As filed with the Securities and Exchange Commission on April 20, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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DURECT CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 2834 94-3297098
(Primary Standard (I.R.S. Employer
(State or Other Industrial Identification Number)
Jurisdiction of Classification Code
Incorporation or Number)
Organization) ----------------
10240 Bubb Road
Cupertino, CA 95014
(408) 777-1417
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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James E. Brown
Chief Executive Officer
DURECT Corporation
10240 Bubb Road
Cupertino, CA 95014
(408) 777-1417
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Mark B. Weeks Gregory M. Gallo
Stephen B. Thau Joe C. Sorenson
Ughetta T. Manzone Sally J. Rau
Venture Law Group Bradley J. Gersich
A Professional Corporation Gray Cary Ware & Freidenrich LLP
2800 Sand Hill Road 400 Hamilton Avenue
Menlo Park, CA 94025 Palo Alto, CA 94301
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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Proposed
Title of Each Class of Maximum Aggregate Amount of
Securities to be Registered Offering Price(1) Registration Fee
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Common Stock, par value $0.0001............. $115,000,000 $30,360
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(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rules 457(a) and 457(o) under the Securities
Act.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued April 20, 2000
[ ] Shares
[LOGO OF DURECT CORPORATION]
DURECT Corporation
COMMON STOCK
-----------
DURECT Corporation is offering shares of its common stock. This is
our initial public offering and no public market exists for our shares. We
anticipate that the initial public offering price will be between $ and
$ per share.
-----------
We have applied to list our common stock for quotation on the Nasdaq National
Market under the symbol "DRRX."
-----------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 5.
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PRICE $ A SHARE
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Price Underwriting
to Discounts and Proceeds to
Public Commissions DURECT
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Per Share ..................................... $ $ $
Total ......................................... $ $ $
DURECT has granted the underwriters the right to purchase up to an additional
shares of common stock to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares of common stock
to purchasers on , 2000.
-----------
MORGAN STANLEY DEAN WITTER
CHASE H&Q
CIBC WORLD MARKETS
, 2000
[COLOR ARTWORK]
Upper right hand corner: Text "Targeted drug delivery for chronic disease
therapy."
Right side of page: The following images and words are presented from top to
bottom: (1) An image of chemistry equipment with the word "Chemistry"
underneath and an arrow pointing to the center of the page; and (2) an image
of gears with the word "Engineering" underneath and an arrow pointing to the
center of the page.
Center of page: Two images of the DUROS drug delivery system, one above the
other. The bottom image also includes a catheter connected to the DUROS drug
delivery system. Four arrows start near the center, each pointing to one of
the images at the left side of the page described below.
Left side of page: The following images and text are presented from top to
bottom: (1) an image of a molecule with the words "The right drug" underneath;
(2) an image of a graph showing curves representing drug concentration in the
body over a period of time, with the words "The Right Amount" underneath; (3)
an image of a person with arrows pointing to locations where pharmaceutical
systems may be located, with the words "The Right Place" underneath; and (4)
an image of an hourglass with the words "The Right Time" underneath.
TABLE OF CONTENTS
Page
----
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Financial and Operating Data.................................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 28
Management............................................................... 43
Certain Transactions..................................................... 56
Principal Stockholders................................................... 57
Description of Capital Stock............................................. 60
Shares Eligible for Future Sale.......................................... 64
Underwriting............................................................. 66
Legal Matters............................................................ 68
Experts.................................................................. 68
Where You Can Find More Information...................................... 69
Index to Consolidated Financial Statements............................... F-1
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You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of the
prospectus or of any sale of the common stock.
Until , 2000 (25 days after the date of this prospectus) all dealers
that buy, sell or trade our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This delivery requirement
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their allotments or subscriptions.
For investors outside the United States: Neither we nor any of the
underwriters have done anything that would permit this offering or possession
or distribution of this prospectus in any jurisdiction where action for that
purpose is required, other than in the United States. You are required to
inform yourselves about and to observe any restrictions relating to this
offering and the distribution of this prospectus.
i
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our consolidated financial statements and notes thereto appearing
elsewhere in this prospectus.
DURECT Corporation
We are pioneering the treatment of chronic diseases and conditions by
developing and commercializing pharmaceutical systems to deliver the right drug
to the right place in the right amount at the right time. Our pharmaceutical
systems combine engineering innovations and delivery technology from the
medical device and drug delivery industries with our proprietary pharmaceutical
and biotechnology drug formulations. By integrating these technologies, we are
able to control the rate and duration of drug administration as well as target
the delivery of the drug to its intended site of action, allowing our
pharmaceutical systems to meet the special challenges associated with treating
chronic diseases or conditions. Our pharmaceutical systems can enable new drug
therapies or optimize existing therapies based on a broad range of compounds,
including small molecule pharmaceuticals as well as biotechnology molecules
such as proteins, peptides and genes. Our initial portfolio of products combine
the DUROS technology, a proven and patented drug delivery platform licensed for
specified fields of use from ALZA Corporation, with drugs for which medical
data on efficacy and safety are available.
According to the Centers for Disease Control, cardiovascular disease,
cancer, neurodegenerative diseases, diabetes, arthritis, epilepsy and other
chronic diseases claimed the lives of more that 1.7 million Americans in 1999.
The Centers for Disease Control also estimates that the major chronic diseases
are responsible for approximately 70% of all deaths in the U.S., and medical
care costs for these conditions totaled more than $400 billion annually.
Currently, more than 60% of total health care spending in the U.S. is devoted
to the treatment of chronic diseases. Demographic trends suggest that, as the
U.S. population ages, the incidence of chronic disease and cost of treating it
as a proportion of total health care spending will increase. While the
pharmaceutical, biotechnology, drug delivery and medical device industries have
increased overall life expectancy and improved patient quality of life, many
chronic debilitating diseases continue to be inadequately treated with current
drugs or medical devices.
