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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For The Fiscal Year Ended December 31, 2000
Commission file number 000-31719
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POZEN(R) Inc.
(Exact name of registrant as specified in its charter)
Delaware 62-1657552
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6330 Quadrangle Drive, Suite 240
Chapel Hill, NC 27514
(Address of principal executive offices, including zip code)
(919) 490-0012
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(g) of the Act:
Title of each Class Name of each Exchange on which
Common Stock registered
The Nasdaq National Market
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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 POZEN Inc. common stock held by nonaffiliates
of POZEN Inc. on March 7, 2001 was approximately $229,533,750. As of March 7,
2001, there were outstanding 27,872,276 shares of common stock.
Documents Incorporated By Reference: Portions of the POZEN Inc. definitive
proxy statement to be filed pursuant to Regulation 14A within 120 days after
the end of the fiscal year are incorporated by reference in Part III of this
Form 10-K and certain documents are incorporated by reference into Part IV.
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TABLE OF CONTENTS
Page
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Forward-Looking Information.................................. 1
PART I BUSINESS
Item 1. Business..................................................... 1
Item 2. Properties................................................... 16
Item 3. Legal Proceedings............................................ 17
Item 4. Submission of Matters to a Vote of Security Holders.......... 17
PART II SECURITIES AND FINANCIAL INFORMATION
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters...................................................... 17
Item 6. Selected Financial Data...................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation.................................... 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk... 30
Item 8. Financial Statements and Supplementary Data.................. 30
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 30
PART III MANAGEMENT AND SECURITY HOLDERS
Item 10. Directors and Executive Officers of the Registrant........... 30
Item 11. Executive Compensation....................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 30
Item 13. Certain Relationships and Related Transactions............... 31
PART IV ADDITIONAL EXHIBITS, SCHEDULES AND REPORTS
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.......................................................... 31
Signatures................................................... 33
Index to Financial Statements and Financial Statement
Schedules.................................................... F-2
i
Forward-Looking Information
This report includes "forward-looking statements" within the meaning of the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include, but are not limited to, statements
about our plans, objectives, representations and contentions and are not
historical facts and typically are identified by use of terms such as "may,"
"will," "should," "could," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "potential," "continue" and similar words, although some
forward-looking statements are expressed differently. You should be aware that
the forward-looking statements included herein represent management's current
judgment and expectations, but our actual results, events and performance could
differ materially from those in the forward-looking statements. The forward-
looking statements are subject to a number of risks and uncertainties,
including, but not limited to, our failure to successfully commercialize MT 100
and our other products; additional costs and delays in the development of MT
100 and our other products; our inability to enter into or maintain, and the
risks resulting from our dependence upon, collaboration or contractual
arrangements necessary for the development, manufacture, commercialization,
marketing, sales and distribution of our products; competitive factors; our
inability to protect our patents or proprietary rights and obtain necessary
rights to third party patents and intellectual property to operate our
business; our inability to operate our business without infringing the patents
and proprietary rights of others; general economic conditions; the failure of
our products to gain market acceptance; our inability to obtain any additional
required financing; technological changes; government regulation; changes in
industry practice; and one-time events. These risks and uncertainties are
discussed below in the section entitled "Item 7--Management's Discussion and
Analysis of Financial Condition and Results of Operations." We do not intend to
update any of these factors or to publicly announce the results of any
revisions to these forward-looking statements.
PART I
Item 1. Business
Overview
We are a commercially focused pharmaceutical development company committed
to building a portfolio of products in targeted therapeutic areas through a
combination of innovation and in-licensing. Our initial therapeutic focus is on
the migraine market. We have completed all five of our planned Phase 3 clinical
trials for our lead product candidate, MT 100, which we are developing as an
oral first-line therapy for the treatment of migraine. We intend to initiate a
Phase 3 trial during the second half of 2001 for MT 300, which we are
developing as an injectable treatment for severe migraine attacks. Our migraine
portfolio also contains a migraine prophylactic agent, MT 500, set to enter a
Phase 2 clinical trial in the second half of 2001, and one additional product
candidate for the treatment of acute migraine, MT 400, for which we recently
completed a Phase 2 clinical trial.
We intend to leverage our pharmaceutical product development expertise by
acquiring or in-licensing and developing commercially attractive products in
several areas outside of migraine. In addition, we plan to enter into
collaborations with established pharmaceutical companies to commercialize and
manufacture our product candidates.
1
Business Strategy
Our goal is to become a leading pharmaceutical development company. The
principal elements of our strategy are to:
Develop and commercialize our portfolio of migraine product candidates
A substantial portion of our efforts over the next few years will be devoted
to the further development, approval and commercialization of our portfolio of
migraine product candidates. We intend to conduct clinical trials with our four
migraine product candidates in order to obtain marketing approvals that will
allow us to provide therapeutic alternatives for different types of migraine
patients. We intend to form collaborations with established pharmaceutical
companies for the worldwide commercialization of our migraine product
candidates.
Build a product pipeline through innovation, in-licensing and acquisition
We intend to build our product pipeline through innovation, in-licensing and
acquisition of select proprietary product candidates. We will focus primarily
on therapeutic areas with significant commercial potential in which members of
our management team have development expertise. These areas of expertise
include gastrointestinal disease, respiratory disease, infectious disease and
oncology. We plan to develop novel products that exhibit distinct advantages
over currently marketed products, as well as innovative combinations of
products in convenient, therapeutically appropriate formulations. We plan to
identify and pursue product candidates generally with the following attributes:
. significant commercial potential;
. sound scientific basis;
. established preclinical safety and efficacy data at a minimum;
. readily measurable clinical endpoints previously accepted by the Food
and Drug Administration ("FDA");
. development timelines generally under four years; and
. cost-effective development programs.
We believe that pursuing product candidates with these attributes will
enable us to develop commercially viable product candidates with lower
development and financial risk than the traditional method of discovering,
developing and commercializing pharmaceutical drugs.
One of the strategies we will use to gain access to product candidates is to
employ our license back option model. We believe that this model differs from a
traditional in-licensing arrangement in that it affords us improved access to
commercially attractive compounds, by providing the licensor with an option to
license back the product candidate at various stages of development and on set
terms and conditions. We used this model to in-license our MT 500 product
candidate from F. Hoffman-La Roche, Ltd. and Syntex (collectively, "Roche").
Form collaborations for the commercialization of our product candidates
We plan to establish collaborative relationships with pharmaceutical
companies for the commercialization of our existing and future product
candidates. In general, we intend to license our product candidates to
pharmaceutical companies for commercialization once we have established
substantial evidence of safety and efficacy, at which point we believe that we
can obtain favorable economic terms. In addition, under our license back option
model, if the licensor chooses not to license back the rights to the product
candidate, we may pursue a collaboration with another third party for
commercialization of the product or commercialize the product ourselves.
2
Leverage development efforts through strategic outsourcing
While maintaining overall control of the planning, development and
regulatory processes, we seek to enter into strategic outsourcing relationships
to develop and commercialize our product candidates in a cost-effective manner.
We have contracted and plan to contract with third parties for product
candidate testing, development and manufacturing.
Products Under Development
All of our migraine product candidates are being developed for the acute, or
episodic, treatment of migraine, except for MT 500, which is being developed as
a migraine prophylactic. If approved for commercial sale, all of the products
in our migraine portfolio will be sold by prescription. The following chart
sets forth information regarding our ongoing and currently planned clinical
studies and some of our completed clinical studies, including those completed
in clinic:
Product Candidate Indication Trial Description Status
----------------- ---------- ----------------- ------
MT 100 Migraine MT 100 vs. components Phase 3 complete
Oral tablet First-line therapy Multiple dosing regimen Phase 3 complete
study
vs. placebo
Long-term safety study Phase 3 complete
Pilot study-- Phase 3 complete
MT 100 vs. Imitrex and
placebo
MT 100 vs. components Phase 3 complete
Pharmacokinetic trials Phase 1 complete
MT 300 Migraine Dose response study-- Phase 2 complete
Injection Severe attacks MT 300 vs. placebo
MT 300 vs. placebo Phase 3 planned
MT 300 vs. placebo Phase 3 planned
Pharmacokinetic trials Phase 1 complete
MT 500 Migraine Single and repeat dose Phase 1 complete
Oral tablet Prophylaxis tolerance study
Extended tolerance study Phase 1 planned
MT 500 vs. placebo Phase 2 planned
MT 400 Migraine Pilot study-- Phase 2 complete
Oral tablet First-line therapy MT 400 vs. component
MT 400 vs. component and
placebo Phase 2 complete
Migraine Market
Migraine is characterized by recurring attacks of headache, often associated
with visual, auditory or gastrointestinal disturbances. While the precise
mechanism of migraine is unknown, researchers believe migraine attacks are
caused by acute inflammation surrounding selected blood vessels in the head.
The average migraine sufferer experiences the first attack during the early
teen years, and the attacks generally continue throughout adulthood. We
estimate that global sales of prescription pharmaceuticals for the treatment of
migraine will exceed $2 billion in 2001.
3
Not all migraine attacks are of the same severity. Consequently, a variety
of oral, injectable and intranasal therapies are used to treat different types
of migraine attacks. Many patients use a personal, individually developed,
step-care approach to treat their attacks. Attacks are often treated initially
with simple over-the-counter analgesics, particularly if the patient is unable
to determine if the attack is a migraine or some other type of headache. If
over-the-counter remedies are unsuccessful, patients often turn to more potent
prescription drugs, including narcotics, analgesic/narcotic drug combinations
and triptans.
Currently, we are aware of no narcotics approved specifically for the
treatment of migraine. However, narcotics are prescribed outside their approved
indications to treat severe migraine attacks because of their ability to mask
migraine headache pain. The use of narcotics for the treatment of migraine has
been limited because they do not address the non-pain symptoms of migraine such
as nausea and vomiting and can cause side effects such as drowsiness, dizziness
and constipation, and because of their potential to cause addiction. In
addition, analgesics such as acetaminophen and aspirin are generally used to
treat only mild migraine attacks, and, similarly to narcotics, do not address
the non-pain symptoms of migraines such as nausea and vomiting.
Triptans are the family of drugs most commonly prescribed for the treatment
of migraine attacks. Triptans have demonstrated the ability to treat migraines
by constricting blood vessels in the brain. Although triptans can be effective
in treating migraine symptoms, they are often associated with significant side
effects and other disadvantages that include:
. the occurrence of cardiovascular related events, including chest
pain/discomfort, throat discomfort and warm/cold sensations;
. the potential for serious cardiovascular events, including death;
. difficulty in producing sustained pain relief with a single dose in a
majority of patients;
. the occurrence of nausea and dizziness during treatment; and
. the need for cardiovascular evaluations from physicians before initially
prescribing triptans to patients with cardiovascular disease risk
factors.
Despite these shortcomings, in 2000, according to IMS Health's Retail and
Provider Perspective ("IMS"), total triptan sales in the U.S. were
approximately $1.3 billion. Imitrex(R), marketed by Glaxo Wellcome, is the
dominant triptan product, with, according to IMS, total U.S. sales of
approximately $878 million in 2000. There are currently three triptan
formulations commercially available: oral, intranasal and injectable. Oral
triptans are often prescribed as a first-line treatment for migraine pain.
Intranasal triptans are often prescribed for patients requiring faster relief
than oral drugs can provide or for patients who cannot take oral medications.
For the most severe attacks, patients sometimes use an injectable form of a
triptan.
Because of the problems associated with triptans, narcotics and analgesics,
we believe that an opportunity exists in all migraine therapeutic segments for
products designed to deliver an improved onset and duration of relief with
reduced side effects, especially those related to cardiovascular events.
MT 100
MT 100 is being developed as an oral first-line therapy for the treatment of
migraine pain and associated symptoms. Oral therapies are currently the most
prevalent form of migraine therapy. According to IMS, existing oral therapies
accounted for approximately $1.0 billion in sales in the U.S. in 2000, of which
Imitrex's oral dosage form accounted for approximately $626 million.
MT 100 is a proprietary formulation that combines metoclopramide
hydrochloride, a commercially available agent that relieves nausea and enhances
gastric emptying, and naproxen sodium, a commercially available anti-
inflammatory and analgesic agent. MT 100 is designed to release a set amount of
metoclopramide hydrochloride initially, followed by a set amount of naproxen
sodium. The initial release of metoclopramide is
4
intended to accelerate the absorption of naproxen and to reduce nausea, which
can be associated with migraines. Results from our pharmacokinetic study in
normal volunteers indicated that peak naproxen blood levels were approximately
15% higher and were achieved approximately 30 minutes faster following
administration of MT 100 than with naproxen sodium alone. Based on this study,
we believe that MT 100 will enhance the speed, effectiveness and duration of
migraine symptom relief provided by each component alone, with fewer adverse
side effects than other migraine therapies.
MT 100 Clinical Trials
Generally, we must demonstrate the efficacy and safety of our product
candidates, including MT 100, before seeking marketing approval from the FDA.
To demonstrate efficacy of a combination product candidate like MT 100, which
combines two previously approved component products, we must demonstrate in
clinical trials that it is both superior to each of its individual components,
and more effective in treating all symptoms of migraine when compared to a
placebo. Generally, the FDA requires two successful clinical trials to
demonstrate that the product candidate meets each of these standards for
approval.
We have completed two Phase 2 clinical trials and five Phase 3 clinical
trials for MT 100. To date, more than 6,000 patients or volunteers have
participated in Phase 2 and Phase 3 clinical trials with MT 100, more than
2,500 of whom have received some form of MT 100. Although we have completed all
of the clinical trials that we planned to conduct prior to submitting a new
drug application ("NDA"), we may choose to conduct market support studies in
the future.
In August 1998, we completed a randomized, double-blind, placebo controlled,
Phase 2 clinical trial designed to evaluate different dose combinations of
metoclopramide hydrochloride and naproxen sodium in the treatment of migraine.
A randomized, double-blind, placebo controlled trial is one in which the
treatment or placebo is randomly assigned (randomized), neither the
investigator nor the patient is aware of whether the treatment or placebo is
being administered (double-blind), and is a comparison of the efficacy of the
drug candidate to placebo (placebo controlled). The trial involved 514 patients
at 34 medical centers in the United States. Patients treated in this study
remained in the physician's office for two hours after dosing and then were
discharged to record any change in symptoms for the remainder of the 24-hour
study period. The results of the study indicated that the optimal dose of MT
100 would include 16mg of metoclopramide hydrochloride and 500mg of naproxen
sodium. While the study was not designed to demonstrate differences between the
MT 100 combination and its components, preliminary evidence suggested that MT
100 might represent an improvement over its components on a sustained response
basis.
Sustained response is a clinical measure used to evaluate both speed of
onset and duration of migraine pain relief provided by the drug being studied.
Sustained response is defined as:
. the reduction of moderate or severe pain at baseline to mild or no pain
without the use of rescue medication at two hours; and
. no return to either moderate or severe pain, or the use of rescue
medication, over the next 22 hours.
In September 1998, we completed a second Phase 2 clinical trial involving
two different doses of MT 100. The 181 patient trial was conducted at 19
medical centers in Germany and was similar in design to the Phase 2 clinical
trial conducted in the United States. While the study was not designed to
distinguish efficacy differences between doses, a dose-response relationship
was observed both on measures of acute relief and sustained response.
In December 1999, we completed a 1,064 patient Phase 3 clinical trial. This
clinical trial was conducted at 37 medical centers in the United States and was
designed to compare the safety and efficacy of MT 100 with its individual
components, naproxen sodium and metoclopramide hydrochloride, for the treatment
of migraine. In contrast to the design of our Phase 2 clinical trials in which
patients were treated at the physician's office, eligible patients in this
Phase 3 component clinical trial were provided a sealed packet of study
medication and a diary card. At the time of their next migraine attack,
patients called their physician and were instructed to
5
take the study medication if their headache pain was moderate or severe, and to
record migraine symptoms for 24 hours after ingesting the medication.
The primary efficacy endpoint for this Phase 3 clinical trial comparing the
combination with the components was sustained response. The primary endpoint is
the outcome against which the success of the product candidate in a particular
trial is evaluated. Using the statistical analysis methodology specified in the
trial protocol, MT 100 showed statistically significant superiority over only
one of its two components. However, MT 100 showed statistically significant
superiority over both components when the results of this trial were analyzed
using a statistical test that was a refinement of the statistical analysis
methodology originally specified in the protocol.
