13 to Registration Statement on Form
S-1, File No. 33-40078, and incorporated herein by reference.
10.11* 1991 Equity Incentive Plan, as amended. Filed as Exhibit 99.1 to the
Registration Statement on Form S-8, File No. 333-05431, as filed with
the Commission on June 7, 1996, and incorporated herein by reference.
10.12* 1992 Director Stock Option Plan, as amended. Filed as exhibit 10.12 to
the Annual Report on Form 10-K for the period ended December 31, 1997,
as filed with the Commission on March 30, 1998, and incorporated
herein by reference.
10.13 Lease for One Kendall Square dated July 16, 1992 between the Company
and the Trustees of Old Kendall Realty Trust and addendum dated as of
September 22, 1992 (the "Lease"). Filed as Exhibit 10.13 to the Annual
Report on Form 10-K for the period ended December 31, 1992, as filed
with the Commission on March 28, 1993, and incorporated herein by
reference. Addendum dated September 22, 1993, filed as Exhibit 10.13 to
the Annual Report on Form 10-K for the period ended December 31, 1993,
as filed with the Commission on February 14, 1994, and incorporated
herein by reference. Addendum dated March 11, 1996, as filed with the
Commission on March 24, 1997, and incorporated herein by reference.
Addendum dated June 17, 1997, filed as Exhibit 10.13 to the Annual
Report on Form 10-K for the period ended December 31, 1997, as filed
with the Commission on March 30, 1998 and incorporated herein by
reference.
49
50
10.15* Form of Indemnification agreement between the Company and Directors and
executive officers. Filed as Exhibit 10.15 to the Annual Report on Form
10-K for the period ended December 31, 1992, as filed with the
Commission on March 28, 1993, and incorporated herein by reference.
10.16+ Stock Purchase Agreement dated as of March 21, 1995 between the Company
and Boehringer Ingelheim International GmbH. Filed as Exhibit 10.16 to
the Annual Report on Form 10-K for the period ended December 31, 1994,
as filed with the Commission on March 31, 1995, and incorporated herein
by reference.
10.17+ License Agreement dated as of March 21, 1995 between the Company and
Boehringer Ingelheim International GmbH. Filed as Exhibit 10.17 to the
Annual Report on Form 10-K for the period ended December 31, 1994, as
filed with the Commission on March 31, 1995, and incorporated herein by
reference.
10.18+ Amendment to Stock Purchase Agreement and License Agreement between the
Company and Boehringer Ingelheim International GmbH dated as of August
19, 1996. Filed as Exhibit 99.4 to Amendment No. 1 to the Current
Report on Form 8-K/A dated August 19, 1996, as filed with the
Commission on January 29, 1997, and incorporated herein by reference.
10.19+ Collaborative Research, Development and Marketing Agreement dated as of
November 20, 1996 between the Company and Vision Pharmaceuticals L.P.
Filed as Exhibit 99.1 to Amendment No. 1 to the Current Report on Form
8-K/A dated August 19, 1996, as filed with the Commission on January
29, 1997, and incorporated herein by reference.
10.2+ Stock Purchase Agreement dated as of November 20, 1996 between the
Company and Vision Pharmaceuticals L.P. Filed as Exhibit 99.2 to
Amendment No. 1 to the Current Report on Form 8-K/A dated August 19,
1996, as filed with the Commission on January 29, 1997, and
incorporated herein by reference.
10.21+ Credit Agreement dated as of November 20, 1996 between the Company and
Vision Pharmaceuticals L.P. Filed as Exhibit 99.3 to Amendment No. 1
to the Current Report on Form 8-K/A dated August 19, 1996, as filed
with the Commission on January 29, 1997, and incorporated herein by
reference.
10.22+ Sponsored Research and Collaborative Agreement dated as of December 23,
1996 between Cambridge NeuroScience Partners, Inc. and The J. David
Gladstone Institutes. Filed as Exhibit 99.1 to Amendment No. 1 to the
Current Report on Form 8-K/A dated December 23, 1996, as filed with the
Commission on January 29, 1997, and incorporated herein by reference.
10.23+ Option Agreement dated as of December 23, 1996 by and among The
Regents of the University of California, Cambridge NeuroScience
Partners, Inc., and the Company. Filed as Exhibit 99.2 to Amendment
No. 1 to the Current Report on Form 8-K/A dated December 23, 1996, as
filed with the Commission on January 29, 1997, and incorporated herein
by reference.
10.24+ Stockholders' Rights Agreement dated as of December 23, 1996 by and
among the Company, Cambridge NeuroScience Partners, Inc., The J. David
Gladstone Institutes and The Regents of the University of California.
Filed as Exhibit 99.3 to Amendment No. 1 to the Current Report on Form
8-K/A dated December 23, 1996, as filed with the Commission on January
29, 1997, and incorporated herein by reference.
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10.25* Compensatory arrangement with certain executive officers and other
members of management. Filed as Exhibit 10.25 to the Annual Report on
Form 10-K for the period ended December 31, 1997, filed with the
Commission on March 30, 1998 and incorporated herein by reference.
10.26 Termination agreement, dated November 4, 1998, between the Company and
Boehringer Ingelheim International, GmbH. Filed as exhibit 10.28 to the
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998,
as filed with the Commission on November 12, 1998, and incorporated
herein by reference.
10.27+ Research Collaboration and License Agreement dated as of December 23,
1998 between the Company and Bayer AG. Filed herewith.
21.1 Subsidiaries of the Company. Filed herewith.
23.1 Consent of Ernst & Young LLP, independent auditors. Filed herewith.
24.1 Powers of Attorney. Contained on signature page hereto.
27.1 Financial Data Schedule for the year ended December 31, 1998 (for
electronic filing only).
99.1 Important Factors Regarding Forward-Looking Statements. Filed herewith.
___________________
* Identifies a management contract or compensatory plan or agreement in
which an executive officer or Director of the Company participates.
+ Confidential information contained in this Exhibit has been omitted and
filed separately with the Securities and Exchange Commission.
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