Our pharmaceutical systems are suitable for providing long-term drug therapy
because they store highly concentrated, stabilized drugs in a small volume and
can protect the drug from degradation by the body. This, in combination with
our ability to deliver precise, accurate and continuous doses of a drug, allows
us to extend the therapeutic value of a wide variety of drugs, including those
which would otherwise be ineffective, too unstable, too potent or cause adverse
side effects. Delivering the drug directly to the intended site of action can
also improve efficacy while minimizing unwanted side effects elsewhere in the
body, which often limit the long-term use of many drugs. Our pharmaceutical
systems can thus provide better therapy for chronic diseases or conditions by
replacing multiple injection therapy or oral dosing, improving drug efficacy,
reducing side effects and ensuring dosing compliance. Our pharmaceutical
systems can improve patients' quality of life by eliminating more repetitive
treatments, reducing dependence on caregivers and allowing them to lead more
independent lives.
We are currently developing pharmaceutical systems based on the DUROS
technology, coupled with proprietary catheter and drug formulation technology,
to address a variety of therapeutic areas, including chronic pain, central
nervous system disorders, cardiovascular diseases and inner ear disorders. The
DUROS is a miniature drug-dispensing pump that releases minute quantities of
concentrated drug formulations in a continuous, consistent flow for as long as
one year using an osmotic engine. The miniature pump, made out of titanium, can
be as small as a wooden matchstick and can be implanted under the skin. The
potential of the DUROS technology as a platform for providing drug therapy was
recently demonstrated by the Food and Drug Administration's approval in March
2000 of ALZA's Viadur (leuprolide acetate implant), a one-year
1
implant for the palliative treatment of prostate cancer, the first approved
product to incorporate the DUROS implant technology. By leveraging this proven
platform technology, we believe we can reduce our development risk and more
rapidly introduce new products to the market. Beyond the DUROS technology, we
intend to develop other technologies consistent with our objective of
delivering the right drug to the right place in the right amount at the right
time.
Our lead product is for the treatment of chronic pain and combines the DUROS
technology with a proprietary formulation of sufentanil, a potent opioid
currently used in hospitals as an anesthetic. We completed an initial Phase I
trial in November 1999 using an external pump to test the safety of continuous
chronic infusion of the drug. We intend to commence a pharmacokinetic study and
a Phase II human clinical trial in late 2000. This product is aimed at the
approximately $1 billion market for the treatment of chronic pain and will
compete with oral opioids, analgesic patches and external and implantable
infusion pumps. Our second product in development is designed to target
delivery of hydromorphone, an opioid approved for use as an analgesic, via a
catheter to the intended site of action in the central nervous system. We are
designing this product to treat end-stage cancer pain and will be conducting
preclinical studies in mid-2000. We are also researching and developing
pharmaceutical systems based on the DUROS technology in a variety of other
therapeutic areas, including central nervous system disorders, cardiovascular
disease and inner ear disorders.
Our objective is to develop and commercialize pharmaceutical systems that
address significant medical needs and improve patients' quality of life. To
achieve this objective, our strategy includes the following key elements:
. Focus on chronic debilitating medical conditions;
. Minimize product development risk and speed time-to-market;
. Enable the development of pharmaceutical systems based on biotechnology
and other new compounds; and
. Expand our technology platforms.
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DURECT Corporation's executive offices are located at 10240 Bubb Road,
Cupertino, CA 95104, (408) 777-1417. IntraEAR, Round Window (mu)-Cath, Round
Window e-Cath and ALZET are trademarks of DURECT Corporation. DUROS is a
registered trademark of ALZA Corporation, and Viadur is a trademark of ALZA
Corporation. Each other trademark, trade name or service mark of any other
company appearing in this prospectus is the property of its holders.
2
THE OFFERING
Common stock offered............................... shares
Common stock to be outstanding after the offering.. shares
Use of proceeds.................................... For research, development,
manufacture and
commercialization of
existing and future
products and general
corporate purposes,
including working capital
and capital expenditures.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol............. DRRX
The number of shares does not take into account:
. 738,350 shares of our common stock subject to options outstanding under
our stock plans at March 31, 2000;
. 1,265,650 shares reserved for issuance under our 2000 stock plan;
. 150,000 shares reserved for issuance under our 2000 employee stock
purchase plan;
. 300,000 shares reserved under our 2000 directors stock option plan;
. a warrant to purchase 31,395 shares of our common stock issued in
January 1999; and
. a warrant to purchase 1,000,000 shares of our common stock issued in
April 2000.
Except as otherwise indicated, information in this prospectus is based on the
following assumptions:
. The conversion of all outstanding shares of preferred stock into common
stock on a one-for-one basis upon the closing of this offering;
. No exercise of the underwriters' over-allotment option; and
. The filing of our amended and restated certificate of incorporation upon
the closing of this offering.
3
SUMMARY FINANCIAL DATA
In the following summary financial data, the statement of operations data
for the period from inception (February 6, 1998), to December 31, 1998, the
year ended December 31, 1999 and the period from inception (February 6, 1998)
to December 31, 1999 are derived from and qualified in their entirety by our
consolidated financial statements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Period from Period from
inception inception
(February 6, Fiscal Year (February 6,
1998) to Ended 1998) to
December 31, December 31, December 31,
1998 1999 1999
------------ ------------ ------------
Statement of Operations Data: (in thousands, except per share data)
Revenue, net............................ $ -- $ 86 $ 86
Research and development expenses....... 709 6,363 7,072
Loss from operations.................... (1,443) (9,359) (10,802)
Net loss applicable to common
stockholders........................... (1,322) (9,310) (10,632)
Basic and diluted net loss per common
share.................................. (0.36) (1.76)
Shares used in computing basic and
diluted net loss per common share...... 3,655 5,291
Pro forma basic and diluted net loss per
common share (unaudited)............... (0.37)
Shares used in computing pro forma basic
and diluted net loss per common share
(unaudited)............................ 23,771
See Note 1 of the notes to financial statements for the determination of the
number of shares used in computing net loss per share and pro forma net loss
per share amounts.
The actual column in the following table presents actual summary balance
sheet data as of December 31, 1999. The pro forma balance sheet data below
reflects the sale of 3,571,429 shares of our stock in March 2000 for net
proceeds of approximately $24.8 million. The pro forma as adjusted balance
sheet data below also reflects the receipt of the net proceeds from the sale of
shares of common stock offered by us at an assumed initial public offering
price of $ per share, and after deducting the estimated underwriting
discounts and commissions and estimated offering expenses payable by us. The
pro forma and pro forma as adjusted columns below do not reflect the issuance
of 1,000,000 shares of our common stock in April 2000.