The refined statistical analysis of this trial indicated that the percentage
of patients that achieved the primary endpoint of sustained response using MT
100 was a statistically significant 19% greater than the percentage of patients
who achieved sustained response using naproxen sodium, and a statistically
significant 81% greater than the percentage of those using metoclopramide
hydrochloride. There was no statistically significant difference in the
occurrence of adverse events for MT 100 relative to naproxen sodium or
metoclopramide hydrochloride. No single adverse event from MT 100 occurred in
more than 2.4% of the patient population. Adverse events included drowsiness,
diarrhea, abdominal pain, dizziness, infection and nervousness.
Based on our discussions with the FDA, we designed our second Phase 3
clinical trial comparing MT 100 to its components using the same refined
statistical analysis that we used in our initial Phase 3 component clinical
trial. The results of the second trial comparing MT 100 with its components
confirmed the results of the first trial. The sustained response rate for MT
100 was statistically significantly greater than for either naproxen sodium or
metoclopramide hydrochloride. No single adverse event from MT 100 occurred in
more than 7.0% of the patient population. Adverse events included drowsiness,
diarrhea, abdominal pain, dizziness, infection and nervousness.
We believe that we have now successfully completed the two Phase 3 clinical
trials generally required by the FDA to demonstrate that a product candidate,
such as MT 100, is superior to each of its individual components.
In addition to showing a statistically significant increase in patients
achieving sustained response in all of our trials, we are required to
demonstrate in our Phase 3 placebo controlled trials that MT 100 is superior to
placebo for the relief of the other symptoms of migraine to obtain FDA approval
for the entire label that we intend to seek in migraine. These other symptoms
are nausea, sensitivity to light and sensitivity to sound. MT 100 showed
statistically significant superiority to placebo with respect to the relief of
each of these other symptoms in both our Phase 3 multiple dosing trial and our
Phase 3 comparison with Imitrex discussed below.
In October 1999, we initiated and have now completed a Phase 3 open label,
long-term safety trial for MT 100. In an open label, long-term safety trial,
only one treatment is administered (open label) and the trial continues until
at least 300 patients have been treated for at least six months and 100
patients have been treated for at least 12 months (long-term). Migraine
patients in this trial received a supply of MT 100 for use in the treatment of
any migraine attack that occurred. Adverse events were recorded by each
patient. Patients were evaluated every three months and some were treated for
up to 12 months. Over 1,000 patients were recruited into this trial, with over
500 completing six months of treatment and 200 having completed one year of
treatment. We expect to complete the analysis of this trial during the second
quarter of 2001.
In addition, we have completed a Phase 3 multiple dosing trial in which
patients with migraine randomly received either placebo or a single tablet of
MT 100. This 426 patient trial was conducted at 15 clinical centers in the
United States. Those patients who continued to have moderate or severe headache
pain at two hours randomly received a second tablet of either a placebo or MT
100. MT 100 showed statistically significant
6
superiority to placebo in the trial's primary endpoint of two-hour sustained
response rate. Furthermore, within two hours after the initial dosing, MT 100
showed statistically significant superiority to placebo in the trial's
secondary endpoints of reducing pain, relief of nausea, sensitivity to light
and sensitivity to sound. A second dose of MT 100 administered at two hours to
non-responders was no more effective than placebo. No single adverse event
occurred from MT 100 in more than 7.0% of the patient population. Adverse
events included drowsiness, diarrhea, abdominal pain, dizziness, infection and
nervousness.
We recently conducted a 546 patient, double-blind, Phase 3 pilot study
comparing four treatments: placebo, MT 100 one tablet, MT 100 two tablets, and
Imitrex 50mg. Results from this study indicate that all active treatments were
statistically superior to placebo for pain relief at 2 hours and that there
were no statistically significant differences between active treatments. Only
the MT 100 one tablet and MT 100 two tablet groups showed statistically
significant superiority over placebo for all of the secondary endpoints of
relief of nausea, sensitivity to light and sensitivity to sound. In addition,
only the MT 100 one tablet and MT 100 two tablet groups showed statistically
significant superiority over placebo with respect to the efficacy parameter of
sustained response, i.e., pain relief at two hours that is maintained
throughout the next 22 hours. All treatments were generally well tolerated with
no serious adverse events reported. Only in the MT 100 two tablet and Imitrex
treatment groups did the incidence of adverse events occur with a frequency
that exceeded the placebo rate by more than 2%. The most common adverse event
for the MT 100 two tablet group was drowsiness and for the Imitrex group was
pain and tightness in the chest or throat.
Generally, genotoxicity and carcinogenicity testing is required prior to the
approval of most new products. Carcinogenicity studies, which are conducted
with two species of laboratory animals, typically take approximately two and a
half years to complete, although in some instances studies of less than one
year have been accepted. To date, we have conducted four types of studies
designed to assess the potential genotoxicity of MT 100, three of which showed
no indications of genotoxicity. In September 2000, we received the results of
the fourth type of study, a mouse cell study performed in test tubes. The
results of two such mouse cell studies indicate that one or more of the
breakdown products of naproxen sodium cause chromosomal changes under the test
conditions.
Based primarily upon the long history of use of naproxen sodium as well as
the fact that three out of the four types of genotoxicity studies showed no
evidence of genotoxicity, we requested that the FDA waive the requirement that
we complete any animal carcinogenicity studies. In January 2001, we received
notification from the FDA that it would require carcinogenicity testing of MT
100 prior to NDA approval. The FDA has agreed to consult with us on appropriate
models and designs for this testing. While we hope to work with the FDA on a
package of appropriate studies that will allow us to maintain our planned
timetable for submission of the NDA by the end of 2001, if no such package is
feasible or acceptable to the FDA, we believe that our commercialization of MT
100 in the United States will be delayed.
MT 300
MT 300 is being developed to provide long-lasting pain relief for patients
needing a convenient injectable therapy for severe migraine, with a reduced
side effect profile compared to existing injectable products. Currently,
patients often use an injectable form of triptans or other drugs such as
dihydroergotamine mesylate ("DHE") to alleviate the symptoms of the most severe
migraine attacks quickly and effectively. However, many patients are unable to
tolerate the injections, especially those sensitive to the vascular side
effects associated with injectable Imitrex. Nevertheless, according to IMS,
injectable migraine therapeutics represented approximately $182 million in 2000
U.S. sales.
MT 300 is a proprietary formulation of injectable DHE that we intend to
package in an easy-to-use, sterile, pre-filled syringe that can be administered
alone or with an auto-injector. Patients in our future clinical trials will be
treated with MT 300 in pre-filled syringes.
7
Injectable DHE is currently approved for use in the treatment of migraine
and cluster headache episodes. Based upon recently published clinical trial
results, injectable DHE has been shown to provide comparable efficacy to
injectable Imitrex three hours after administration. Importantly, only 18% of
the injectable DHE patients experienced headache recurrence within 24 hours as
compared to 45% of the injectable Imitrex patients. In addition, injectable
Imitrex's acute vascular side effects were reported by 23% of the patients
receiving injectable Imitrex, but by only 2% of the patients receiving
injectable DHE.
MT 300 Clinical Trials
In November 1998, we completed a placebo controlled, dose-response Phase 2
clinical trial of MT 300. The 291 patient trial was conducted at 21 medical
centers in the United States. In this trial, eligible patients with an acute
migraine attack were treated in the physician's office, monitored for two hours
after the dose, and then discharged to record their symptoms on a diary card
for the remainder of the 24-hour study period. Participants in the study were
divided into four dosing groups, with three receiving varying doses of MT 300
and one receiving placebo. A total of 291 patients received a single
subcutaneous dose of MT 300 or placebo in this study. In this clinical trial,
MT 300 demonstrated a statistically significant improvement in the percentage
of patients achieving four-hour response rates when compared to placebo and
demonstrated a statistically significantly lower use of rescue medication. MT
300 was well tolerated and no serious adverse events were reported. The most
commonly reported side effect was nausea, reported by 4% of patients in the
high dose group. The four-hour sustained response rate used in this trial
differs from the sustained response measure used thus far in our clinical
trials of MT 100 and MT 400, in that the four-hour rate measures pain reduction
after four hours, without return to moderate or severe pain or rescue
medication over the next 20 hours.
We plan to initiate a placebo controlled, Phase 3 clinical trial of a
single, subcutaneous dose of MT 300 in patients with moderate to severe
migraine during the third quarter of 2001 and a second trial in early 2002.
Based upon a recent discussion with the FDA, we expect to submit an NDA for MT
300 in the second half of 2002.
MT 500
MT 500 is being developed as an orally administered drug for the
prophylactic treatment of migraine pain. The prophylaxis market is currently
composed of drugs such as anticonvulsants, anti-hypertensives, such as beta-
blockers, and anti-depressants, which were developed primarily for uses outside
of migraine. Many have side effects including fatigue, sexual dysfunction,
weight gain, insomnia and liver toxicity. Studies of the migraine patient
population indicate that approximately 25% of migraine patients experience four
or more migraine attacks per month. We believe that these patients may benefit
from the prophylactic treatment of their migraine attacks.
In September 1999, utilizing our license back option model, we obtained an
exclusive worldwide license for MT 500, a novel serotonin (5-HT\\2\\B) receptor
antagonist discovered by Roche. Receptors are substances in the body that
interact with drugs to produce certain bodily functions. 5-HT\\2\\B receptors
are believed to be activated by a mobilization of serotonin, provoking
inflammation of the nerves in cerebral blood vessels and leading ultimately to
the pain and associated symptoms of migraine. We believe that MT 500 acts as an
antagonist, or blocker, of the 5-HT\\2\\B receptor, and is the first orally
administered, highly selective 5-HT\\2\\B receptor antagonist being developed
specifically for the prophylactic treatment of migraine in patients suffering
frequent and debilitating attacks. By selectively blocking the 5-HT\\2\\B
receptor, MT 500 may prevent or reduce the occurrence of migraine attacks
without producing the unwanted side effects associated with currently used
prophylactic migraine therapies.
8
MT 500 Studies
MT 500 has been evaluated in five Phase 1 clinical trials and one Phase 2
clinical trial conducted by Roche. The Phase 2 trial was for an indication
unrelated to migraine. In all studies, MT 500 was generally well tolerated.
There were no serious adverse events reported, and side effects were generally
mild or moderate.
We have performed four 13-week toxicology studies with MT 500, two in rats
and two in dogs. These studies were intended to support a proof-of-concept
study in migraine patients. Both studies administered a twice-daily dosing
regimen of MT 500 using oleic acid as a delivery medium. In the first dog
study, we found unexpected changes in the liver that were not observed in the
studies performed by Roche using a different delivery medium and a once-daily
dosing regimen. We have completed an additional study in dogs designed to
determine whether the liver changes were due to the delivery medium, the drug
or the dosing regimen. In this repeat study, there was no evidence of liver
injury with MT 500. The results in this study were consistent with the studies
performed by Roche.
We intend to initiate a Phase 1 tolerance study of MT 500 in the first half
of 2001 and a Phase 2 proof-of-concept study in migraine prophylaxis in the
second half of 2001.
MT 400
We are developing MT 400 as a co-active migraine therapy, which combines the
activity of a commercially approved triptan drug with that of a commercially
approved long-acting, non-steroidal, anti-inflammatory drug. We believe that
the effective treatment of migraine requires targeted, specific and
complementary co-active therapy to achieve maximum therapeutic benefit with the
fewest side effects. We believe that MT 400 will offer greater sustained pain
response than either drug component by itself. In addition, since lower doses
of the triptan components could be used in certain MT 400 formulations relative
to the use of triptans by themselves, we believe that the potential risks of
triptan-related side effects may also be reduced with MT 400.
MT 400 represents a commercially attractive opportunity to create multiple
products based on different combinations of triptans and long acting, non-
steroidal, anti-inflammatory drugs. We believe that these MT 400 products will
be attractive to pharmaceutical companies due to their potential to expand the
reach of the existing triptan brands to patients with less severe migraine,
offer maximum oral therapy for severe attacks and potentially expand the
proprietary life of most triptan brands.
MT 400 Clinical Trials
In 1998, we completed an open label pilot study for MT 400. In this study,
MT 400 had a 74% higher sustained response rate compared to use of the triptan
by itself. In October 2000, the FDA approved our IND application for a Phase 2
clinical trial of MT 400. We commenced a Phase 2 clinical trial of MT 400 in
December 2000 that we recently completed. In order to commercialize MT 400
prior to the expiration of any triptan patent, we will need to acquire the
rights to a triptan.
Product In-Licensing
In order to continue to expand our product pipeline, we intend to complement
our internal product innovations by in-licensing additional product candidates.
Our in-licensing strategy to obtain new product candidates will include using
our license back option model, which we believe provides us with improved
access to promising compounds. Specifically, the major elements of our license
back option model are:
. We in-license a product candidate at the late preclinical or Phase 1
development stage.
. We grant the licensor an option to license back the product candidate at
a later stage of development.
9
. We assume all development and funding responsibility.
. If the licensor exercises its option to license back the product
candidate, we receive certain milestone payments and a royalty on sales
of the product candidate.
. If the licensor foregoes its option, we have the right to license the
product candidate to a third party or commercialize the product
ourselves, with sublicense royalties in both cases being paid to the
original licensor.
. All financial terms are set when the original license agreement is
signed.
We believe that our license back option model offers advantages to both us
and the licensor and will be an effective tool in expanding our product
portfolio successfully. The advantages of this model for the licensor include:
. realization of value from product candidates whose development would
otherwise be delayed or never undertaken;
. delayed commitment of resources and capital until the product
candidate's technical risk and commercial potential are better defined;
and
. utilization of our product development and regulatory expertise.
We believe that the advantages of our license back option model for us
include:
. improving our access to attractive product candidates;
. limiting our financial exposure to product candidate development
expenses due to low upfront costs compared to traditional in-licensing
structures; and
. in-licensing product candidates with substantial preclinical development
risk removed.
Our success under this license back option model is dependent upon the
successful development of the product licensed and the extent to which the
milestone and royalty payments we receive from the licensor exceed our
development expenses associated with the product candidate.
We used our license back option model to acquire the migraine prophylactic
agent, MT 500, from Roche in September 1999. In exchange for an upfront
payment, Roche granted us a royalty-bearing, exclusive, worldwide license to
develop and commercialize MT 500. Under the terms of the agreement, Roche can
exercise its right to license back MT 500 following completion of either the
Phase 2 or Phase 3 clinical trials in exchange for set milestone payments and
royalties on future sales of MT 500. If Roche does not exercise either of its
options to license back MT 500, we have the right to sublicense to a third
party the commercialization rights for MT 500 or to commercialize the product
ourselves in exchange for fixed royalties payable to Roche. If we sublicense MT
500, we are obligated to pay Roche a set percentage of any milestone payments
and royalties we receive from the third party sublicensees. The royalty
obligations of either party expire on a country-by-country basis upon the
earlier of patent expiration or the tenth anniversary of first sale in a
country.
The license agreement provides us with worldwide exclusive rights to
develop, manufacture and commercialize MT 500 under patents owned by Roche, as
well as exclusive worldwide rights to know-how and data which had been
generated by Roche prior to entering into the agreement. As part of the
agreement, Roche provided us with an amount of MT 500 that we believe will be
sufficient to carry out the initial stages of the development program. We are
obligated to advance MT 500 through the clinical development process and to
bear the full expense associated with the development program. Either Roche or
we may terminate the agreement upon a material breach by the other party that
is not cured within 90 days, in which case the terminating party will obtain
all rights to MT 500. Additionally, until Roche has exercised one of its
options to license back MT 500, we may terminate the agreement for any reason
upon 180 days' notice, in which case Roche will obtain all rights to MT 500.
10
Sales and Marketing
We currently have no sales or distribution capabilities. We currently intend
to commercialize our products through other pharmaceutical companies in
exchange for upfront and milestone payments, proceeds from the manufacturing of
drug substance and royalties from sales. In the future, we may retain the right
to co-promote our products.
Manufacturing
We currently have no manufacturing capability and we do not intend to
establish internal manufacturing capabilities. To date, we have entered into
arrangements with third party manufacturers for the supply of formulated and
packaged MT 100 and MT 500 clinical trial materials. Use of third party
manufacturing enables us to focus on our clinical development strengths,
minimize fixed costs and capital expenditures and gain access to advanced
manufacturing process capabilities and expertise. We also intend to enter into
agreements with third party manufacturers for the commercial scale
manufacturing of our products.
In March 1999, we entered into a Development Agreement with Catalytica
Pharmaceuticals, Inc. ("Catalytica") under which Catalytica has supplied us
with clinical trial materials for all of our MT 100 clinical trials. We
received from Catalytica sufficient clinical trial materials to complete our
planned clinical development program for MT 100. We have the right to terminate
the agreement upon 60 days' notice to Catalytica.
In March 2000, we entered into a Clinical Development and Clinical Supply
Agreement with R.P. Scherer Corporation ("R.P. Scherer") for the exclusive,
worldwide manufacturing of MT 500 for all of our clinical requirements. R.P.
Scherer will, at our request, conduct development and validation studies
combining MT 500 with their softgel delivery technology and manufacture MT 500.
The agreement expires on September 30, 2004, unless extended by the parties. We
have the right to terminate the agreement upon 30 days' notice to R.P. Scherer.
In January 2001, we entered into a Product Development and Clinical Supply
Agreement with Cook Imaging Corporation ("Cook") for the manufacture of MT 300
for use in our clinical studies. Cook will implement a process for
manufacturing MT 300 and, at our request on a project-by-project basis, will
manufacture supplies of MT 300 to our specifications. The agreement has a two-
year term (which may be extended for any additional period required to complete
any projects in process at the end of the term). We have the right to cancel
any project undertaken under the agreement, subject to our payment of certain
of Cook's costs to the date of cancellation and a sliding percentage of the
fees due for the project.
In March 2001, we entered into a Supply Agreement with Catalytica for the
exclusive worldwide manufacturing of MT 100 for commercial sale. At our
request, Catalytica will conduct all manufacturing, testing and packaging of
commercial supplies of MT 100. The initial term of the agreement expires on the
third anniversary of the first commercial sale of MT 100, and automatically
renews for additional two-year terms thereafter. We may terminate the agreement
at the conclusion of any term by providing Catalytica with at least twelve
months' written notice of our intent to do so. Beginning at the conclusion of
the second renewal term (the seventh anniversary of the first commercial sale),
Catalytica may terminate the agreement at the conclusion of any term by
providing us with at least eighteen months' written notice of its intent to do
so.
We believe our current supply of compounds and product candidates, together
with our current suppliers' capacity, should be sufficient to complete both our
ongoing and planned clinical trials.
Competition
Not all migraine attacks are of the same severity. Consequently, a variety
of oral, injectable and intranasal therapies are used to treat different types
of migraine attacks. Attacks are often treated initially with simple over-the-
counter analgesics, particularly if the patient is unable to determine if the
attack is a migraine or some other type of headache. These analgesics include
Excedrin Migraine(R), which is approved for the pain associated with migraine.
If over-the-counter remedies are unsuccessful, patients often turn to more
potent
11
prescription drugs, including triptans. According to IMS, in 2000, total
triptan sales in the U.S. were approximately $1.025 billion. Imitrex, marketed
by Glaxo Wellcome, is the dominant triptan product, with total U.S. sales of
approximately $878 million in 2000, according to IMS.
Narcotics such as codeine and drugs containing analgesic/narcotic
combinations, along with other non-narcotic pain medications, are also used for
the treatment of migraine. If approved, our migraine product candidates will
most likely compete with one or more of the existing migraine therapeutics, as
well as any therapies developed in the future.
The pharmaceutical and biopharmaceutical industries are intensely
competitive and are characterized by rapid technological progress. Certain
pharmaceutical and biopharmaceutical companies and academic and research
organizations currently engage in, or have engaged in, efforts related to the
discovery and development of new medicines for the treatment of migraine
symptoms. Significant levels of research in chemistry and biotechnology occur
in universities and other nonprofit research institutions. These entities have
become increasingly active in seeking patent protection and licensing revenues
for their research results. They also compete with us in recruiting skilled
scientific talent.
Our ability to compete successfully will be based on our ability to create
and maintain scientifically advanced technology, develop proprietary products,
attract and retain scientific personnel, obtain patent or other protection for
our products, obtain required regulatory approvals and manufacture and
successfully market our products either alone or through outside parties. Some
of our competitors have substantially greater financial, research and
development, manufacturing, marketing and human resources and greater
experience in product discovery, development, clinical trial management, FDA
regulatory review, manufacturing and marketing than we do.
Patents and Proprietary Information
We intend to actively seek, when appropriate, protection for our products
and proprietary technology by means of U.S. and foreign patents, trademarks and
contractual arrangements. In addition, we plan to rely upon trade secrets and
contractual agreements to protect certain of our proprietary technology and
products.
We own or have exclusive rights to six issued U.S. patents and three pending
U.S. patent applications. In addition, we presently have pending foreign patent
applications or issued foreign patents relating to MT 100, MT 400 and MT 500.
Applications have been filed under the Patent Cooperation Treaty, or PCT, and
are in the international phase relating to MT 300. There can be no assurance
that our patent applications will issue as patents or, with respect to our
issued patents, that they will provide us with significant protection. The
following provides a general description of our patent portfolio and is not
intended to represent an assessment of claim limitations or claim scope.
MT 100
We have one issued U.S. patent with claims relating to dosage forms that can
be used in administering metoclopramide hydrochloride and a long acting non-
steroidal anti-inflammatory drug to a patient with migraine headache. There are
also claims relating to a method of manufacturing a specific type of dosage
form. We have one pending U.S. patent application with claims relating to
various pharmaceutical compositions and treatment methods that can be used for
migraine patients. In addition, there are applications relating to MT 100 that
are pending in Australia, Canada, Europe and Japan. The expected expiration
date of the issued U.S. patent relating to MT 100 is November 12, 2016. Foreign
patents, if issued, are expected to expire in a similar timeframe.
MT 300
With respect to MT 300, we presently have one pending U.S. application and
one pending international application filed under the PCT. Both of these have
claims relating to liquid pharmaceutical compositions for treating migraine
which contain concentrated dihydroergotamine. There are also claims relating to
treating patients for migraine using these compositions and to therapeutic
packages that include the compositions.
12
MT 500
Through our license agreement with Roche, we have exclusive worldwide rights
to patents and patent applications relating to MT 500. In the U.S., we have
exclusive rights to three issued patents. These have claims relating to certain
chemical compounds and to various treatment methods involving the use of the
compounds. Related non-U.S. applications are pending or have issued in numerous
countries including Australia, Canada, Europe and Japan. The issued U.S.
patents relating to MT 500 have an expected expiration date of May 20, 2017.
Foreign patents, if issued, are expected to expire in a similar timeframe.
MT 400
We have two issued U.S. patents with claims relating to methods,
compositions and therapeutic packages involving the use of certain non-
steroidal, anti-inflammatory drugs ("NSAIDs") and 5-HT receptor agonists in
treating patients with migraine. Outside of the U.S., we have an issued patent
in Australia and applications relating to MT 400 pending in Canada, Europe and
Japan. In addition, we have one pending U.S. application with claims relating
to dosage forms and methods of treatment involving a 5-HT receptor agonist and
a particular subset of NSAIDs and to the use of MT 400 in the treatment of
other types of headache. The expected expiration date of the issued U.S.
patents relating to MT 400 is August 14, 2017. Foreign patents, if issued, are
expected to expire in a similar timeframe.
Other Intellectual Property
Much of the know-how of importance to us is dependent upon the knowledge,
experience and skills of key scientific and technical personnel. To protect our
rights to proprietary know-how and technology, we require employees,
consultants and advisors to enter into confidentiality agreements that prohibit
the disclosure of confidential information to anyone outside of the Company.
There can be no assurance that these agreements will effectively prevent
disclosure of our confidential information. In the absence of effective patent
or other protection of intellectual property, our business may be adversely
affected by competitors who develop substantially equivalent or superior
technology or know-how.
The patent and other intellectual property positions of pharmaceutical
companies are highly uncertain and involve complex legal and factual questions.
We cannot assure you that:
. our patent rights will provide us with proprietary protection or
competitive advantages against our competitors;
. our patent applications will not be challenged, invalidated or
circumvented;
. others will not independently develop technologies similar to ours or
duplicate our technologies; or
. the patents issued to or licensed by us will not be infringed or
challenged.
Government Regulation
The FDA and comparable regulatory agencies in state and local jurisdictions
and in foreign countries impose substantial requirements on the clinical
development, manufacture and marketing of pharmaceutical product candidates.
These agencies and other federal, state and local entities regulate research
and development activities and the testing, manufacture, quality control,
safety, effectiveness, labeling, storage, record-keeping, approval and
promotion of our product candidates. All of our product candidates will require
regulatory approval before commercialization. In particular, therapeutic
product candidates for human use are subject to rigorous preclinical and
clinical testing and other requirements of the Federal Food, Drug, and Cosmetic
Act (FFDCA), implemented by the FDA, as well as similar statutory and
regulatory requirements of foreign countries. Obtaining these marketing
approvals and subsequently complying with ongoing statutory and regulatory
requirements is costly and time-consuming. Any failure by us or our
collaborators, licensors or licensees to obtain, or any delay in obtaining,
regulatory approvals or in complying with other requirements
13
could adversely affect the commercialization of product candidates then being
developed by us and our ability to receive product or royalty revenues.
The steps required before a new drug product candidate may be distributed
commercially in the U.S. generally include:
. conducting appropriate preclinical laboratory evaluations of the product
candidate's chemistry, formulation and stability and preclinical studies
to assess the potential safety and efficacy of the product candidate;
. submitting the results of these evaluations and tests to the FDA, along
with manufacturing information and analytical data, in an IND;
. initiating clinical trials under the IND after the resolution of any
safety or regulatory concerns of the FDA;
. obtaining approval of Institutional Review Boards to introduce the drug
into humans in clinical studies;
. conducting adequate and well-controlled human clinical trials that
establish the safety and efficacy of the product candidate for the
intended use, typically in the following three sequential, or slightly
overlapping, stages:
Phase 1: The product is initially introduced into human subjects or
patients and tested for safety, dose tolerance, absorption,
metabolism, distribution and excretion;
Phase 2: The product candidate is studied in patients to identify
possible adverse effects and safety risks, to determine dosage
tolerance and the optimal dosage, and to collect some efficacy
data; and
Phase 3: The product candidate is studied in an expanded patient
population at multiple clinical study sites, to confirm efficacy
and safety at the optimized dose, by measuring a primary endpoint
established at the outset of the study;
. submitting the results of preclinical studies, and clinical trials as
well as chemistry, manufacturing and control information on the product
candidate to the FDA in an NDA; and
. obtaining FDA approval of the NDA and final product labeling prior to
any commercial sale or shipment of the product candidate.
This process can take a number of years and require substantial financial
resources. The results of preclinical studies and initial clinical trials are
not necessarily predictive of the results from large-scale clinical trials, and
clinical trials may be subject to additional costs, delays or modifications due
to a number of factors, including the difficulty in obtaining enough patients,
clinical investigators, product candidate supply, or financial support. The FDA
may also require testing and surveillance programs to monitor the effect of
approved product candidates that have been commercialized, and the agency has
the power to prevent or limit further marketing of a product candidate based on
the results of these post-marketing programs. Upon approval, a product
candidate may be marketed only in those dosage forms and for those indications
approved in the NDA.
In addition to obtaining FDA approval for each indication to be treated with
each product candidate, each domestic product candidate manufacturing
establishment must register with the FDA, list its product with the FDA, comply
with the applicable FDA current Good Manufacturing Practices ("cGMP"),
regulations, which include requirements relating to quality control and quality
assurance, as well as the corresponding maintenance of records and
documentation, and permit and pass manufacturing plant inspections by the FDA.
Moreover, the submission of applications for approval may require additional
time to complete manufacturing stability studies. Foreign establishments
manufacturing product for distribution in the U.S. also must list their product
candidates
14
with the FDA and comply with cGMP regulations. They are also subject to
periodic inspection by the FDA or by local authorities under agreement with the
FDA.
Any product candidates manufactured or distributed by us pursuant to FDA
approvals are subject to extensive continuing regulation by the FDA, including
record-keeping requirements and reporting of adverse experiences with the
product candidate. In addition to continued compliance with standard regulatory
requirements, the FDA may also require post-marketing testing and surveillance
to monitor the safety and efficacy of the marketed product. Product approvals
may be withdrawn if compliance with regulatory requirements is not maintained
or if problems concerning safety or efficacy of the product are discovered
following approval.
The FFDCA also mandates that products be manufactured consistent with cGMP
regulations. In complying with the FDA's regulations on cGMP regulations,
manufacturers must continue to spend time, money and effort in production,
record-keeping quality control, and auditing to ensure that the marketed
product meets applicable specifications and other requirements. The FDA
periodically inspects manufacturing facilities to ensure compliance with cGMP
regulations. Failure to comply subjects the manufacturer to possible FDA
action, such as warning letters, suspension of manufacturing, seizure of the
product, voluntary recall of a product or injunctive action, as well as
possible civil penalties. We currently rely on, and intend to continue to rely
on, third parties to manufacture our compounds and product candidates. These
third parties will be required to comply with cGMP regulations.
Even after FDA approval has been obtained, further studies, including post-
marketing studies, may be required. Results of post-marketing studies may limit
or expand further marketing of the products. If we propose any modifications to
a product, including changes in indication, manufacturing process,
manufacturing facility or labeling, a supplement to our NDA may be required to
be submitted to the FDA.
Products manufactured in the U.S. for distribution abroad will be subject to
FDA regulations regarding export, as well as to the requirements of the country
to which they are shipped. These latter requirements are likely to cover the
conduct of clinical trials, the submission of marketing applications, and all
aspects of manufacturing and marketing. Such requirements can vary
significantly from country to country.
We are also subject to various federal, state and local laws, rules,
regulations and policies relating to safe working conditions, laboratory and
manufacturing practices, the experimental use of animals and the use of and
disposal of hazardous or potentially hazardous substances used in connection
with our research work. Although we believe that our safety procedures for
handling and disposing of such materials comply with current federal, state and
local laws, rules, regulations and policies, the risk of accidental injury or
contamination from these materials cannot be entirely eliminated.
The extent of government regulation which might result from future
legislation or administrative action cannot be accurately predicted. In this
regard, although the Food and Drug Administration Modernization Act of 1997
modified and created requirements and standards under the FFDCA with the intent
of facilitating product development and marketing, the FDA is still in the
process of developing regulations implementing the Food and Drug Administration
Modernization Act of 1997. Consequently, the actual effect of these
developments on our own business is uncertain and unpredictable.
Employees
As of March 7, 2001, we had a total of twenty full-time employees. All of
our current employees are based at our headquarters in Chapel Hill, North
Carolina. Twelve of our employees hold advanced degrees, including five
Pharm.D. or Ph.D. degrees.
15
Executive Officers of the Company
Our executive officers and their ages as of December 31, 2000 are as
follows:
Name Age Position
---- --- --------
John R. Plachetka, Pharm.D....... 47 Chairman, President and Chief Executive
Officer
Kristina M. Adomonis............. 46 Senior Vice President, Business
Development
John E. Barnhardt................ 51 Vice President, Finance and
Administration
Matthew E. Czajkowski............ 51 Chief Financial Officer, Senior Vice
President, Finance and Administration
Andrew L. Finn, Pharm.D.......... 51 Executive Vice President, Product
Development
John R. Plachetka, Pharm.D., is Chairman of the Board of Directors, a co-
founder and President and Chief Executive Officer of POZEN. Prior to founding
POZEN, Dr. Plachetka was Vice President of Development at Texas Biotechnology
Corporation from 1993 to 1995 and was President and Chief Executive Officer of
Clinical Research Foundation-America, a leading clinical research organization,
from 1990 to 1992. From 1981 to 1990, he was employed at Glaxo Inc. Dr.
Plachetka received his B.S. in Pharmacy from the University of Illinois College
of Pharmacy and his Doctor of Pharmacy from the University of Missouri-Kansas
City.
Kristina M. Adomonis joined POZEN in June 1999 as Senior Vice President of
Business Development. Prior to joining POZEN, Ms. Adomonis was Vice President
of Global Business Development & Licensing, OTC at Novartis Consumer Health
from 1997 to 1999. From 1994 to 1997, she was Director of Business Development
in Glaxo Wellcome's U.S. operations. Prior to Glaxo, she served on the Canadian
Executive Committees of Burroughs Wellcome and Abbott Laboratories, where she
managed the Business Development Units of these two respective operations. She
joined the industry in 1980 with F. Hoffman-La Roche Ltd. Ms. Adomonis received
a B.S. in Chemistry from Tufts University and her M.B.A. from McGill
University.
John E. Barnhardt joined POZEN in March 1997 as Vice President of Finance
and Administration. Prior to joining POZEN, Mr. Barnhardt was Chief Financial
Officer and Principal Accounting Officer of Medco Research, Inc. from 1993 to
1996 and Microwave Laboratories, Inc. from 1988 to 1993. Mr. Barnhardt received
a B.S. from North Carolina State University, and while employed at Ernst &
Young LLP, received his CPA certification.