December 31, 1999
----------------------------------
Pro Pro Forma
Actual Forma As Adjusted
-------------- ------- -----------
(in thousands) (unaudited)
Balance Sheet Data:
Cash, cash equivalents and investments...... $18,933 $43,683
Working capital............................. 15,921 40,671
Total assets................................ 22,463 47,213
Equipment loan, net of current portion...... 189 189 189
Stockholders' equity........................ 20,728 45,478
4
RISK FACTORS
An investment in our shares is extremely risky. You should carefully
consider the following risks, in addition to the other information presented in
this prospectus, before deciding to buy our common stock. If any of the
following risks actually occur, as well as other risks not mentioned here, our
business and prospects could be seriously harmed, the price of our common stock
could decline and you could lose all or part of your investment.
Risks Related to Our Business
We have not completed development of any of our pharmaceutical systems, and
we cannot be certain that our pharmaceutical systems will be able to be
commercialized
To be profitable, we must successfully research, develop, obtain regulatory
approval for, manufacture, introduce, market and distribute our pharmaceutical
systems under development. For each pharmaceutical system that we intend to
commercialize, we must successfully meet a number of critical developmental
milestones for each disease or medical condition that we target, including:
. selecting and developing drug delivery platform technology to deliver
the proper dose of drug over the desired period of time;
. selecting and developing catheter technology, if appropriate, to deliver
the drug to a specific location within the body;
. determining the appropriate drug dosage for use in the pharmaceutical
system;
. developing drug compound formulations that will be safe, effective and
compatible with the system; and
. demonstrating the drug formulation will be stable for commercially
reasonable time periods.
The time frame necessary to achieve these developmental milestones for any
individual product is long and uncertain, and we may not successfully complete
these milestones for any of our products in development. For our lead product,
DUROS sufentanil, we have not yet determined the drug dosages we intend to use
for commercialization. We may not be able to develop dosages that will be safe
and effective or compatible with the pharmaceutical system for a commercially
reasonable treatment and storage period.
Development of pharmaceutical systems is costly and requires significant
investment. In addition, we may choose to license either additional drug
delivery platform technology or rights to particular drugs for use in our
pharmaceutical systems. The license fees for these technologies or rights would
increase the costs of our pharmaceutical systems.
We must conduct and satisfactorily complete clinical trials for our
pharmaceutical systems
Before we can obtain government approval to sell any of our pharmaceutical
systems, we must demonstrate through preclinical (animal) studies and clinical
(human) trials that each system is safe and effective for human use for each
targeted disease. We have completed an initial Phase I clinical trial for our
lead product, DUROS sufentanil, using an external pump to test the safety of
continuous chronic infusion of the drug, and we plan to begin pharmacokinetic
studies and Phase II human clinical trials for this product in late 2000. We
plan to continue extensive and costly clinical trials to assess the safety and
effectiveness of DUROS sufentanil and our other potential products. We may not
be permitted to begin or continue our planned clinical trials for our potential
products or, if our trials are permitted, our potential products may not prove
to be safe or produce their intended effects.
The length of our clinical trials depends upon, among other factors, the
rate of trial site and patient enrollment. We may fail to obtain adequate
levels of patient enrollment in our clinical trials. Delays in planned patient
enrollment may result in increased costs, delays or termination of clinical
trials, which could have a material adverse effect on us. In addition, even if
we enroll the number of patients we expect in the time frame we expect, our
clinical trials may not provide the data necessary for their successful
completion.
5
Additionally, we may fail to effectively oversee and monitor these clinical
trials, which would result in increased costs or delays of our clinical
trials. Even if these clinical trials are completed, we may fail to complete
and submit a new drug application as scheduled. Even if we are able to submit
a new drug application as scheduled, the Food and Drug Administration may not
clear our application in a timely manner or may deny the application entirely.
Data already obtained from preclinical studies and clinical trials of our
pharmaceutical systems do not necessarily predict the results that will be
obtained from later preclinical studies and clinical trials. Moreover,
preclinical and clinical data such as ours is susceptible to varying
interpretations, which could delay, limit or prevent regulatory approval. A
number of companies in the pharmaceutical industry have suffered significant
setbacks in advanced clinical trials, even after promising results in earlier
trials. The failure to adequately demonstrate the safety and effectiveness of
a product under development could delay or prevent regulatory clearance of the
potential product, resulting in delays to the commercialization of our
products, and could materially harm our business. Our clinical trials may not
demonstrate the sufficient levels of safety and efficacy necessary to obtain
the requisite regulatory approvals for our products, and thus our products may
not be approved for marketing.
Our agreement with ALZA limits our fields of operation for our DUROS-based
pharmaceutical systems, requires us to spend significant funds on product
development and gives ALZA a first right to distribute selected products
for us
In April 1998, we entered into a development and commercialization
agreement with ALZA Corporation, which was amended and restated in April 1999
and April 2000. This agreement gives us exclusive rights to develop,
commercialize and manufacture products using ALZA's DUROS technology to
deliver by catheter:
. drugs to the central nervous system to treat select nervous system
disorders;
. drugs to the middle and inner ear;
. drugs to the pericardial sac of the heart; and
. select drugs into vascular grafts.
We also have the right to use the DUROS technology to deliver systemically
and by catheter:
. sufentanil to treat chronic pain; and
. select cancer antigens.
We may not develop, manufacture or commercialize DUROS-based pharmaceutical
systems outside of these specific fields without ALZA's prior approval. In
addition, if we develop or commercialize any drug delivery technology for use
in a manner similar to the DUROS technology in a field covered in our license
agreement with ALZA, then we may lose our exclusive rights to use the DUROS
technology in such field as well as the right to develop new products using
DUROS technology in such field. Furthermore, to maintain our rights under this
license agreement, we must spend at least $58.0 million to develop products in
some or all of these fields through 2004. In order to maintain
commercialization rights for our products in the U.S. and any foreign
countries, we must diligently develop our products, procure required
regulatory approvals and commercialize the products in these countries. If we
fail to meet the various diligence requirements, we may:
. lose our rights to develop, commercialize and manufacture some of our
DUROS-based pharmaceutical systems;
. lose rights for products in some or all countries, including the U.S.;
or
. lose rights in some fields of use.
These rights would revert to ALZA, which could then develop DUROS-based
pharmaceutical products in such countries or fields of use itself or license
others to do so.
6
Our agreement with ALZA gives us the right to develop and manufacture the
DUROS pump component of our pharmaceutical systems in the fields described
above. In the event of a change in our corporate control, including an
acquisition of us, our right to manufacture and develop the DUROS pump would
terminate and ALZA would have the right to manufacture and develop DUROS
systems for us so long as ALZA can meet our specification and supply
requirements following such change in control.
Under the ALZA agreement, we must pay ALZA royalties on sales of DUROS-
based pharmaceutical systems we commercialize. In addition, ALZA has an
exclusive option to distribute our DUROS sufentanil product in the U.S. and
Canada and any DUROS-based pharmaceutical system we develop to deliver non-
proprietary cancer antigens worldwide. ALZA's option to acquire distribution
rights limit our ability to negotiate with other distributors for these
products and may result in lower payments to us than if these rights were
subject to competitive negotiations.
Failure to obtain product approvals or comply with ongoing governmental
regulations could delay or limit introduction of our new products and
result in failure to achieve anticipated revenues
The manufacture and marketing of our products and our research and
development activities are subject to extensive regulation for safety,
efficacy and quality by numerous government authorities in the United States
and abroad. Before receiving FDA clearance to market a product, we will have
to demonstrate that the product is safe and effective on the patient
population and for the diseases that will be treated. Clinical trials,
manufacturing and marketing of products are subject to the rigorous testing
and approval process of the FDA and equivalent foreign regulatory authorities.
The Federal Food, Drug and Cosmetic Act and other federal, state and foreign
statutes and regulations govern and influence the testing, manufacture,
labeling, advertising, distribution and promotion of drugs and medical
devices. As a result, clinical trials and regulatory approval can take a
number of years to accomplish and require the expenditure of substantial
resources. Data obtained from clinical trials are susceptible to varying
interpretations, which could delay, limit or prevent regulatory clearances. As
of the date of this prospectus, we have completed an initial Phase I clinical
trial for our DUROS sufentanil product using an external pump to test the
safety of continuous chronic infusion of the drug, but we have not begun Phase
II or Phase III trials of any products. If we fail to obtain timely clearance
or approval for our products, we will not be able to market and sell our
products, which will limit our ability to generate revenue. See "Business--
Government Regulation."
In addition, we may encounter delays or rejections based upon additional
government regulation from future legislation or administrative action or
changes in FDA policy during the period of product development, clinical
trials and FDA regulatory review. We may encounter similar delays in foreign
countries. Sales of our products outside the U.S. are subject to foreign
regulatory approvals that vary from country to country. The time required to
obtain approvals from foreign countries may be shorter or longer than that
required for FDA approval, and requirements for foreign licensing may differ
from FDA requirements. We may be unable to obtain requisite approvals from the
FDA and foreign regulatory authorities, and even if obtained, such approvals
may not be on a timely basis, or they may not cover the clinical uses that we
specify.
Marketing or promoting a drug for an unapproved use is subject to very
strict controls. Furthermore, clearance may entail ongoing requirements for
post-marketing studies. The manufacture and marketing of drugs are subject to
continuing FDA and foreign regulatory review and requirements that we update
our regulatory filings. Later discovery of previously unknown problems with a
product, manufacturer or facility, or our failure to update regulatory files,
may result in restrictions, including withdrawal of the product from the
market. Any of the following events, if they were to occur, could delay or
preclude us from further developing, marketing or realizing full commercial
use of our products, which in turn would materially harm our business,
financial condition and results of operations:
. failure to obtain or maintain requisite governmental approvals;
. failure to obtain approvals for clinically intended uses of our products
under development; or
. identification of serious and unanticipated adverse side effects in our
products under development.
7
Manufacturers of drugs also must comply with the applicable FDA good
manufacturing practice regulations, which include production design controls,
testing, quality control and quality assurance requirements as well as the
corresponding maintenance of records and documentation. Compliance with
current good manufacturing practices regulations is difficult and costly.
Manufacturing facilities are subject to ongoing periodic inspection by the FDA
and corresponding state agencies, including unannounced inspections, and must
be licensed before they can be used for the commercial manufacture of our
products. We or our present or future suppliers may be unable to comply with
the applicable good manufacturing practice regulations and other FDA
regulatory requirements. We have not been subject to a good manufacturing
regulation inspection by the FDA or any state agency relating to our
pharmaceutical systems. If we do not achieve compliance for the products we
manufacture, the FDA may withdraw marketing clearance or require product
recall, which may cause interruptions or delays in the manufacture and sale of
our products.
Our limited operating history makes evaluating our stock difficult
You can only evaluate our business based on a limited operating history. We
were incorporated in February 1998 and have engaged primarily in research and
development, licensing technology, raising capital and recruiting scientific
and management personnel. This short history may not be adequate to enable you
to fully assess our ability to successfully develop our products, achieve
market acceptance of our products and respond to competition.
Acceptance of our products in the marketplace is uncertain, and failure to
achieve market acceptance will delay our ability to generate or grow
revenues
Our future financial performance will depend upon the successful
introduction and customer acceptance of our future products, including DUROS
sufentanil. Even if approved for marketing, our products may not achieve
market acceptance. The degree of market acceptance will depend upon a number
of factors, including:
. the receipt of regulatory clearance of marketing claims for the uses
that we are developing;
. the establishment and demonstration in the medical community of the
safety and clinical efficacy of our products and their potential
advantages over existing therapeutic products, including oral
medication, transdermal drug delivery products such as drug patches, or
external or implantable drug delivery products; and
. pricing and reimbursement policies of government and third-party payors
such as insurance companies, health maintenance organizations and other
health plan administrators.
Physicians, patients, payors or the medical community in general may be
unwilling to accept, utilize or recommend any of our products. If we are
unable to obtain regulatory approval, commercialize and market our future
products when planned and achieve market acceptance, we will not achieve
anticipated revenues.