Matthew E. Czajkowski joined POZEN in March 2000 as Chief Financial Officer
and Senior Vice President of Finance and Administration. Prior to joining
POZEN, Mr. Czajkowski was an investment banker. From 1997 through 1998, he was
a Managing Director of Mergers and Acquisitions at Societe Generale. From 1992
to 1997, he was a Managing Director in charge of Corporate Finance at Wheat
First Butcher Singer, Inc. From 1983 to 1991, he was employed, and served as a
Vice President beginning in 1987, with Goldman, Sachs & Co. Mr. Czajkowski
received his B.A. from Harvard University and his M.B.A. from Harvard Business
School.
Andrew L. Finn, Pharm.D. joined POZEN in January 2000 as Executive Vice
President of Product Development. Prior to joining POZEN, Dr. Finn co-founded
enVision Sciences, a specialized clinical research and regulatory services
company, in 1996. From 1991 to 1996, he was Vice President of U.S. Clinical
Research and Biometrics for Solvay Pharmaceuticals. He joined Glaxo Inc. in
1981 as Assistant Director of Anti-Infective Development. Dr. Finn received his
B.S. in Pharmacy from the University of North Carolina, Chapel Hill and his
Doctor of Pharmacy from the University of Michigan.
Item 2. Properties
Our leased corporate facilities, located in Chapel Hill, North Carolina,
currently occupy approximately 7,200 square feet. This lease expires in
February 2003. We believe that our existing facility is adequate for our
current needs. To the extent that we determine that we need additional space in
the future, we believe that suitable additional or alternative space will be
available on commercially reasonable terms.
16
Item 3. Legal Proceedings
We are not a party to any material legal proceeding.
On October 6, 2000, an action was filed against us by Punk Ziegel & Company
arising out of our engagement of Punk Ziegel in early 1999 to assist us with
the sale of convertible preferred stock in a private placement offering. Punk
Ziegel alleges in the action that POZEN owes it certain fees and expenses in
connection with our termination of their engagement, and transaction
consideration, including warrants, in connection with our issuance and sale of
preferred stock in the twelve-month period following our termination of such
engagement. We believe that this is not a material proceeding, and we are
vigorously defending the action.
Item 4. Submission of Matters to a Vote of Security Holders
Effective as of October 5, 2000, our stockholders acted by written consent
pursuant to Section 228 of the Delaware General Corporation Law to approve an
amendment to our Amended and Restated Certificate of Incorporation, providing
for a 1.349-for-1 stock split with respect to each issued and outstanding share
of common stock. 9,103,522 votes were cast by written consent in favor of the
proposed amendment and there were no votes against or abstentions.
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters
(a) The Company's common stock began trading on The Nasdaq National Market
under the symbol "POZN" on October 11, 2000. As of March 7, 2001, we had
approximately 86 stockholders of record of the common stock. The following
table details the high and low sales prices for the common stock as reported by
The Nasdaq National Market for the periods indicated.
Price Range
-------------
2000 Fiscal Year High Low
---------------- ------- -----
Fourth Quarter............................................. $21.875 $9.25
On March 7, 2001, the closing price for our common stock as reported by The
Nasdaq National Market was $10.00. Other than cash dividends paid to our
preferred stockholders at the time of the conversion of their preferred stock
to common stock upon the completion of our initial public offering in October
2000, we paid no cash dividends in 2000. We currently intend to retain all of
our future earnings to finance the growth and development of our business and
do not anticipate paying any cash dividends in the foreseeable future.
(b) During the three months ended December 31, 2000, we issued and sold
108,304 shares of our common stock to employees and consultants upon exercise
of stock options held by them. For these issuances we relied on the exemption
provided by Section 4(2) of the Securities Act and Rule 701 promulgated
thereunder.
17
Item 6. Summary of Selected Financial Data
The following tables set forth selected historical financial data of the
Company for the four years ended December 31, 2000 and the period from
September 26, 1996 (inception) through December 31, 2000. These tables should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements of the
Company included elsewhere herein. The report of Ernst & Young LLP, independent
auditors, covering the Company's financial statements for the three years ended
December 31, 2000, is also included elsewhere herein.
Period from
Year ended or as of December 31, September 26, 1996
------------------------------------- (inception) through
1997 1998 1999 2000 December 31, 2000
------- -------- -------- -------- -------------------
(in thousands, except per share
data)
Statement of Operations
Data:
Operating expenses:
General and
administrative...... $ 1,021 $ 1,478 $ 2,320 $ 4,822 $ 9,727
Research and
development......... 3,097 7,569 9,458 19,399 39,548
------- -------- -------- -------- --------
Total operating
expenses............... 4,118 9,047 11,778 24,221 49,275
Interest income
(expense), net......... 315 309 (367) 1,844 2,111
------- -------- -------- -------- --------
Net loss................ (3,803) (8,738) (12,145) (22,377) (47,164)
Non-cash preferred stock
charge................. -- -- -- 27,617 27,617
Preferred stock
dividends.............. -- -- -- 934 934
------- -------- -------- -------- --------
Net loss attributable to
common stockholders.... $(3,803) $ (8,738) $(12,145) $(50,928) $(75,715)
======= ======== ======== ======== ========
Basic and diluted net
loss per common share.. $ (0.65) $ (1.50) $ (2.08) $ (4.95)
======= ======== ======== ========
Shares used in computing
basic and diluted net
loss per common share.. 5,814 5,835 5,845 10,294
======= ======== ======== ========
Pro forma net loss per
common share--basic and
diluted................ $ (1.01) $ (2.56)
======== ========
Pro forma weighted
average common shares
outstanding--basic and
diluted................ 12,018 19,915
======== ========
Balance Sheet Data:
Cash and cash
equivalents............ $ 8,089 $ 2,986 $ 4,171 $ 92,351
Total assets............ 8,291 3,113 4,325 92,830
Total liabilities....... 1,924 2,066 2,360 3,762
Accumulated deficit..... (3,904) (12,642) (24,787) (48,099)
Total stockholders'
equity................. $ 6,367 $ 1,047 $ 1,965 $ 89,068
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
We are a pharmaceutical company engaged in the development of products in
targeted therapeutic areas. Since our inception in 1996, our business
activities have primarily been associated with the development and acquisition
of four pharmaceutical product candidates. We have completed all five of our
planned Phase 3 clinical trials for our lead product candidate, MT 100, which
we are developing as an oral first-line therapy for the treatment of migraine.
To date, we have devoted substantially all our resources to the research and
clinical development of MT 100 and of MT 300, our injectable product candidate
for severe migraine. Our other
18
migraine therapeutic product candidates include MT 500, a migraine
prophylactic, and MT 400, an orally delivered co-active therapy. Specifically,
our business activities have included:
. product candidate research and development;
. designing and funding clinical trials for our product candidates;
. regulatory and clinical affairs;
. intellectual property prosecution and expansion; and
. business development including product acquisition or in-licensing.
Historically, we have financed our operations and internal growth primarily
through private placements of preferred stock and our initial public offering
rather than through collaborative or partnership agreements. Therefore, we have
no research funding or collaboration payments payable to us nor have we
received any payments that are refundable or subject to performance milestones.
We have incurred significant losses since our inception and we have not
generated any revenue. As of December 31, 2000, our accumulated deficit was
$48,098,547. Our historical operating losses have resulted principally from our
research and development activities, including Phase 3 and Phase 2 clinical
trial activities for our product candidates MT 100 and MT 300, respectively,
and general and administrative expenses. We expect to continue to incur
operating losses over the next several years as we complete the development of
MT 100, apply for regulatory approval, continue development of our other
migraine therapeutic product candidates, and acquire and develop product
portfolios in other therapeutic areas. Our results may vary depending on many
factors, including:
. the progress of MT 100 and MT 300 in the regulatory process;
. the acceleration of our other product candidates in the regulatory
process;
. the establishment of collaborations for the development and
commercialization of any of our migraine product candidates; and
. acquisition or in-licensing of other therapeutic product candidates.
Our ability to generate revenue is dependent upon our ability, alone or with
others, to successfully develop MT 100 or our other migraine product
candidates, obtain regulatory approvals and, alone or with others, successfully
manufacture and market our future products.
In March 2000, we closed a private placement of series E convertible
preferred stock in which we raised net proceeds of $16,875,115 after commission
and expenses. In connection with this offering, we recorded a non-cash charge
of $16,875,115 during March 2000 related to the beneficial conversion feature
of the preferred stock we sold in March 2000. The series E convertible
preferred stock was sold in March 2000 at $6.95 per share, which represented
the fair value of the preferred stock and was in excess of the deemed fair
value of our common stock at that time.
In August 2000, we closed a private placement of series F convertible
preferred stock in which we raised net proceeds of $10,742,000 after commission
and expenses. In connection with this offering, we recorded a non-cash charge
of $10,742,000 during August 2000 related to the beneficial conversion feature
of the preferred stock we sold in the series F offering. Similarly to the
series E, the series F convertible preferred stock was sold at $6.95 per share,
which represented the fair value of the preferred stock and was in excess of
the deemed fair value of our common stock at that time.
In October and November 2000, we received $78,265,552 in net proceeds from
the sale of 5,750,000 shares of our common stock in our initial public
offering, including through the exercise of the underwriters' over-allotment
option. All of our outstanding preferred shares were converted into shares of
our common stock upon the completion of our initial public offering.
19
In connection with the grant of stock options to employees, we recorded
deferred compensation of approximately $6,328,000 and $3,046,000 in the years
ended December 31, 2000 and 1999, respectively. These amounts were recorded as
a component of stockholders' equity and are being amortized as charges to
operations over the vesting period of the options using the straight line
method. The vesting period of the options is generally three years.
Approximately $3,054,000 and $613,000 of deferred compensation expense was
charged to operations in the years ended December 31, 2000 and 1999,
respectively. As of December 31, 2000 we anticipate recording the amortization
of deferred compensation to operations of approximately $3,160,000, $2,925,000
and $532,000 for the years ended December 31, 2001, 2002 and 2003,
respectively.
Historical Results of Operations
Year ended December 31, 2000 compared to year ended December 31, 1999
Revenue: We generated no revenue during the year ended December 31, 2000 or
the year ended December 31, 1999. In the future, we intend to generate revenue
from upfront and milestone payments connected to potential collaborations for
development and commercialization and from product royalty revenue.
Research and Development: Research and development expenses increased 105.1%
to $19,398,904 for the year ended December 31, 2000 from $9,458,225 for the
year ended December 31, 1999. This net increase of $9,941,000 was due primarily
to a $7,734,000 increase in clinical trial costs of MT 100. Costs associated
with MT 400 increased $568,000 due primarily to increased clinical trial
activities. The costs associated with MT 500 reflected a net increase of
$1,021,000 due to an increase of $2,021,000 in toxicology and pharmaceutical
development expenses being offset by a $1,000,000 decrease from the prior
year's $1,000,000 product licensing expense. MT 300 costs decreased $1,211,000
reflecting the directing of development efforts toward MT 100. Additional other
research and development costs increased $1,829,000 including an increase of
$1,429,000 in personnel costs, of which $962,000 represented increased
amortization of deferred stock compensation. We expect that research and
development expenditures will continue to increase due to the continuation or
expansion of clinical trials and the expansion of pharmaceutical development
and toxicology study expenditures. Research and development expenses included
the personnel costs related to our research activities and clinical trial
preparations and monitoring expenses, and any regulatory matters.
General and Administrative: General and administrative expenses increased
107.9% to $4,822,102 for the year ended December 31, 2000 from $2,319,939 for
the year ended December 31, 1999. This increase of $2,502,000 resulted from
increases of $1,789,000 in personnel and related benefits, of which $1,479,000
represented increased amortization of deferred stock compensation.
Additionally, professional and consulting fees increased $429,000 and an
increase of $284,000 was reflected in other costs related to our expanded
operational infrastructure. We expect that general and administrative
expenditures will continue to increase due to increasing fees and expenses
associated with growth in our market research, business development and
commercialization efforts. An expansion in general and administrative
expenditures is also expected to accompany our infrastructure growth associated
with our public company reporting activities. General and administrative
expenses consisted primarily of the costs of administrative personnel and
related facility costs along with legal, accounting and professional fees.
Interest Income, net: Net interest income increased to $1,844,378 for the
year ended December 31, 2000 from a net interest expense of $367,282 for the
year ended December 31, 1999. Interest income increased $1,626,000 to
$1,845,000 for the year ended December 31, 2000 from $219,000 for the year
ended December 31, 1999 due to increased levels of cash and cash equivalents
available for investing. During the year ended December 31, 2000, there was
nominal interest expense while interest expense was $586,000 for the year ended
December 31, 1999 and was related to a promissory note converted to preferred
stock during the period.
Year ended December 31, 1999 compared to year ended December 31, 1998
Revenue: We generated no revenue during the year ended December 31, 1999 or
the year ended December 31, 1998.
20
Research and Development: Research and development expenses increased 25.0%
to $9,458,225 for the year ended December 31, 1999 from $7,569,187 for the year
ended December 31, 1998. This increase was primarily due to the $352,000
increase in toxicology studies and clinical trial costs associated with the
Phase 3 clinical trial of MT 100, an increase of $537,000 in research and
development personnel and benefits cost, and one-time licensing costs.
In September 1999, we entered into a license agreement with Roche in which
we were granted certain patent rights and know-how to develop, manufacture and
commercialize Roche's MT 500 compound. The agreement provides for a product
option during two discrete development periods whereby Roche would re-acquire
all of the rights granted to us as well as any data, documentation, know-how
and additional intellectual property generated, owned or controlled by us.
Depending upon the development period at which the product option is exercised,
Roche would make specified one-time payments upon exercise of the product
option and upon NDA approval. The maximum potential aggregate amount of these
one-time payments is $50,000,000. In addition, Roche would make ongoing royalty
payments based upon net sales following approval.
We made a one-time nonrefundable payment of $1,000,000 to enter into this
agreement. If the product option is not exercised, we will pay Roche royalties
on net sales and a portion of all payments owed by any sublicensees less our
development costs. We charged the $1,000,000 payment to research and
development expense.
General and Administrative: General and administrative expenses increased
57.0% to $2,319,939 for the year ended December 31, 1999 from $1,477,768 for
the year ended December 31, 1998 and primarily reflects a $842,000 increase in
personnel and related benefits, travel costs and professional fees.
Interest Income, net: Net interest income decreased 218.7% to net interest
expense of $367,282 for the year ended December 31, 1999 from net interest
income of $309,324 for the year ended December 31, 1998. The decrease is
attributable to a $450,000 loan origination fee on the convertible promissory
note expensed as a financing cost and lower interest income offset by higher
interest expense. Interest income decreased to $219,000 for the year ended
December 31, 1999 from $345,000 for the year ended December 31, 1998 due to
lower levels of cash and cash equivalents available for investing in 1999 as
compared to 1998. Interest expense in the same periods was $586,000 and
$36,000, respectively. The increase in interest expense was primarily due to
interest paid upon the conversion of a promissory note.
Income Taxes
As of December 31, 2000, we had federal and state net operating loss
carryforwards of approximately $39.4 million and research and development
credit carryforwards of approximately $1.9 million. These federal net operating
loss carryforwards and research and development credit carryforwards begin to
expire in 2012. The state net operating loss carryforwards begin to expire in
2001. The utilization of the loss carryforwards to reduce future income taxes
will depend on our ability to generate sufficient taxable income prior to the
expiration of the net loss carryforwards. In addition, the maximum annual use
of net loss carryforwards is limited in certain situations where changes occur
in our stock ownership.
Liquidity and Capital Resources
Since our inception, we have financed our operations and internal growth
primarily through private placements of preferred stock and our initial public
offering, resulting in aggregate net proceeds to us of $131,470,765. At
December 31, 2000, cash and cash equivalents totaled $92,350,583, an increase
of $88,179,497 as compared to December 31, 1999. The increase in cash and cash
equivalents resulted primarily from our financing activities, offset by the
cash used in operating activities.
Cash used by operations of $18,139,521 during the year ended December 31,
2000 represented a net loss of $22,376,628 offset by non-cash charges of
$3,112,369, a decrease in prepaid and other assets of $276,825
21
and an increase in accounts payable and accrued liabilities of $1,401,563. The
increase in accounts payable and accrued liabilities was primarily due to the
increased spending in our clinical activities.
Cash used in investing activities of $106,512 during the year ended December
31, 2000 reflected the purchase of equipment.
Cash provided by financing activities during the year ended December 31,
2000, which totaled $106,425,530, was generated primarily by the net proceeds
of $16,875,115 from the sales of the series E preferred stock in March 2000,
the net proceeds of $10,742,000 from the sales of the series F preferred stock
in August 2000, and the net proceeds of $78,265,552 from our initial public
offering in October and November 2000.
We believe that our existing liquidity and capital resources, including the
proceeds resulting from our initial public offering, will be sufficient to
complete our ongoing and planned clinical trials reflected in the description
of business, to conduct appropriate development studies, and to satisfy our
other anticipated cash needs for operating expenses for at least the next two
years. We do not expect to make any material capital expenditures during the
next two years. In addition, we do not currently have any milestone or other
required material payment obligations during that period. However, we cannot be
certain that additional funding will not be required and, if required, will be
available on acceptable terms, or at all. Further, any additional equity
financing may be dilutive to stockholders, and debt financing, if available,
may involve restrictive covenants.
Our forecast of the period of time through which our financial resources
will be adequate to support our operations is a forward-looking statement that
involves risks and uncertainties, and actual results could vary as a result of
a number of factors. Our future capital requirements will depend on many
factors, including:
. the number and progress of our clinical trials;
. our ability to negotiate favorable terms with various contractors
assisting in these clinical trails;
. our success in commercializing the products to which we have rights; and
. the cost incurred enforcing and defending our patent claims and other
intellectual rights.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. ("SFAS") 133, "Accounting for
Derivative Investments and Hedging Activities." SFAS 133 established a new
model for accounting for derivatives and hedging activities and supercedes
several existing standards. SFAS 133, as amended by SFAS 137 and SFAS 138, is
effective on January 1, 2001. The adoption of SFAS 133 had no impact on the
Company's financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin No. ("SAB") 101, "Revenue Recognition in
Financial Statements." SAB 101 explains how the SEC staff applies by analogy
the existing rules on revenue recognition to other transactions not covered by
such rules. In March 2000, the SEC issued SAB 101A that delayed the original
effective date of SAB 101 until the second quarter of 2000 for calendar year
companies. In June 2000, the SEC issued SAB 101B that further delayed the
effective date of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 15, 1999. The adoption of SAB 101 had no
impact on the Company's financial statements.
Factors Affecting the Company's Prospects
We depend heavily on the success of our lead product candidate, MT 100,
which may never be approved for commercial use. If we are unable to develop,
gain approval of or commercialize MT 100, we may never be profitable.
Since our founding, we have invested a significant portion of our time and
financial resources in the development of MT 100 and anticipate that for the
foreseeable future our ability to achieve profitability will be
22
dependent on its successful development, approval and commercialization. Many
factors could negatively affect the success of our efforts to develop and
commercialize MT 100, including:
. negative, inconclusive or otherwise unfavorable results from our
toxicology, genotoxicity or carcinogenicity studies or from our clinical
trials;
. an inability to obtain, or delay in obtaining, regulatory approval for
the commercialization of MT 100;
. an inability to establish collaborative arrangements with third parties
for the manufacture and commercialization of MT 100, or any disruption
of any of these arrangements, if established;
. a failure to achieve market acceptance of MT 100;
. significant delays in our toxicology, genotoxicity and carcinogenicity
studies;
. any demand by the FDA that we conduct additional clinical trials and the
expenses relating thereto; and
. significant increases in the costs of toxicology, genotoxicity and
carcinogenicity studies.
We have incurred losses since inception and anticipate that we will continue
to incur losses for the foreseeable future. We do not have a current source of
product revenue and may never be profitable.
We have incurred losses in each year since our inception and we currently
have no source of product revenue. As of December 31, 2000, we had an
accumulated deficit of approximately $48.1 million. We expect to incur
significant and increasing operating losses and do not know when or if we will
generate product revenue.
We expect that the amount of our operating losses will fluctuate
significantly from quarter to quarter as a result of increases and decreases in
development efforts, the timing of payments that we may receive from others,
and other factors. Our ability to achieve profitability is dependent on a
number of factors, including our ability to:
. develop and obtain regulatory approvals for our product candidates;
. receive upfront and milestone payments;
. successfully commercialize our product candidates, which may include
entering into collaborative agreements; and
. secure contract manufacturing and distribution services.
If we, or our collaborators, do not obtain and maintain required regulatory
approvals, we will be unable to commercialize our product candidates.
Our product candidates under development are subject to extensive domestic
and foreign regulation. The FDA regulates, among other things, the development,
testing, manufacture, safety, efficacy, recordkeeping, labeling, storage,
approval, advertisement, promotion, sale and distribution of pharmaceutical
products. If we market our products abroad, they are also subject to extensive
regulation by foreign governments. None of our product candidates, including MT
100, has been approved for sale in the United States or any foreign market.
Generally, we will need to complete preclinical, toxicology, genotoxicity and
carcinogenicity studies, as well as clinical trials on these product candidates
before submitting an NDA to the FDA for approval to market the product
candidate. If we are unable to obtain and maintain FDA and foreign governmental
approvals for our product candidates, we will not be permitted to sell them.
Approval of a product candidate may be conditioned upon certain limitations
and restrictions as to the drug's use, or upon the conduct of further studies,
and is subject to continuous review. The FDA may also
23
require us to conduct additional post-approval studies. These post-approval
studies may include carcinogenicity studies in animals or further human
clinical trials. The later discovery of previously unknown problems with the
product, manufacturer or manufacturing facility may result in criminal
prosecution, civil penalties, recall or seizure of products, or total or
partial suspension of production, as well as other regulatory action against
our product candidates or us. If approvals are withdrawn for a product, or if a
product is seized or recalled, we would be unable to sell that product and our
revenues would suffer.
We and our contract manufacturers are required to comply with the applicable
FDA current Good Manufacturing Practices regulations, which include
requirements relating to quality control and quality assurance, as well as the
corresponding maintenance of records and documentation. Further, manufacturing
facilities must be approved by the FDA before they can be used to manufacture
our product candidates, and are subject to additional FDA inspection. We, or
our third-party manufacturers, may not be able to comply with cGMP regulations
or other FDA regulatory requirements, resulting in delay or inability to
manufacture the products.
Labeling and promotional activities are subject to scrutiny by the FDA and
state regulatory agencies and, in some circumstances, the Federal Trade
Commission. FDA enforcement policy prohibits the marketing of approved products
for unapproved, or off-label, uses. These regulations and the FDA's
interpretation of them may impair our ability to effectively market products
for which we gain approval. Failure to comply with these requirements can
result in regulatory enforcement action by the FDA. Further, we may not obtain
the labeling claims we believe are necessary or desirable for the promotion of
our product candidates.
We need to conduct preclinical, toxicology, genotoxicity and carcinogenicity
studies and clinical trials of all of our product candidates. Any additional
costs or delays in these studies or trials, or the need to conduct additional
studies or trials, could reduce our revenues and profitability.
Generally, we must demonstrate the efficacy and safety of our product
candidates before approval to market can be obtained from the FDA. Our product
candidates are in various stages of clinical development. Depending upon the
stage at which a product candidate is in the development process, we will need
to complete preclinical, toxicology, genotoxicity and carcinogenicity studies,
as well as clinical trials on these product candidates before we submit
marketing applications in the United States and abroad. These studies and
trials can be very costly and time-consuming. In addition, we rely on third
parties to perform significant aspects of our studies and clinical trials,
introducing additional sources of risk into our development programs. Results
from preclinical testing and early clinical trials are not necessarily
predictive of results obtained in later clinical trials involving large scale
testing of patients in comparison to control groups.
The completion of clinical trials depends upon many factors, including the
rate of enrollment of patients. If we are unable to accrue sufficient clinical
patients during the appropriate period, we may need to delay our clinical
trials and incur significant additional costs. In addition, the FDA or
Institutional Review Boards may require us to conduct additional trials or
delay, restrict or discontinue our clinical trials on various grounds,
including a finding that the subjects or patients are being exposed to an
unacceptable health risk. Even though we have completed the clinical trials for
MT 100 and even if we complete our clinical trials for our other product
candidates, we may be unable to submit an NDA to the FDA as scheduled,
including because the FDA requires us to conduct additional clinical trials and
studies. Once submitted, an NDA would require FDA approval before we could
distribute or commercialize the product described in the application.
Even if we determine that data from our clinical trials, toxicology,
genotoxicity and carcinogenicity studies are positive, we cannot assure you
that the FDA, after completing its analysis, will not determine that the trials
or studies should have been conducted or analyzed differently, and thus reach a
different conclusion from that reached by us, or request that further trials,
studies or analysis be conducted. For example, the FDA may also require data in
certain subpopulations, such as pediatric use, prior to NDA approval, unless we
can obtain a waiver to delay such a study.
24
Our costs associated with our human clinical trials vary based on a number
of factors, including:
. the order and timing of clinical indications pursued;
. the extent of development and financial support from collaborative
parties, if any;
. the number of patients required for enrollment;
. the difficulty in obtaining sufficient patient populations and
clinicians;
. the difficulty of obtaining clinical supplies of our product candidates;
and
. governmental and regulatory delays.
Even if we obtain positive preclinical or clinical study results initially,
future clinical trial results may not be similarly positive.
We depend on collaborations with third parties, which may reduce our product
revenues or restrict our ability to commercialize products.
Our ability to develop, manufacture, commercialize and obtain regulatory
approval of our existing and any future product candidates depends upon our
ability to enter into and maintain contractual and collaborative arrangements
with others. We have and intend in the future to retain contract manufacturers
and clinical trial investigators. In addition, the identification of new
compounds or product candidates for development may require us to enter into
licensing or other collaborative agreements with others, including
pharmaceutical companies and research institutions. We currently intend to
market and commercialize our products through others, which will require us to
enter into sales, marketing and distribution arrangements with third parties.
These arrangements may reduce our product revenues.
Our third party contractual or collaborative arrangements may require us to
grant rights, including marketing rights, to one or more parties. These
arrangements may also contain covenants restricting our product development or
business efforts in the future, or other terms that are burdensome to us, and
may involve the acquisition of our equity securities. Collaborative agreements
for the acquisition of new compounds or product candidates may require us to
pay license fees, make milestone payments and/or pay royalties.
We cannot be sure that we will be able to maintain our existing or future
collaborative or contractual arrangements, or that we will be able to enter
into future arrangements with third parties on terms acceptable to us, or at
all. If we fail to maintain our existing arrangements or to establish new
arrangements when and as necessary, we could be required to undertake these
activities at our own expense, which would significantly increase our capital
requirements and may delay the development, manufacture and commercialization
of our product candidates.
We are subject to a number of risks associated with our dependence on
contractual and collaborative arrangements with others:
. We may not have day-to-day control over the activities of our
contractors or collaborators.
. Third parties may not fulfill their obligations to us.
. We may not realize the contemplated or expected benefits from
collaborative or other arrangements.
. Business combinations and changes in the contractual or collaborative
party's business strategy may adversely affect its willingness or
ability to complete its obligations to us.
. The contractor or collaborative party may have the right to terminate
its arrangements with us on limited or no notice and for reasons outside
of our control.
. The contractual or collaborative party may develop or have rights to
competing products or product candidates and withdraw support or cease
to perform work on our products.
25
. Disagreements may arise regarding breach of the arrangement, ownership
of proprietary rights, clinical results or regulatory approvals.
These factors could lead to delays in the development or commercialization
of our product candidates, and disagreements with our contractors or
collaborators could require or result in litigation or arbitration, which would
be time-consuming and expensive. Our ultimate success may depend upon the
success and performance on the part of these third parties. If we fail to
maintain these relationships or establish new relationships as required,
development and commercialization of our product candidates will be delayed.
We currently depend and will in the future depend on third parties to
manufacture our product candidates. If these manufacturers fail to meet our
requirements or any regulatory requirements, the product development and
commercialization of our product candidates will be delayed.
We do not have, and have no plans to develop, the internal capability to
manufacture either clinical trial or commercial quantities of products that we
may develop or are under development. We rely upon third party manufacturers to
supply us with our product candidates. We also need supply contracts to sell
our products commercially. There is no guarantee that manufacturers that enter
into commercial supply contracts with us will be financially viable entities
going forward. If we do not have the necessary commercial supply contracts, or
if our current manufacturer is unable to satisfy our requirements or meet any
regulatory requirements, and we are required to find an alternative source of
supply, there may be additional costs and delays in product development and
commercialization of our product candidates or we may be required to comply
with additional regulatory requirements.
If we are unable to build sales, marketing and distribution capabilities or
enter into agreements with third parties to perform these functions, we will
not be able to commercialize any of our drug candidates.
We intend to enter into agreements with third parties to market and sell any
of our product candidates approved by the FDA for commercial sale. We may not
be able to enter into marketing and sales agreements with others on terms
acceptable to us, if at all. To the extent that we enter into marketing and
sales agreements with others, our revenues, if any, will be affected by the
sales and marketing efforts of others. We may also retain the right, where
possible, to co-promote our products in conjunction with our collaborative
parties. If we are unable to enter into third-party sales and marketing
agreements, or if we are exercising our rights to co-promote a product, then we
will be required to develop internal marketing and sales capabilities. We may
not successfully establish marketing and sales capabilities or have sufficient
resources to do so.
If our competitors develop and commercialize products faster than we do or
if their products are superior to ours, our commercial opportunities will be
reduced or eliminated.
Our product candidates will have to compete with existing and any newly
developed migraine therapies. There are also likely to be numerous competitors
developing new products to treat migraine and the other diseases and conditions
for which we may seek to develop products in the future, which could render our
product candidates or technologies obsolete or non-competitive. Our primary
competitors will likely include large pharmaceutical companies, biotechnology
companies, universities and public and private research institutions. We face,
and will continue to face, intense competition from other companies for
securing collaborations with pharmaceutical companies, establishing
relationships with academic and research institutions, and acquiring licenses
to proprietary technology. These competitors, either alone or with
collaborative parties, may succeed with technologies or products that are more
effective than any of our current or future technologies or products. Many of
our actual or potential competitors, either alone or together with
collaborative parties, have substantially greater financial resources, and
almost all of our competitors have larger numbers of scientific and
administrative personnel than we do. Many of these competitors, either alone or
together with their collaborative parties, also have significantly greater
experience than we do in:
. developing product candidates;
. undertaking preclinical testing and human clinical trials;
. obtaining FDA and other regulatory approvals of product candidates; and
. manufacturing and marketing products.
26
Accordingly, our actual or potential competitors may succeed in obtaining
patent protection, receiving FDA approval or commercializing products before we
do. Our competitors may also develop products or technologies that are superior
to those that we are developing, and render our product candidates or
technologies obsolete or non-competitive. If we cannot successfully compete
with new or existing products, our marketing and sales will suffer and we may
not ever be profitable.
If we are unable to protect our patents or proprietary rights, or if we are
unable to operate our business without infringing the patents and proprietary
rights of others, we may be unable to develop our product candidates or compete
effectively.
The pharmaceutical industry places considerable importance on obtaining
patent and trade secret protection for new technologies, products and
processes. Our success will depend, in part, on our ability, and the ability of
our licensors, to obtain and to keep protection for our products and
technologies under the patent laws of the United States and other countries, so
that we can stop others from using our inventions. Our success also will depend
on our ability to prevent others from using our trade secrets. In addition, we
must operate in a way that does not infringe, or violate, the patent, trade
secret, and other intellectual property rights of other parties.
We cannot know how much protection, if any, our patents will provide or
whether our patent applications will issue as patents. The breadth of claims
that will be allowed in patent applications cannot be predicted and neither the
validity nor enforceability of claims in issued patents can be assured. If, for
any reason, we are unable to obtain and enforce valid claims covering our
products and technology, we may be unable to prevent competitors from using the
same or similar technology or to prevent competitors from marketing identical
products. In addition, due to the extensive time needed to develop and test our
products, any patents that we obtain may expire in a short time after
commercialization. This would reduce or eliminate any advantages that such
patents may give us.
We may need to license rights to third party patents and intellectual
property to continue the development and marketing of our product candidates.
If we are unable to acquire such rights on acceptable terms, our development
activities may be blocked and we may be unable to bring our product candidates
to market.
We may enter into litigation to defend ourselves against claims of
infringement, assert claims that a third party is infringing one or more of our
patents, protect our trade secrets or know-how, or determine the scope and
validity of other's patent or proprietary rights. As a result of such
litigation, our patent claims may be found to be invalid, unenforceable or not
of sufficient scope to cover the activities of an alleged infringer. If we are
found to infringe the patent rights of others, then we may be forced to pay
damages sufficient to irreparably harm the Company and/or be prevented from
continuing our product development and marketing activities. Regardless of its
eventual outcome, any lawsuit that we enter into may consume time and resources
that will impair our ability to develop and market our product candidates.
We have entered into confidentiality agreements with our employees,
consultants, advisors and collaborators. However, these parties may not honor
these agreements and, as a result, we may not be able to protect our rights to
unpatented trade secrets and know-how. Others may independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets and know-how. Also, many of our scientific and
management personnel were previously employed by competing companies. As a
result, such companies may allege trade secret violations and similar claims
against us.