We have a history of operating losses, expect to continue to have losses in
the future and may never achieve or maintain profitability
We have incurred significant operating losses since our inception in 1998
and, as of December 31, 1999, had an accumulated deficit of approximately
$10.6 million. We expect to continue to incur significant operating losses
over the next several years as we continue to incur increasing costs for
research and development, clinical trials and manufacturing. Our ability to
achieve profitability depends upon our ability, alone or with others, to
successfully complete the development of our proposed products, obtain the
required regulatory clearances and manufacture and market our proposed
products. To date, we have not generated significant revenue from the
commercial sale of our products and do not expect to receive significant
revenue in the near future. All revenues to date are from the sale of products
we acquired in October 1999 in connection with the acquisition of
substantially all of the assets of IntraEAR, Inc. and the ALZET product we
acquired in April 2000 from ALZA. We do not expect these revenues to increase
significantly in future periods. We do not anticipate commercialization and
marketing of our products in development in the near future, and therefore do
not expect to generate sufficient revenues to cover expenses or achieve
profitability in the near future.
8
We do not control ALZA's ability to develop and commercialize DUROS
technology outside of fields licensed to us, and problems encountered by
ALZA could result in negative publicity, loss of sales and delays in market
acceptance of our DUROS-based pharmaceutical systems
ALZA retains complete rights to the DUROS technology for fields outside the
specific fields licensed to us. Accordingly, ALZA may develop and
commercialize DUROS-based products or license others to do so, so long as
there is no conflict with the rights granted to us. ALZA recently received FDA
approval to market its first DUROS-based product, Viadur (leuprolide acetate
implants) for the palliative treatment of advanced prostate cancer. If ALZA
fails to commercialize this product successfully, or encounters problems
associated with this product, negative publicity could be created about all
DUROS-based products, which could result in harm to our reputation and cause
reduced sales of our products. In addition, if any third-party that may be
licensed by ALZA fails to develop and commercialize DUROS-based products
successfully, the success of all DUROS-based systems could be impeded,
including ours, resulting in delay or loss of revenue or damage to our
reputation, any one of which could harm our business.
We do not own the trademark "DUROS" and any competitive advantage we derive
from the name may be impaired by third-party use
ALZA owns the trademark "DUROS." Because ALZA is also developing and
marketing DUROS-based systems, and may license third parties to do so, there
may be confusion in the market between ALZA, its potential licensees and us,
and this confusion could impair the competitive advantage, if any, we derive
from use of the DUROS name. In addition, any actions taken by ALZA or its
potential licensees that negatively impact the trademark "DUROS" could
negatively impact our reputation and result in reduced sales of our DUROS-
based pharmaceutical systems.
We may be sued by third parties which claim that our products infringe on
their intellectual property rights, particularly because there is
substantial uncertainty about the validity and breadth of medical patents
We may be exposed to future litigation by third parties based on claims
that our products infringe the intellectual property rights of others or that
we have misappropriated the trade secrets of others. This risk is exacerbated
by the fact that the validity and breadth of claims covered in medical
technology patents and the breadth and scope of trade secret protection
involve complex legal and factual questions for which important legal
principles are unresolved. Any litigation or claims against us, whether or not
valid, could result in substantial costs, could place a significant strain on
our financial resources and could harm our reputation. In addition,
intellectual property litigation or claims could force us to do one or more of
the following:
. cease selling, incorporating or using any of our products that
incorporate the challenged intellectual property, which would adversely
affect our revenue;
. obtain a license from the holder of the infringed intellectual property
right, which license may be costly or may not be available on reasonable
terms, if at all; or
. redesign our products, which would be costly and time-consuming.
If we are unable to adequately protect or enforce our intellectual property
rights or secure rights to third-party patents, we may lose valuable
assets, experience reduced market share or incur costly litigation to
protect our rights
Our success will depend in part on our ability to obtain patents, maintain
trade secret protection and operate without infringing the proprietary rights
of others. We currently hold four issued or allowed U.S. patents and one
issued or allowed foreign patent. In addition, we have 11 pending U.S. patent
applications and have filed six corresponding patent applications under the
Patent Cooperation Treaty, five of which are currently pending in Europe,
Australia and Canada. To maintain the license rights to ALZA intellectual
property granted to us under
9
our development and commercialization agreement with ALZA, we must meet annual
minimum development spending requirements and develop a minimum number of
products. If we do not meet these diligence requirements, we may lose rights
to one or more of our licensed fields. Also, under our agreement with ALZA, we
must assign any intellectual property rights relating to the DUROS technology
to ALZA. In addition, ALZA retains the right to enforce and defend against
infringement actions relating to DUROS technology, and if ALZA exercises these
rights, it will be entitled to the proceeds of these infringement actions.
The patent positions of pharmaceutical companies, including ours, are
uncertain and involve complex legal and factual questions. In addition, the
coverage claimed in a patent application can be significantly reduced before
the patent is issued. Consequently, our patent applications or those of ALZA
may not issue into patents, and any issued patents may not provide protection
against competitive technologies or may be held invalid if challenged or
circumvented. Our competitors may also independently develop products similar
to ours or design around or otherwise circumvent patents issued to us or
licensed by us. In addition, the laws of some foreign countries may not
protect our proprietary rights to the same extent as U.S. law.
We also rely upon trade secrets, technical know-how and continuing
technological innovation to develop and maintain our competitive position. We
require our employees, consultants, advisors and collaborators to execute
appropriate confidentiality and assignment-of-inventions agreements with us.
These agreements typically provide that all materials and confidential
information developed or made known to the individual during the course of the
individual's relationship with us is to be kept confidential and not disclosed
to third parties except in specific circumstances, and that all inventions
arising out of the individual's relationship with us shall be our exclusive
property. These agreements may be breached, and in some instances, we may not
have an appropriate remedy available for breach of the agreements.
Furthermore, our competitors may independently develop substantially
equivalent proprietary information and techniques, reverse engineer our
information and techniques, or otherwise gain access to our proprietary
technology. We may be unable to meaningfully protect our rights in trade
secrets, technical know-how and other non-patented technology.
We may have to resort to litigation to protect our intellectual property
rights, or to determine their scope, validity or enforceability. Enforcing or
defending our proprietary rights is expensive, could cause diversion of our
resources and may not prove successful. Any failure to enforce or protect our
rights could cause us to lose the ability to exclude others from using our
technology to develop or sell competing products.