If we fail to acquire, develop and commercialize additional products or
product candidates, or fail to successfully promote or market approved
products, we may never achieve profitability.
As part of our business strategy, we plan to identify and acquire product
candidates or approved products in areas in which we possess particular
knowledge. Because we do not directly engage in basic research or drug
discovery, we must rely upon third parties to sell or license product
opportunities to us. Other companies,
27
including some with substantially greater financial, marketing and sales
resources, are competing with us to acquire such products. We may not be able
to acquire rights to additional products on acceptable terms, if at all. In
addition, we may acquire new products with different marketing strategies,
distribution channels and bases of competition than those of our current
products. Therefore, we may not be able to compete favorably in those product
categories.
Any of our future products, including MT 100, may not be accepted by the
market, which would limit the commercial opportunities for our products.
Even if our product candidates perform successfully in clinical trials and
are approved by the FDA and other regulatory authorities, our future products,
including MT 100, may not achieve market acceptance and may not generate the
revenues that we anticipate. The degree of market acceptance will depend upon a
number of factors, including:
. the receipt and timing of regulatory approvals;
. the availability of third-party reimbursement;
.the indications for which the product is approved;
.the rate of adoption by health care providers;
. the rate of product acceptance by target patient populations;
.the price of product relative to alternative therapies;
. the availability of alternative therapies;
. the extent of marketing efforts by us and third-party distributors and
agents;
. the publicity regarding our products or similar products; and
. the extent and severity of side effects as compared to alternative
therapies.
If we do not receive adequate third-party reimbursements for any of our
future products, our revenues and profitability will be reduced.
Our ability to commercialize our product candidates successfully will
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, such as Medicare and Medicaid in the United States,
private health insurers and other organizations. Significant uncertainty exists
as to the reimbursement status of a newly approved health care product,
particularly for indications for which there is no current effective treatment
or for which medical care is typically not sought. Adequate third-party
coverage may not be available to enable us to maintain price levels sufficient
to realize an appropriate return on our investment in product research and
development. If adequate coverage and reimbursement levels are not provided by
government and third-party payors for use of our products, our products may
fail to achieve market acceptance.
Our future revenues, profitability and access to capital will be affected by
the continuing efforts of governmental and private third-party payors to
contain or reduce the costs of health care through various means. We expect
that a number of federal, state and foreign proposals will seek to control the
cost of drugs through governmental regulation. We are unsure of the form that
any health care reform legislation may take or what actions federal, state,
foreign and private payors may take in response to the proposed reforms.
Therefore, we cannot predict the effect of any implemented reform on our
business.
If product liability lawsuits are successfully brought against us, we may
incur substantial liabilities and may be required to limit commercialization of
our product candidates.
The testing and marketing of pharmaceutical products entails an inherent
risk of product liability. Product liability claims might be brought against us
by consumers, health care providers, pharmaceutical companies or
28
others selling our future products. If we cannot successfully defend ourselves
against such claims, we may incur substantial liabilities or be required to
limit the commercialization of our product candidates. We have obtained limited
product liability insurance coverage only for our human clinical trials.
However, insurance coverage is becoming increasingly expensive, and no
assurance can be given that we will be able to maintain insurance coverage at a
reasonable cost or in sufficient amounts to protect us against losses due to
liability. We may not be able to obtain commercially reasonable product
liability insurance for any products approved for marketing. If a plaintiff
brings a successful product liability claim against us in excess of our
insurance coverage, if any, we may incur substantial liabilities and our
business may fail.
We may need substantial additional funding and may not have access to
capital. If we are unable to raise capital when needed, we may need to delay,
reduce or eliminate our product development or commercialization efforts.
We may need to raise additional funds to execute our business strategy. We
have incurred losses from operations since inception and we expect to incur
additional operating losses. In particular, we believe that we will require
additional capital to fund the acquisition of new product candidates. Our
actual capital requirements will depend upon numerous factors, including:
. the progress of our research and development programs;
. the progress of preclinical studies and clinical testing;
. the time and cost involved in obtaining regulatory approvals;
. the costs of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights;
. the effect of competing technological and market developments;
. the effect of changes and developments in our collaborative, licensing
and other relationships; and
. the terms and timing of any new collaborative, licensing and other
arrangements that we may establish.
We may be unable to raise sufficient funds to execute our business strategy.
In addition, we may not be able to find sufficient debt or equity funding on
acceptable terms. If we cannot, we may need to delay, reduce or eliminate
research and development programs. The sale by us of additional equity
securities or the expectation that we will sell additional equity securities
may have an adverse effect on the price of our common stock. In addition,
collaborative arrangements may require us to grant product development programs
or licenses to third parties for products that we might otherwise seek to
develop or commercialize ourselves.
We depend on key personnel and may not be able to retain these employees or
recruit additional qualified personnel, which would harm our research and
development efforts.
We are highly dependent on the efforts of our key management and scientific
personnel, especially John R. Plachetka, Pharm.D., our Chairman, President and
Chief Executive Officer. Dr. Plachetka signed an employment agreement with us
on April 1, 1999, for a three-year term with automatic one-year renewal terms.
We do not have employment agreements with our other key management personnel.
If we lose the services of Dr. Plachetka or the services of any of our other
key personnel, or fail to recruit key scientific personnel, we may be unable to
achieve our business objectives. There is intense competition for qualified
scientific personnel. Since our business is very science-oriented, we need to
continue to attract and retain such people. We may not be able to continue to
attract and retain the qualified personnel necessary for developing our
business. Furthermore, our future success will also depend in part on the
continued service of our other key management personnel.
29
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk at December 31, 2000 was confined to our cash
and cash equivalents which had maturities of less than three months, and our
short-term investments which have maturities of less than one year. We
maintained an investment portfolio of commercial paper and short-term U.S.
government securities. The securities in our investment portfolio are not
leveraged, are classified as available-for-sale and are, due to their short-
term nature, subject to minimal interest rate risk. We do not hedge interest
rate exposure. Because of the short-term maturities of our investments, we do
not believe that an increase in market rates would have any significant
negative impact on the realized value of our investment portfolio.
Item 8. Financial Statements and Supplementary Data
POZEN's Financial Statements and notes thereto and the supplementary data
are included elsewhere in this annual report on Form 10-K and incorporated
herein by reference. See Item 14 of Part IV.
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
(a) Identification of Directors
Information with respect to the members of the Board of Directors of the
Company is set forth under the captions "Nominee for Election as Director for a
Term of Three Years" and "Directors Continuing in Office" in the Company's
definitive proxy statement to be filed pursuant to Regulation 14A, which
information is incorporated herein by reference.
(b) Identification of Executive Officers
Information with respect to the executive officers of the Company is set
forth under the caption "Executive Officers of the Company" contained in Part
I, Item 1 of this report, which information is incorporated herein by
reference.
(c) Section 16(a) Beneficial Ownership Reporting Compliance.
Information with respect to the Section 16(a) compliance of the directors
and executive officers of the Company is set forth under the caption "Section
16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive
proxy statement to be filed pursuant to Regulation 14A, which information is
incorporated herein by reference.
Item 11. Executive Compensation
Information required by this Item is set forth under the caption "Executive
and Director Compensation" in the Company's definitive proxy statement to be
filed pursuant to Regulation 14A, which information is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this Item is set forth under the captions "Principal
Stockholders" and "Stock Ownership of Directors, Nominee for Director, and
Executive Officers" in the Company's definitive proxy statement to be filed
pursuant to Regulation 14A, which information is incorporated herein by
reference.
30
Item 13. Certain Relationships and Related Transactions
Information required by this Item is set forth under the caption "Executive
and Director Compensation" in the Company's definitive proxy statement to be
filed pursuant to Regulation 14A, which information is incorporated herein by
reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements and Schedules:
1. Financial Statements
The financial statements and reports of independent auditors are included
herein. The supplementary data is included in note 11 to the financial
statements. See page F-1 through F-20.
2. Financial Statement Schedules
Not applicable.
3. List of Exhibits
See below for a list of the exhibits incorporated by reference herein or
filed herewith.
(b) Reports on Form 8-K.
None.
(c) Exhibits Required by Item 601 of Regulation S-K.
The following exhibits filed as a part of this Form 10-K include both
exhibits submitted with this Report as filed with the SEC and those
incorporated by reference to other filings:
Exhibit
Number Description
------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Registrant.*
3.2 Amended and Restated Bylaws of the Registrant.*
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated
Certificate of Incorporation and Amended and Restated Bylaws of the
Registrant defining rights of the holders of common stock of the
Registrant.
10.1 Sublease Agreement between Quintiles, Inc. and the Registrant, dated
April 7, 1997.*
10.2 Stock Option Plan of the Registrant.*+
10.3 First Amendment to Stock Option Plan dated February 14, 1997.*+
10.4 Executive Employment Agreement with John R. Plachetka dated April 1,
1999.*+
10.5 License Agreement dated September 24, 1999 between the Registrant and
F. Hoffman-La Roche Ltd. and Syntex.*
10.6 Investor Rights Agreement dated July 28, 1999 between the Registrant
and the holders of the Series D Preferred Stock.*
31
Exhibit
Number Description
------- -----------
10.7 Investor Rights Agreement dated March 24, 2000 between the Registrant
and the holders of the Series E Preferred Stock.*
10.8 2000 Equity Compensation Plan.*+
10.9 Investor Rights Agreement dated August 28, 2000 between the Registrant
and the holders of the Series F Preferred Stock.*
10.10 Sublease Agreement between Intecardia, Inc. and the Registrant dated
as of September 1, 2000.**
21.1 List of Subsidiaries.*
23.1 Consent of Ernst & Young LLP, Independent Auditors.**
- --------
* Incorporated by reference to Registration Statement on Form S-1, No. 333-
35930.
** Filed herewith.
+ Management contracts or compensatory plans filed pursuant to Item 14(c) of
Form 10-K.
32
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.
Registrant:
POZEN Inc.
Date: March 21, 2001 /s/ John R. Plachetka
By: _________________________________
John R. Plachetka
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ John R. Plachetka Chairman of the Board, March 21, 2001
______________________________________ President and Chief
John R. Plachetka Executive Officer
(Principal Executive
Officer)
/s/ Matthew E. Czajkowski Senior Vice President, March 21, 2001
______________________________________ Finance and
Matthew E. Czajkowski Administration, and Chief
Financial Officer
(Principal Financial
Officer)
/s/ John E. Barnhardt Vice President, Finance March 21, 2001
______________________________________ and Administration
John E. Barnhardt (Principal Accounting
Officer)
/s/ Jacques F. Rejeange Director March 21, 2001
______________________________________
Jacques F. Rejeange
/s/ Bruce A. Tomason Director March 21, 2001
______________________________________
Bruce A. Tomason
/s/ Peter J. Wise Director March 21, 2001
______________________________________
Peter J. Wise
/s/ Ted G. Wood Director March 21, 2001
______________________________________
Ted G. Wood
33
Audited Financial Statements
POZEN Inc.
(A Development Stage Company)
Years ended December 31, 2000, 1999 and 1998 and the period from September 25,
1996
(inception) through December 31, 2000 with Report of Independent Auditors
F-1
POZEN Inc.
(A Development Stage Company)
Audited Financial Statements
Years ended December 31, 2000, 1999 and 1998 and the
period from September 25, 1996 (inception) through December 31, 2000
Contents
Report of Independent Auditors....................................... F-3
Audited Financial Statements
Balance Sheets....................................................... F-4
Statements of Operations............................................. F-5
Statements of Stockholders' Equity................................... F-6
Statements of Cash Flows............................................. F-8
Notes to Financial Statements........................................ F-9
F-2
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
POZEN Inc.
We have audited the accompanying balance sheets of POZEN Inc. (a development
stage company) as of December 31, 2000 and 1999, and the related statements of
operations, stockholders' equity and cash flows for each of the three years
ended December 31, 2000, 1999 and 1998, and for the period from September 25,
1996 (inception) through December 31, 2000. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of POZEN Inc. (a development
stage company) at December 31, 2000 and 1999 and the results of its operations
and its cash flows for each of the three years ended December 31, 2000, 1999
and 1998 and for the period from September 25, 1996 (inception) through
December 31, 2000 in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
Raleigh, North Carolina
February 2, 2001
F-3
POZEN Inc.
(A Development Stage Company)
BALANCE SHEETS
December 31,
--------------------------
2000 1999
------------ ------------
ASSETS
------
Cash and cash equivalents.......................... $ 92,350,583 $ 4,171,086
Prepaid expenses................................... 198,144 14,720
Accrued interest receivable........................ 113,160 19,297
Other current assets............................... 9,091 9,553
------------ ------------
Total current assets............................... 92,670,978 4,214,656
Furniture and fixtures, net of accumulated
depreciation of $166,616 and $108,533............. 158,780 110,351
------------ ------------
Total assets....................................... $ 92,829,758 $ 4,325,007
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.................................. $ 128,329 $ 359,370
Accrued expenses.................................. 3,633,531 2,000,927
------------ ------------
Total current liabilities.......................... 3,761,860 2,360,297
Stockholders' equity:
Series A preferred stock, $0.001 par value,
authorized 2,750,000 shares, 2,105,931 shares
issued and outstanding at December 31, 1999...... -- 2,106
Series B preferred stock, $0.001 par value,
authorized 4,000,000 shares, 1,139,377 shares
issued and outstanding at December 31, 1999...... -- 1,139
Series C preferred stock, $0.001 par value,
authorized 2,839,507 shares, 563,044 shares
issued and outstanding at December 31, 1999...... -- 563
Series D preferred stock, $0.001 par value,
authorized 6,000,000 shares, 2,593,750 shares
issued and outstanding at December 31, 1999...... -- 2,594
Common stock, $0.001 par value, 90,000,000 shares
authorized, issued and outstanding, 27,732,213
and 5,847,540 shares at December 31, 2000 and
1999, respectively............................... 27,732 5,848
Additional paid-in capital........................ 143,330,124 28,742,154
Preferred stock warrants.......................... 426,048 1,341,000
Deferred compensation............................. (6,617,459) (3,343,253)
Deficit accumulated during the development stage.. (48,098,547) (24,787,441)
------------ ------------
Total stockholders' equity......................... 89,067,898 1,964,710
------------ ------------
Total liabilities and stockholders' equity......... $ 92,829,758 $ 4,325,007
============ ============
See accompanying notes.
F-4
POZEN Inc.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Period from
September 26,
1996 (inception)
Year Ended December 31, through
--------------------------------------- December 31,
2000 1999 1998 2000
------------ ------------ ----------- ----------------
Operating expenses:
General and
administrative........ $ 4,822,102 $ 2,319,939 $ 1,477,768 $ 9,727,027
Research and
development........... 19,398,904 9,458,225 7,569,187 39,548,003
------------ ------------ ----------- ------------
Total operating
expenses............... 24,221,006 11,778,164 9,046,955 49,275,030
Interest income
(expense), net......... 1,844,378 (367,282) 309,324 2,110,961
------------ ------------ ----------- ------------
Net loss................ (22,376,628) (12,145,446) (8,737,631) (47,164,069)
Non-cash preferred stock
charge................. 27,617,105 -- -- 27,617,105
Preferred stock
dividends.............. 934,478 -- -- 934,478
------------ ------------ ----------- ------------
Loss attributable to
common stockholders.... $(50,928,211) $(12,145,446) $(8,737,631) $(75,715,652)
------------ ------------ ----------- ------------
Basic and diluted net
loss per common share.. $ (4.95) $ (2.08) $ (1.50)
------------ ------------ -----------
Shares used in computing
basic and diluted net
loss per common share.. 10,293,605 5,845,304 5,835,133
------------ ------------ -----------
Pro forma net loss per
common share--basic and
diluted................ $ (2.56) $ (1.01)
------------ ------------
Pro forma weighted
average common shares
outstanding--basic and
diluted................ 19,915,147 12,017,944
------------ ------------
See accompanying notes.
F-5
POZEN Inc.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
Series A Series B Series C Series D
Date of Preferred Preferred Preferred Preferred Common
Transaction Stock Stock Stock Stock Stock
-------------- --------- --------- --------- --------- -------
Issuance of 5,814,190 September
shares of common stock 1996
at $0.001 per share... $ -- $ -- $ -- $ -- $ 5,814
Issuance of 2,105,931 December
shares of Series A 1996
preferred stock at
$3.15 per share....... 2,106 -- -- -- --
Issuance of 78,776 December
shares of Series A 1996
preferred stock
warrants for financing
activities............ -- -- -- -- --
Deferred compensation.. -- -- -- -- --
Amortization of -- -- -- -- --
deferred
compensation..........
Net loss............... -- -- -- -- --
------- ------- ----- ------- -------
Balance at December 31, 2,106 -- -- -- 5,814
1996...................
Proceeds from -- -- -- -- --
stockholders'
receivables...........
Issuance of 1,135,000 December
shares of Series B 1997
preferred stock at
$4.00 per share....... -- 1,135 -- -- --
Issuance of 36,450
shares of Series B
preferred stock
warrants for financing
activities............ -- -- -- -- --
Deferred compensation.. -- -- -- -- --
Amortization of -- -- -- -- --
deferred
compensation..........
Net loss............... -- -- -- -- --
------- ------- ----- ------- -------
Balance at December 31, 2,106 1,135 -- -- 5,814
1997...................
Issuance of 4,377 March
shares of Series C 1998
preferred stock at
$4.00 per share....... -- 4 -- -- --
Issuance of 563,044 March
shares of Series C 1998
preferred stock at
$4.05 per share....... -- -- 563 -- --
Exercise of 29,977 -- -- -- -- 30
stock options at $0.19
per share.............
Issuance of 8,884 March
shares of Series C 1998
preferred stock
warrants for financing
activities............ -- -- -- -- --
Deferred compensation.. -- -- -- -- --
Amortization of -- -- -- -- --
deferred
compensation..........
Net loss............... -- -- -- -- --
------- ------- ----- ------- -------
Balance at December 31, 2,106 1,139 563 -- 5,844
1998...................
Issuance of 2,593,750 July and Sept.
shares of Series D 1999
preferred stock at
$4.80 per share....... -- -- -- 2,594 --
Exercise of 3,373 stock -- -- -- -- 4
options at $0.19 per
share.................
Deferred compensation.. -- -- -- -- --
Amortization of -- -- -- -- --
deferred
compensation..........
Issuance of 200,000 July and Sept.
shares of Series D 1999
preferred stock
warrants for financing
activities............ -- -- -- -- --
Net loss............... -- -- -- -- --
------- ------- ----- ------- -------
Balance at December 31, 2,106 1,139 563 2,594 5,848
1999...................
Exercise of common -- -- -- -- 208
stock options.........
Deferred compensation.. -- -- -- -- --
Amortization of -- -- -- -- --
deferred
compensation..........
Preferred stock -- -- -- -- --
dividends.............
Conversion of preferred (2,106) (1,139) (563) (2,594) 15,488
stock into common
stock.................
Proceeds from sale of
common stock in
initial public
offering, net of
offering costs........ -- -- -- -- 5,000
Proceeds from sale of -- -- -- -- 750
common stock..........
Exercise of common -- -- -- -- 369
stock warrants........
Dividends.............. -- -- -- -- 69
Net loss............... -- -- -- -- --
------- ------- ----- ------- -------
Balance at December 31, $ -- $ -- $ -- $ -- $27,732
2000...................
------- ------- ----- ------- -------
F-6
POZEN Inc.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
Deficit
Accumulated
Additional Preferred Receivable During the Total
Paid-In Stock From Deferred Development Stockholders'
Capital Warrants Stockholders Compensation Stage Equity
----------- ---------- ------------ ------------ ------------ -------------
$ (1,504) $ -- $ (4,310) $ -- $ -- $ --
6,231,314 -- (1,000,000) -- -- 5,233,420
-- 242,000 -- -- -- 242,000
190,385 -- -- -- -- --
-- -- -- (190,385) -- 28,267
-- -- -- 28,267 (101,334) (101,334)
----------- ---------- ----------- ----------- ------------ ------------
6,420,195 242,000 (1,004,310) (162,118) (101,334) 5,402,353
-- -- 1,004,310 -- -- 1,004,310
4,195,865 -- -- -- 4,197,000
-- 139,000 -- -- -- 139,000
1,001,629 -- -- (1,001,629) -- --
-- -- -- 214,272 -- 214,272
-- -- -- -- (3,803,030) (3,803,030)
----------- ---------- ----------- ----------- ------------ ------------
11,617,689 381,000 -- (949,475) (3,904,364) 7,153,905
17,508 -- -- -- -- 17,512
2,170,250 -- -- -- -- 2,170,813
5,525 -- -- -- -- 5,555
-- 35,000 -- -- -- 35,000
(362,489) -- -- (362,489) -- --
-- -- -- 401,468 -- 401,468
-- -- -- -- (8,737,631) (8,737,631)
----------- ---------- ----------- ----------- ------------ ------------
14,173,461 416,000 (910,496) (12,641,995) 1,046,622
11,522,406 -- -- -- 11,525,000
621 -- -- -- -- 625
3,045,666 -- -- (3,045,666) -- --
-- -- -- 612,909 -- 612,909
-- 925,000 -- -- -- 925,000
-- -- -- -- (12,145,446) (12,145,446)
----------- ---------- ----------- ----------- ------------ ------------
28,742,154 1,341,000 (3,343,253) (24,787,441) 1,964,710
74,861 -- -- -- -- 75,069
6,328,492 -- -- (6,328,492) -- --
-- -- -- 3,054,286 -- 3,054,286
-- -- -- -- (934,478) (934,478)
27,347,019 -- -- -- -- 27,356,105
67,798,052 -- -- -- -- 67,803,052
10,461,750 -- -- -- -- 10,462,500
1,805,682 (914,952) -- -- -- 891,099
772,114 -- -- -- -- 772,183
-- -- -- -- (22,376,628) (22,376,628)
----------- ---------- ----------- ----------- ------------ ------------
$43,330,124 $ 426,048 $ -- $(6,617,459 $(48,098,547) $ 89,067,898
=========== ========== =========== =========== ============ ============
F-7
POZEN Inc.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Period from
September 26,
1996 (inception)
Year Ended December 31, through
--------------------------------------- December 31,
2000 1999 1998 2000
------------ ------------ ----------- ----------------
Operating activities
Net loss................ $(22,376,628) $(12,145,446) $(8,737,631) $(47,164,069)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation.......... 58,083 43,815 42,980 166,616
Amortization of
deferred
compensation......... 3,054,286 612,909 401,468 4,311,202
Noncash financing
charge............... -- 450,000 -- 450,000
Changes in operating
assets and liabilities:
Prepaid expenses and
accrued interest
receivable........... (277,287) (15,422) 76,579 (311,304)
Other assets.......... 462 (625) (21) (9,091)
Accounts payable and
accrued expenses..... 1,401,563 293,826 929,529 3,761,860
------------ ------------ ----------- ------------
Net cash used in
operating activities... (18,139,521) (10,760,943) (7,287,096) (38,794,786)
Investment activities
Purchase of equipment... (106,512) (54,676) (44,334) (325,396)
------------ ------------ ----------- ------------
Net cash used in
investing activities... (106,512) (54,676) (44,334) (325,396)
Financing activities
Proceeds from issuance
of preferred stock..... 27,617,105 9,000,000 2,223,325 48,651,850
Proceeds from issuance
of common stock........ 78,970,720 625 5,555 78,976,900
Proceeds from
stockholders'
receivables............ -- -- -- 1,004,310
Proceeds from notes
payable................ -- 3,000,000 -- 3,000,000
Payment of dividend..... (162,295) -- -- (162,295)
------------ ------------ ----------- ------------
Net cash provided by
financing activities... 106,425,530 12,000,625 2,228,880 131,470,765
------------ ------------ ----------- ------------
Net increase (decrease)
in cash and cash
equivalents............ 88,179,497 1,185,006 (5,102,550) 92,350,583
Cash and cash
equivalents at
beginning of period.... 4,171,086 2,986,080 8,088,630 --
------------ ------------ ----------- ------------
Cash and cash
equivalents at end of
period................. $ 92,350,583 $ 4,171,086 $ 2,986,080 $ 92,350,583
------------ ------------ ----------- ------------
Supplemental schedule of
cash flow information
Cash paid for interest.. $ 5,772 $ 136,318 $ 35,630 $ 184,416
------------ ------------ ----------- ------------
Supplemental schedule
noncash investing and
financing activities
Conversion of notes
payable to preferred
stock.................. $ -- $ 3,000,000 $ -- $ 3,000,000
------------ ------------ ----------- ------------
Preferred stock
dividend............... $ 772,183 $ -- $ -- $ 772,183
------------ ------------ ----------- ------------
See accompanying notes.
F-8
POZEN Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
Development Stage Company
POZEN Inc. ("POZEN" or the "Company") was incorporated in the state of
Delaware on September 25, 1996.
The Company is a pharmaceutical company committed to building a portfolio of
products with significant commercial potential in targeted therapeutic areas.
The Company's initial therapeutic area of focus is migraine, where it has built
a portfolio of four product candidates through a combination of innovation and
in-licensing. The Company's lead product candidate is MT 100, which is being
developed as an oral first-line therapy for the treatment of migraine.
In order to continue to expand its product pipeline, the Company intends to
complement its internal product innovations by in-licensing additional product
candidates. The Company intends to commercialize its product candidates through
other pharmaceutical companies in exchange for upfront and milestone payments
and royalties. In the future, the Company may retain the right to co-promote
its products.
The Company's in-licensing strategy, intended to improve the Company's
access to commercially attractive compounds, also provides the licensor with an
option to license back the product candidate at various stages of development
and on set terms and conditions.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from the estimates and
assumptions used.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash is invested in
interest-bearing investment-grade securities.
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents. Cash and
cash equivalents are deposited with high credit quality financial institutions
which invest primarily in U.S. Government securities, highly rated commercial
paper and certificates of deposit guaranteed by banks which are members of the
FDIC. The counterparties to the agreements relating to the Company's
investments consist primarily of the U.S. Government and various major
corporations with high credit standings.
Equipment
Equipment consists primarily of furniture and fixtures and is recorded at
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets ranging from five to seven years.
Research and Development Costs
Research and development costs are charged to operations as incurred.
Income Taxes
The Company accounts for income taxes using the liability method. Deferred
income taxes are provided for temporary differences between financial reporting
and tax bases of assets and liabilities.
F-9
POZEN Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Net Loss Per Share
Basic and diluted net loss per common share are presented in conformity with
the Statement of Financial Accounting Standards No. ("SFAS") 128, "Earnings per
Share", for all periods presented.
In accordance with SFAS 128, basic and diluted net loss per common share has
been computed using the weighted-average number of shares of common stock
outstanding during the period. Pro forma basic and diluted net loss per common
share, as presented in the statements of operations, has been computed for the
years ended December 31, 2000 and 1999 as described below.
The following table presents the calculation of basic and diluted net loss
per common share for the years ended December 31:
2000 1999 1998
------------ ------------ -----------
Net loss attributable to common
stockholders......................... $(50,928,211) $(12,145,446) $(8,737,631)
------------ ------------ -----------
Basic and diluted:
Weighted-average shares used in
computing basic and diluted net loss
per common share..................... 10,293,605 5,845,304 5,835,133
------------ ------------ -----------
Basic and diluted net loss per common
share................................ $ (4.95) $ (2.08) $ (1.50)
------------ ------------ -----------
The Company's preferred stock and related warrants converted into common
stock and common stock warrants upon the closing of the Company's initial
public offering in October 2000. For information purposes, the following pro
forma net loss per share data reflects the assumed conversion of the Company's
preferred stock into common stock at the later of issuance of the preferred
stock during, or at the beginning of, each of the years ended December 31:
2000 1999
----------- -----------
Pro forma:
Shares used above.................................. 10,293,605 5,845,304
Proforma adjustment to reflect weighted-average
effect of assumed conversion of preferred stock... 9,621,542 6,172,640
----------- -----------
Total weighted-average shares of common stock
outstanding proforma.............................. 19,915,147 12,017,944
----------- -----------
Basic and diluted proforma net loss per share...... $ (2.56) $ (1.01)
----------- -----------
During all periods presented, the Company had securities outstanding which
could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share, as their effect
would have been antidilutive. Such outstanding securities consist of the
following at December 31:
2000 1999 1998
--------- --------- ---------
Convertible preferred stock..................... -- 6,163,192 4,982,280
Outstanding common stock options................ 814,777 903,261 545,330
Outstanding warrants............................ 418,307 246,516 164,995
--------- --------- ---------
Total........................................... 1,233,084 7,312,969 5,692,605
--------- --------- ---------
F-10
POZEN Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock Based Compensation
The Company accounts for stock options issued to employees in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25"). Under APB 25, no compensation expense is recognized
for stock or stock options issued with an exercise price equivalent to the fair
value of the Company's common stock. In general, stock options and other equity
instruments granted or issued to consultants and others who are not employees
or directors are accounted for in accordance with SFAS No. 123, "Accounting for
Stock Based Compensation." For companies that continue to account for stock-
based compensation arrangements under APB 25, SFAS 123 requires disclosure of
the pro forma effect on net income (loss) as if the fair value-based method
prescribed by SFAS 123 had been applied. The Company has adopted the pro forma
disclosure requirements of SFAS 123.
Segment Reporting
As of January 1, 1998, the Company adopted SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS 131 establishes
standards for the way companies report information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company has determined that it does not have any separately reportable
operating segments as of December 31, 2000.
Accounting for Derivative Investments and Hedging Activities
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Investments and Hedging Activities." SFAS 133 establishes a new model for
accounting for derivatives and hedging activities and supersedes several
existing standards. SFAS 133, as amended by SFAS 137 and SFAS 138, is effective
January 1, 2001. The adoption of SFAS 133 had no impact on the Company's
financial statements.
2. Stockholders' Equity
In December 1996, the Company completed a private placement of 2,105,931
shares of its Series A Convertible Preferred Stock ("Series A") and received
cash of $5,475,420 and notes receivable of $1,000,000, net of offering costs.
The notes receivable were collected during 1997. In conjunction with the
issuance of the Series A, in January 1997, the Company issued warrants to
purchase 78,776 shares of Series A at a purchase price of $0.001 per share to
certain key advisors for their services related to financing activities. The
warrants have been accounted for as offering costs related to the issuance of
the Series A at a value calculated under the "Black-Scholes" formula at
approximately $242,000.
In December 1997, the Company completed a private placement of 1,135,000
shares of its Series B Convertible Preferred Stock ("Series B") and received
cash of $4,336,000, net of offering costs. At December 31, 1997, the Company
issued warrants to purchase 36,450 shares of Series B at a purchase price of
$0.001 per share to certain key advisors for their services related to
financing activities. The warrants have been accounted for as offering costs
related to the issuance of the Series B at a value calculated under the
"Black-Scholes" formula at approximately $139,000.
In March 1998, the Company issued an additional 4,377 shares of its Series B
for $17,512 interest accrued on the funds received prior to the December 1997
Series B private placement.
On March 4, 1998, the Company amended its Certificate of Incorporation to
increase the number of authorized shares of common stock, par value $.001, from
10,000,000 shares to 20,000,000 shares.
F-11
POZEN Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In March 1998, the Company completed a private placement of 563,044 shares
of its Series C Convertible Preferred Stock ("Series C") and received cash of
$2,205,813, net of offering costs. In conjunction with the issuance of the
Series C, the Company issued warrants to purchase 8,884 shares of Series C at a
purchase price of $0.001 per share to certain key advisors for their services
related to financing activities. The warrants have been accounted for as
offering costs related to the issuance of Series C at a value calculated under
the "Black-Scholes" formula at approximately $35,000.
In July 1999, the Company amended its Certificate of Incorporation to
increase the number of authorized shares of common stock, par value $0.001 per
share, from 20,000,000 shares to 30,000,000 shares and the number of authorized
shares of preferred stock, par value $0.001 per share, from 10,000,000 shares
to 20,000,000 shares.
In July 1999 the Company completed a private placement of 1,875,000 shares
of its Series D Convertible Preferred Stock ("Series D") and received cash of
$9,000,000. In September 1999, upon completion of the Series D private
placement, the previously issued Convertible Promissory Note ("Note") funded by
MEDGROWTH S.A. ("MEDGROWTH") in bridge financing, issued on March 1, 1999 for
$3,000,000, automatically converted into 625,000 shares of Series D at $4.80
per share. The terms of the Note provided for automatic conversion into shares
of Series D on the same terms and conditions extended to other purchasers of
Series D, the conversion of the $450,000 loan origination fee into Series D or
payable in cash at the time of conversion and the issuance of 200,000 warrants
to BB Medtech AG, of which MEDGROWTH is a wholly owned subsidiary, to purchase
200,000 shares of Series D at a purchase price of $3.15 per share with a term
of two years for their services related to financing activities. Interest on
the Note was paid at a fixed rate of 11% annually. The warrants have been
accounted for as offering costs related to the issuance of the Series D at a
value calculated under the "Black-Scholes" formula at approximately $925,000.
MEDGROWTH elected to receive 93,750 shares of Series D in exchange for the
Note's loan origination fee in the amount of $450,000, which was expensed as a
financing cost.