We rely heavily on third parties and do not control critical steps in the
manufacturing and testing of our products
We currently depend heavily and will depend heavily in the future on third
parties for support in manufacturing and clinical testing. We have an
agreement with Chesapeake Biological Labs, Inc. for the final manufacturing
steps of our DUROS sufentanil product to deliver product quantities that we
expect we will need for Phase II clinical trials of this product. The steps to
be performed by Chesapeake include filling the DUROS system with the
sufentanil drug formulation in a sterile environment, sterilization and final
product testing. Manufacturing DUROS sufentanil, including the manufacturing
steps performed by Chesapeake, is a complex process, and Chesapeake may not be
able to provide sufficient quantities of DUROS sufentanil within an acceptable
time frame. Failure by Chesapeake to do so could delay clinical trials of our
products and result in delays in regulatory approval and commercialization of
our products, either of which would materially harm our business.
We have a master services agreement with Quintiles, Inc. under which we may
engage Quintiles to provide services related to clinical trials for our
pharmaceutical systems, at terms to be agreed to and specified in subsequent
work orders. We may be unable to negotiate the terms of these work orders with
Quintiles. If we are unable to agree to terms, we will need to establish
commercial relationships with a different third party, or perform these
services ourselves, either of which could materially delay the development and
approval of our products and increase our expenses. If we do negotiate work
orders with Quintiles, Quintiles may be unable to manage these trials to
completion in the time periods or at the costs we expect. Failure of Quintiles
to do so could materially harm our business, financial condition and results
of operations.
10
Key components of our DUROS-based pharmaceutical systems are provided by
sole or limited numbers of suppliers, and supply shortages or loss of these
suppliers could result in interruptions in supply or increased costs
Certain components used in our DUROS-based pharmaceutical systems are
currently purchased from a single or a limited number of outside sources. The
reliance on a sole or limited number of suppliers could result in:
. delays associated with redesigning a product due to a failure to obtain
a single source component;
. an inability to obtain an adequate supply of required components; and
. reduced control over pricing, quality and timely delivery.
We do not have long-term agreements with any of our suppliers, and
therefore the supply of a particular component could be terminated at any time
without penalty to the supplier. Any interruption in the supply of single
source components could cause us to seek alternative sources of supply or
manufacture these components internally. If the supply of any components for
our pharmaceutical systems is interrupted, components from alternative
suppliers may not be available in sufficient volumes within required
timeframes, if at all, to meet our needs. This could delay our ability to
complete clinical trials and obtain approval for commercialization and
marketing of our products, causing us to lose sales, incur additional costs
and delay new product introductions and could harm our reputation.
We have limited manufacturing experience and may not be able to manufacture
sufficient quantities of our products at an acceptable cost
We must manufacture our products in clinical and commercial quantities,
either directly or through third parties, in compliance with regulatory
requirements and at an acceptable cost. We do not own manufacturing facilities
necessary to provide clinical and commercial quantities of our products. We
currently manufacture sub-assemblies of our DUROS-based pharmaceutical systems
and rely on Chesapeake Biological Labs, Inc. to complete the final
manufacturing steps of these products. See "Risk Factors--We rely heavily on
third parties and do not control critical steps in the manufacturing and
testing of our products." Under our agreement with ALZA, we cannot subcontract
the manufacture of subassemblies of the DUROS system.
Prior to obtaining regulatory approval of our products under development,
we intend to build a manufacturing facility that will enable us to manufacture
commercial quantities of our DUROS-based pharmaceutical systems, as well as to
manufacture additional products in development on a pilot scale and our own
clinical trial supplies. The manufacture of our DUROS-based pharmaceutical
systems is a complex process, and any facility that we build must comply with
federal and state good manufacturing practices regulations. DURECT has no
experience building facilities, and we may not be able to build a facility
prior to clinical approval of our products or at currently anticipated costs.
If we build a facility, we will be subject to government audits to determine
compliance with good manufacturing practices regulations, and we may be unable
to obtain and maintain certifications for complying with these regulations. If
we fail to build a manufacturing facility before regulatory approval of our
products or at currently anticipated costs, or fail to obtain and maintain
certification for compliance with good manufacturing practices regulation, we
could experience a delay in the commercial sale of our DUROS-based
pharmaceutical systems.
In April 2000, we acquired the ALZET product and related assets from ALZA.
We intend to manufacture the ALZET product at a leased facility. We have
limited experience manufacturing this product, and we may not be able to
successfully or consistently manufacture this product at an acceptable cost,
if at all.
We lack marketing, sales and distribution experience for pharmaceutical
systems and we may not be able to sell our products if we do not enter into
relationships with third parties or develop a direct sales organization
We have yet to establish marketing, sales or distribution capabilities for
our pharmaceutical systems. We intend to enter into agreements with third
parties to sell our products or to develop our own sales and marketing
11
force. We may be unable to establish or maintain third-party relationships on
a commercially reasonable basis, if at all. In addition, these third parties
may have similar or more established relationships with our competitors.
If we do not enter into relationships with third parties for the sales and
marketing of our products, we will need to develop our own sales and marketing
capabilities. DURECT has only limited experience in developing, training or
managing a sales force. If we choose to establish a direct sales force, we
will incur substantial additional expenses in developing, training and
managing such an organization. We may be unable to build a sales force, the
cost of establishing such a sales force may exceed our product revenues, or
our direct marketing and sales efforts may be unsuccessful. In addition, we
compete with many other companies that currently have extensive and well-
funded marketing and sales operations. Our marketing and sales efforts may be
unable to compete successfully against these other companies. We may be unable
to establish a sufficient sales and marketing organization on a timely basis,
if at all.
We may be unable to engage qualified distributors. Even if engaged, these
distributors may:
. fail to satisfy financial or contractual obligations to us;
. fail to adequately market our products;
. cease operations with little or no notice to us; or
. offer, design, manufacture or promote competing product lines.
If we fail to develop sales, marketing and distribution channels, we would
experience delays in product sales and incur increased costs, which would harm
our financial results.
If we are unable to train physicians to use our pharmaceutical systems to
treat patients' diseases or medical conditions, we may incur delays in
market acceptance of our products
Broad use of our pharmaceutical systems will require extensive training of
numerous physicians. The time required to begin and complete training of
physicians could delay introduction of our products and adversely affect
market acceptance of our products. We may be unable to rapidly train
physicians in numbers sufficient to generate adequate demand for our
pharmaceutical systems. Any delay in training would materially delay the
demand for our systems. In addition, we may expend significant funds towards
such training before any orders are placed for our products.
We may have difficulty raising needed capital in the future
Our business currently does not generate sufficient revenues to meet our
capital requirements and we do not expect that it will do so in the near
future. We have expended and will continue to expend substantial funds to
complete the research, development and clinical testing of our products. We
will require additional funds for these purposes, to establish additional
clinical- and commercial-scale manufacturing arrangements and to provide for
the marketing and distribution of our products. Additional funds may not be
available on acceptable terms, if at all. If adequate funds are unavailable
from operations or additional sources of financing, we may have to delay,
reduce the scope of or eliminate one or more of our research or development
programs which would materially harm our business, financial condition and
results of operations.
We believe that the net proceeds of this offering, together with our cash,
cash equivalents and investments, will be adequate to satisfy our capital
needs for at least the next 18 months. However, our actual capital
requirements will depend on many factors, including:
. continued progress and cost of our research and development programs;
. progress with preclinical studies and clinical trials;
. the time and costs involved in obtaining regulatory clearance;
. costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims;
. costs of developing sales, marketing and distribution channels and our
ability to sell our products;
12
. costs involved in establishing manufacturing capabilities for commercial
quantities of our products;
. competing technological and market developments;
. market acceptance or our products; and
. costs for recruiting and retaining employees and consultants.
We may consume available resources more rapidly than currently anticipated,
resulting in the need for additional funding. We may seek to raise any
necessary additional funds through equity or debt financings, collaborative
arrangements with corporate partners or other sources, which may be dilutive
to existing stockholders. In addition, in the event that additional funds are
obtained through arrangements with collaborative partners or other sources, we
may have to relinquish rights to some of our technologies, product candidates
or products under development that we would otherwise seek to develop or
commercialize ourselves. If adequate funds are not available, we may be
required to significantly reduce or refocus our product development efforts,
or relinquish to ALZA rights to develop DUROS products in certain fields,
resulting in loss of sales, increased costs, and reduced revenues.
We may acquire technologies and businesses which may be difficult to
integrate, disrupt our business, dilute stockholder value or divert
management attention
We may acquire technologies, products or businesses to broaden the scope of
our existing and planned product lines and technologies. For example, in
October 1999, we acquired substantially all of the assets of IntraEAR, Inc.
and in April 2000 we acquired the ALZET product and related assets from ALZA.
These and other acquisitions expose us to:
. the risks associated with the assimilation of new technologies,
operations, sites and personnel;
. the diversion of resources from our existing business and technologies;
. the inability to generate revenues to offset associated acquisition
costs;
. the requirement to maintain uniform standards, controls, and procedures;
and
. the impairment of relationships with employees and customers as a result
of any integration of new management personnel.
Acquisitions may also result in the issuance of dilutive equity securities,
the incurrence or assumption of debt or additional expenses associated with
the amortization of acquired intangible assets or potential businesses. Past
acquisitions, such as our acquisitions of IntraEAR and ALZET, as well future
acquisitions, may not generate any additional revenue or provide any benefit
to our business.
We depend upon key personnel who may terminate their employment with us at
any time, and we need to hire additional qualified personnel
Our success will depend to a significant degree upon the continued services
of key management, technical, and scientific personnel, including Felix
Theeuwes, our Chairman and Chief Scientific Officer and James E. Brown, our
President and Chief Executive Officer. In addition, our success will depend on
our ability to attract and retain other highly skilled personnel. Competition
for qualified personnel is intense, and the process of hiring and integrating
such qualified personnel is often lengthy. We may be unable to recruit such
personnel on a timely basis, if at all. Our management and other employees may
voluntarily terminate their employment with us at any time. The loss of the
services of key personnel, or the inability to attract and retain additional
qualified personnel, could result in delays to product development or
approval, loss of sales and diversion of management resources.
We may not successfully manage our growth
Our success will depend on the expansion of our operations and the
effective management of growth, which will place a significant strain on our
management and on our administrative, operational and financial resources.
13
To manage such growth, we must expand our facilities, augment our operational,
financial and management systems and hire and train additional qualified
personnel. If we are unable to manage growth effectively our business would be
harmed.
Risks Related to Our Industry
The market for our products is new, rapidly changing and competitive, and
new products or technologies developed by others could impair our ability
to grow our business and remain competitive
The pharmaceutical industry is subject to rapid and substantial
technological change. Developments by others may render our products under
development or technologies noncompetitive or obsolete, or we may be unable to
keep pace with technological developments or other market factors.
Technological competition in the industry from pharmaceutical and
biotechnology companies, universities, governmental entities and others
diversifying into the field is intense and is expected to increase. Many of
these entities have significantly greater research and development
capabilities than we do, as well as substantially more marketing,
manufacturing, financial and managerial resources. These entities represent
significant competition for us. Acquisitions of, or investments in, competing
pharmaceutical or biotechnology companies by large corporations could increase
such competitors' financial, marketing, manufacturing and other resources.
We are a new enterprise and are engaged in the development of novel
therapeutic technologies. As a result, our resources are limited and we may
experience technical challenges inherent in such novel technologies.
Competitors have developed or are in the process of developing technologies
that are, or in the future may be, the basis for competitive products. Some of
these products may have an entirely different approach or means of
accomplishing similar therapeutic effects than our products. Our competitors
may develop products that are safer, more effective or less costly than our
products and, therefore, present a serious competitive threat to our product
offerings.
The widespread acceptance of therapies that are alternatives to ours may
limit market acceptance of our products even if commercialized. Chronic pain
can also be treated by oral medication, transdermal drug delivery systems,
such as drug patches, or with other implantable drug delivery devices. These
treatments are widely accepted in the medical community and have a long
history of use. The established use of these competitive products may limit
the potential for our products to receive widespread acceptance if
commercialized.