All outstanding shares of Series A, Series B, Series C and Series D and
related warrants were converted into 8,636,436 shares of the Company's common
stock and warrants upon the closing of the Company's initial public offering
(the "Offering") in October 2000.
In November 2000, common stock warrants valued at $925,000 were exercised
for 269,800 shares of common stock.
In December 2000, common stock warrants valued at $250,952 were exercised
for 99,424 shares of common stock.
On August 28, 2000 and September 14, 2000, the Board of Directors and the
stockholders, respectively, of the Company approved a 1.349-for-1 common stock
split to be effective prior to the effectiveness of the Offering. An amendment
to the Company's Certificate of Incorporation effecting the stock split was
filed with the State of Delaware on October 6, 2000. All common share and per
common share amounts for all periods presented in the accompanying financial
statements reflect the effect of this common stock split.
In addition, the Board of Directors and stockholders approved an amendment
to the Certificate of Incorporation that took effect upon the completion of the
initial public offering, increasing the authorized capital stock to 90,000,000
shares of common stock and reducing the number of authorized preferred stock to
10,000,000, each with a par value of $0.001.
F-12
POZEN Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Shares Reserved for Future Issuance
At December 31, 2000, shares of common stock reserved for future issuance
are as follows:
Shares available for grant under stock option plans.............. 2,980,000
Shares issuable pursuant to options granted under stock option
plans........................................................... 1,383,573
Warrants......................................................... 101,031
---------
Total reserved................................................... 4,464,604
---------
3. Redeemable Preferred Stock
On March 24, 2000, the Company completed a private placement of 2,589,927
shares of Series E Convertible Preferred Stock ("Series E") and received cash
of $16,875,115, net of offering costs. The terms of the Series E provide for
similar rights as those provided to the Series A, Series B, Series C, and
Series D. The Series E holders were entitled to receive cumulative dividends at
an annual rate of 8% of the original purchase price payable in cash or shares
of Series E at the option of the holder. Dividends are payable when declared by
the Board of Directors and upon conversion, liquidation or redemption. The
terms of conversion decreased the conversion price from $6.95 to $5.73 since
the Company was unable to complete by September 15, 2000 a qualified public
offering or to effect a merger or acquisition of the Company that would entitle
the holders of the Series E to receive $10.43 or more per share. At the date of
issuance, the Company believed the per share price of $6.95 represented the
fair value of the preferred stock and was in excess of the deemed fair value of
its common stock. Subsequent to the commencement of the Company's initial
public offering process, the Company re-evaluated the deemed fair market value
of its common stock as of March 2000 and determined it to be $22.48 per share
(on a pre-split basis). Accordingly, the incremental fair value is deemed to be
the equivalent of a preferred stock dividend. The Company recorded the non-cash
preferred stock charge at the date of issuance by offsetting charges and
credits to additional paid-in capital of $16,875,115, without any effect on
total stockholders' equity. The non-cash charge was limited to the net proceeds
received from the Series E offering.
In conjunction with the issuance of the Series E, the Company issued
warrants to purchase 24,485 shares of Series E at an initial exercise price of
$6.95 per share to certain key advisors for their services related to financing
activities. These warrants have since been modified to provide for an
additional per share payment upon exercise, equal to the difference between the
exercise price otherwise applicable and the initial public offering price per
share of common stock. The warrants have been accounted for as offering costs
related to the issuance of Series E at a value calculated under the "Black
Scholes" formula at approximately $261,000.
On August 28, 2000, the Company completed a private placement of 1,597,285
shares of Series F and received cash of $10,742,000, net of offering costs. The
terms of the Series F are substantially similar to those of Series E. The
Company recorded a non-cash preferred stock charge at the date of issuance by
offsetting charges and credits to additional paid-in capital of $10,742,000,
without any effect on total stockholders' equity.
All outstanding shares of Series E and Series F and related Series E
warrants were converted into 6,851,207 shares of the Company's common stock and
33,030 warrants upon the closing of the Company's initial public offering in
October 2000.
F-13
POZEN Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Accrued Expenses
Accrued expenses consist of the following:
December 31,
---------------------
2000 1999
---------- ----------
Clinical trial contract costs......................... $2,793,848 $1,832,551
Compensation costs.................................... 407,192 --
Other................................................. 432,491 168,376
---------- ----------
$3,633,531 $2,000,927
========== ==========
5. Income Taxes
At December 31, 2000 and 1999, the Company had federal and state net
operating loss carryforwards of approximately $39.4 million and $22.1 million,
respectively, for income tax purposes. At December 31, 2000 and 1999, the
Company had research and development credit carryforwards of approximately $1.9
million and $685,000, respectively. The federal net operating loss
carryforwards and research and development credit carryforwards begin to expire
in 2012. The state net operating loss carryforwards begin to expire in 2001.
For financial reporting purposes, a valuation allowance has been recognized to
offset the deferred tax assets related to the carryforwards. When, and if
recognized, the tax benefit for those items will be reflected in current
operations of the period in which the benefit is recorded as a reduction of
income tax expense. The utilization of the loss carryforwards to reduce future
income taxes will depend on the Company's ability to generate sufficient
taxable income prior to the expiration of the net operating loss carryforwards.
In addition, the maximum annual use of net operating loss carryforwards is
limited in certain situations where changes occur in stock ownership.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets are as follows:
December 31,
-------------------------
2000 1999
------------ -----------
Deferred tax assets:
Net operating loss carryforward.................. $ 15,760,000 $ 9,040,000
Research and development credits................. 1,923,000 685,000
Other............................................ 419,000 --
------------ -----------
Total deferred tax assets......................... 18,102,000 9,725,000
Valuation allowance............................... (18,102,000) (9,725,000)
------------ -----------
Net deferred tax asset............................ $ -- $ --
============ ===========
6. Stock Option Plan
On November 20, 1996, the Company established a Stock Option Plan and
authorized the issuance of options for up to 1,605,310 shares of common stock
to attract and retain quality employees and to allow such employees to
participate in the growth of the Company. Awards may be made to participants in
the form of incentive and nonqualified stock options. Eligible participants
under the Plan include executive and key employees of the Company. The vesting
period ranges from immediate vesting at issuance to three years or
F-14
POZEN Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
immediately upon a significant change in ownership as defined by the plan
document. The exercise price for incentive stock options may not be less than
100% of the fair market value of the common stock on the date of grant (110%
with respect to incentive stock options granted to optionees who are 10% or
more stockholders of the Company).
In May 2000, the Board of Directors adopted, and in June 2000 the
stockholders approved, the POZEN Inc. 2000 Equity Compensation Plan. The Plan
became effective upon the consummation of the Company's initial public offering
in October 2000 and provides for grants of incentive stock options,
nonqualified stock options, stock awards, performance units and other stock-
based awards to our employees, non-employee directors, advisors, and
consultants. The Plan authorizes up to 3,000,000 shares of common stock for
issuance under the terms of the Plan. The maximum number of shares for which
any individual may receive grants in any calendar year is 1,000,000 shares. If
options granted under the Plan expire or are terminated for any reason without
being exercised, or if stock awards, performance units or other stock-based
awards are forfeited or otherwise terminate, the shares of common stock
underlying the grants will again be available for purposes of the Plan.
A summary of the Company's stock option activity, and related information is
as follows:
Weighted-
Number of Average Exercise
Shares Price
--------- ----------------
Balance at December 31, 1996..................... 88,562 0.19
Options granted................................. 470,127 0.19
Forfeited....................................... (10,118) 0.19
--------- -----
Balance at December 31, 1997..................... 548,571 0.19
Options granted................................. 194,593 0.33
Exercised....................................... (29,977) 0.19
Forfeited....................................... (104,923) 0.19
--------- -----
Balance at December 31, 1998..................... 608,264 0.23
Options granted................................. 612,221 1.12
Exercised....................................... (3,373) 0.19
Forfeited....................................... (105,222) 0.88
--------- -----
Balance at December 31, 1999..................... 1,111,890 0.66
Options granted................................. 486,762 2.87
Exercised....................................... (208,334) 0.36
Forfeited....................................... (6,745) 1.48
--------- -----
Balance at December 31, 2000..................... 1,383,573 $1.49
--------- -----
F-15
POZEN Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The options outstanding and exercisable at December 31, 2000 are as follows:
Options Outstanding Weighted-Average
----------------------------- Remaining Contractual
Exercise Number Life Vested
Price Outstanding (In years) Options
-------- ----------- --------------------- -------
$ 0.19 354,294 6.6 336,664
$ 0.44 77,568 7.7 41,595
$ 0.89 233,828 8.3 64,078
$ 1.48 366,029 8.9 77,043
$ 2.02 167,276 9.2 --
$ 3.40 76,893 9.4 --
$ 3.74 47,215 4.6 --
$ 4.25 40,470 9.8 --
$12.50 20,000 9.9 --
--------- -------
1,383,573 519,380
--------- -------
The following table summarizes the fair value of options granted:
Weighted-Average
Fair Value Exercise Price
--------------------- ------------------
Type of Option 2000 1999 1998 2000 1999 1998
-------------- ------ ------ ----- ------ ----- -----
Stock price = exercise price......... $12.50 $ -- $ -- $12.50 $ -- $ --
Stock price > exercise price......... $20.23- $ 4.05- $4.00- $ 2.36 $1.12 $0.33
$22.48 $20.23 $4.05
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options.
During the years ended December 31, 2000, 1999 and 1998 in connection with
the grant of certain share options to employees, the Company recorded deferred
compensation of $6,328,492, $3,045,666, and $362,439, respectively,
representing the excess of the fair value of the common stock on the date of
grant over the exercise price. Deferred compensation is included as a reduction
of stockholders' equity and is being amortized to expense according to the
vesting method. During the years ended December 31, 2000, 1999 and 1998 and
from September 26, 1996 (inception) through December 31, 2000, the Company
recorded amortization of deferred compensation of $3,054,286, $612,909,
$401,468 and $4,311,202, respectively.
Pro forma net loss information is required to be disclosed by SFAS 123 and
has been determined as if the Company has accounted for its employee stock
options under the fair market value method of that statement. The fair value
for these options was estimated at the date of grant using the minimum value
method with the following weighted-average assumptions:
2000 1999 1998
--------- -------- --------
Expected dividend yield.......................... 0% 0% 0%
Risk-free interest rate range.................... 5.3%-6.6% 6.5% 6.0%
Expected life.................................... 10 years 10 years 10 years
F-16
POZEN Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
For periods following the Company's initial public offering, the "Black-
Scholes" method was used to calculate the fair value of options granted. This
method includes the above assumptions, as well as the estimated volatility of
the Company's common stock.
The minimum value option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions. Because the Company's employee stock options
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options. For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period. Had
compensation cost for the Company's stock option plans been determined based on
the fair value at the grant date consistent with the provisions of SFAS 123,
the Company's net loss attributable to common stockholders would not have been
materially affected.
7. Leases
The Company leases its office space and certain equipment under cancelable
and noncancelable operating lease agreements. Rent expense incurred by the
Company was approximately $123,000, $107,000, $116,000 and $536,000 for the
years ended December 31, 2000, 1999 and 1998 and for the period September 25,
1996 (inception) through December 31, 2000, respectively. The following is a
schedule of future minimum lease payments for operating leases at December 31,
2000:
2001............................ $143,243
2002............................ 146,855
2003............................ 50,720
--------
$340,818
========
8. License Agreement
In September 1999, the Company entered into a licensing agreement with F.
Hoffmann-La Roche, Ltd. and Syntex (collectively, "Roche") in which the Company
is granted certain patent rights and know how to develop, manufacture and
commercialize Roche's MT 500 compound. The agreement provides for a product
option during two discrete periods whereby Roche would re-acquire all of the
rights granted to the Company as well as any data, documentation, know how and
additional intellectual property generated, owned or controlled by the Company.
Depending upon the development period at which the product option is exercised,
Roche would make specified one-time payments upon exercise of the product
option and upon NDA approval. In addition, Roche would make royalty payments
based upon net sales. In general, either party may terminate the agreement in
the event of an uncured material breach by the other party, or in the event of
the bankruptcy of the other party. In either case the terminating party will
obtain all rights to the product. Additionally, the Company, prior to exercise
of the option by Roche, or Roche, following exercise of the option by Roche,
may terminate the agreement without cause by providing the other party with 180
days' written notice, in which case the non-terminating party will obtain all
rights to the product. All royalty and other payment obligations of the parties
survive any termination of the agreement.
The Company made a one-time non refundable payment of $1 million to enter
into this agreement. If the collaborative agreement continues for the full
term, the Company will pay Roche royalties on net sales and a portion of all
payments owed by the Company's sublicensees less the Company's development
cost. The
F-17
POZEN Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
product has not completed the clinical development process. As the Company is
required to advance the product through the clinical development process, it
has charged the $1 million payment to research and development.
9. Retirement Savings Plan
In July 1997, the Company began a defined contribution 401(k) pension plan
(the "Plan") covering substantially all employees who are at least 21 years of
age. Based upon management's discretion, the Company may elect to make
contributions to the Plan. For the years ended December 31, 1998, 1999 and
2000, and for the period September 25, 1996 (inception) through December 31,
2000, the Company did not make any contributions to the Plan.
10. Legal Proceedings
The Company is not a party to any material legal proceedings.
On October 6, 2000, an action was filed against the Company arising out the
engagement of an investment banking firm in early 1999 to assist the Company
with the sale of convertible preferred stock in a private placement offering.
It is alleged that POZEN owes certain fees and expenses in connection with the
termination of the firm's engagement, and transaction consideration, including
warrants, in connection with the issuance and sale of preferred stock in the
twelve-month period following the termination of such engagement. The Company
believes that this is not a material proceeding and is vigorously defending the
action. The Company also believes that any fees or expenses incurred will not
have a material effect on the financial position or the results of operations
of the Company.
11. Summary of Operations by Quarters (Unaudited)
2000
-----------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
(in thousands except for per share data)
Operating expenses............ $ 3,033 $ 6,314 $ 8,789 $ 6,085
Net loss...................... (2,984) (6,058) (8,554) (4,780)
Net loss attributable to
common stockholders.......... (19,859) (6,449) (19,735) (4,885)
Net loss per share of common
stock
Basic and diluted............ $ (3.43) $ (1.10) $ (3.35) $ (0.21)
Proforma..................... (1.34) (0.34) (1.00) (0.19)
Number of shares used in per
share calculation
Basic and diluted............ 5,792 5,873 5,887 23,623
Proforma..................... 14,848 18,747 19,737 26,328
1999
-----------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
(in thousands except for per share data)
Operating expenses............ $ 2,099 $ 1,810 $ 3,208 $ 4,661
Net loss...................... (2,068) (1,883) (3,610) (4,585)
Net loss attributable to
common stockholders.......... (2,068) (1,883) (3,610) (4,585)
Net loss per share of common
stock
Basic and diluted............ $ (0.35) $ (0.32) $ (0.62) $ (0.78)
Proforma..................... (0.19) (0.17) (0.31) (0.32)
Number of shares used in per
share calculation
Basic and diluted............ 5,844 5,844 5,844 5,845
Proforma..................... 11,018 11,018 11,552 14,482
F-18
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Registrant.*
3.2 Amended and Restated Bylaws of the Registrant.*
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated
Certificate of Incorporation and Amended and Restated Bylaws of the
Registrant defining rights of the holders of common stock of the
Registrant.
10.1 Sublease Agreement between Quintiles, Inc. and the Registrant, dated
April 7, 1997.*
10.2 Stock Option Plan of the Registrant.*+
10.3 First Amendment to Stock Option Plan dated February 14, 1997.*+
10.4 Executive Employment Agreement with John R. Plachetka dated April 1,
1999.*+
10.5 License Agreement dated September 24, 1999 between the Registrant and
F. Hoffman-La Roche Ltd. and Syntex.*
10.6 Investor Rights Agreement dated July 28, 1999 between the Registrant
and the holders of the Series D Preferred Stock.*
10.7 Investor Rights Agreement dated March 24, 2000 between the Registrant
and the holders of the Series E Preferred Stock.*
10.8 2000 Equity Compensation Plan.*+
10.9 Investor Rights Agreement dated August 28, 2000 between the Registrant
and the holders of the Series F Preferred Stock.*
10.10 Sublease Agreement between Intecardia, Inc. and the Registrant dated
as of September 1, 2000.**
21.1 List of Subsidiaries.*
23.1 Consent of Ernst & Young LLP, Independent Auditors.**
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*Incorporated by reference to Registration Statement on Form S-1, No. 333-
35930.
**Filed herewith.
+Management contracts or compensatory plans filed pursuant to Item 14(c) of
Form 10-K.