If users of our products are unable to obtain adequate reimbursement from
third-party payors, or if new restrictive legislation is adopted, market
acceptance of our products may be limited and we may not achieve
anticipated revenues
The continuing efforts of government and insurance companies, health
maintenance organizations and other payors of healthcare costs to contain or
reduce costs of health care may affect our future revenues and profitability,
and the future revenues and profitability of our potential customers,
suppliers and collaborative partners and the availability of capital. For
example, in certain foreign markets, pricing or profitability of prescription
pharmaceuticals is subject to government control. In the United States, given
recent federal and state government initiatives directed at lowering the total
cost of health care, the U.S. Congress and state legislatures will likely
continue to focus on health care reform, the cost of prescription
pharmaceuticals and on the reform of the Medicare and Medicaid systems. While
we cannot predict whether any such legislative or regulatory proposals will be
adopted, the announcement or adoption of such proposals could materially harm
our business, financial condition and results of operations.
Our ability to commercialize our products successfully will depend in part
on the extent to which appropriate reimbursement levels for the cost of our
products and related treatment are obtained by governmental authorities,
private health insurers and other organizations, such as HMOs. Third-party
payors are increasingly challenging the prices charged for medical products
and services. Also, the trend toward managed health care in
14
the United States and the concurrent growth of organizations such as HMOs,
which could control or significantly influence the purchase of health care
services and products, as well as legislative proposals to reform health care
or reduce government insurance programs, may all result in lower prices for or
rejection of our products. The cost containment measures that health care
payors and providers are instituting and the effect of any health care reform
could materially harm our ability to operate profitably.
We could be exposed to significant product liability claims which could be
time consuming and costly to defend, divert management attention and
adversely impact our ability to obtain and maintain insurance coverage
The testing, manufacture, marketing and sale of our products involve an
inherent risk that product liability claims will be asserted against us.
Although we are insured against such risks up to a $5,000,000 annual aggregate
limit in connection with clinical trials and commercial sales of our products,
our present product liability insurance may be inadequate and may not fully
cover the costs of any claim or any ultimate damages we might be required to
pay. Product liability claims or other claims related to our products,
regardless of their outcome, could require us to spend significant time and
money in litigation or to pay significant damages. Any successful product
liability claim may prevent us from obtaining adequate product liability
insurance in the future on commercially desirable or reasonable terms. In
addition, product liability coverage may cease to be available in sufficient
amounts or at an acceptable cost. An inability to obtain sufficient insurance
coverage at an acceptable cost or otherwise to protect against potential
product liability claims could prevent or inhibit the commercialization of our
pharmaceutical systems. A product liability claim could also significantly
harm our reputation and delay market acceptance of our products.
Our business involves environmental risks and risks related to handling
controlled substances
In connection with our research and development activities and our
manufacture of materials and products, we are subject to federal, state and
local laws, rules, regulations and policies governing the use, generation,
manufacture, storage, air emission, effluent discharge, handling and disposal
of certain materials, biological specimens and wastes. Although we believe
that we have complied with the applicable laws, regulations and policies in
all material respects and have not been required to correct any material
noncompliance, we may be required to incur significant costs to comply with
environmental and health and safety regulations in the future. Our research
and development involves the controlled use of hazardous materials, including
but not limited to certain hazardous chemicals and narcotics. Although we
believe that our safety procedures for storing, handling and disposing of such
materials comply with the standards prescribed by state and federal
regulations, we cannot completely eliminate the risk of accidental
contamination or injury from these materials. In the event of such an
occurrence, we could be held liable for any damages that result and any such
liability could exceed our resources.
Risks Related to this Offering
Our stock price will fluctuate after this offering, and your investment in
our stock could decline in value
After this offering, an active trading market in our stock might not
develop or continue. If you purchase shares of our common stock in the
offering, you will pay a price that was not established in a competitive
market. Rather, you will pay a price that we negotiated with the
representatives of the underwriters based upon an assessment of the valuation
of our stock. The public market may not agree with or accept this valuation,
in which case you may not be able to sell your shares at or above the initial
offering price. See "Underwriters." The market price of our common stock may
fluctuate significantly in response to factors which are beyond our control.
In addition, the stock market in general has recently experienced extreme
price and volume fluctuations. In addition, the market prices of securities of
technology and pharmaceutical companies have been extremely volatile, and have
experienced fluctuations that often have been unrelated or disproportionate to
the operating performance of these companies. These broad market fluctuations
could result in extreme fluctuations in the price of our common stock, which
could cause a decline in the value of your shares.
15
Future sales of our common stock may depress our stock price
As many as 23,863,617 shares of our common stock can be sold in the public
market 180 days after the offering. If substantial amounts of our common stock
were to be sold in the public market following this offering, the market price
of our common stock could fall. In addition, these sales could create the
perception to the public of difficulties or problems in our business. As a
result, these sales also might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate. For a more detailed discussion of shares eligible for sale after
the offering, see "Shares Eligible for Future Sale."
We have broad discretion to use the offering proceeds, and the investment
of these proceeds may not yield a favorable return
Our management has broad discretion over how these proceeds are used and
could spend most of these proceeds in ways with which our stockholders may not
agree. The proceeds may be invested in ways that do not yield favorable
returns. See "Use of Proceeds" for more information about how we plan to use
our proceeds from this offering.
Executive officers, directors and entities affiliated with them will
continue to have substantial control over us after the offering, which
could delay or prevent a change in our corporate control favored by our
other stockholders
After this offering, our directors, executive officers and principal
stockholders, together with their affiliates, will beneficially own, in the
aggregate, approximately % of our outstanding common stock following the
completion of this offering, % if the overallotment option is exercised in
full. In particular, our executive officers will control approximately % of
our common stock after this offering, % if the overallotment option is
exercised in full. The interests of these stockholders may differ from the
interests of other stockholders. As a result, these stockholders, if acting
together, would have the ability to exercise control over all corporate
actions requiring stockholder approval irrespective of how our other
stockholders may vote, including:
. the election of directors;
. the amendment of charter documents;
. the approval of certain mergers and other significant corporate
transactions, including a sale of substantially all of our assets; or
. the defeat of any non-negotiated takeover attempt that might otherwise
benefit the public stockholders.
Our certificate of incorporation, our bylaws and Delaware law contain
provisions that could discourage another company from acquiring us
Provisions of Delaware law, our certificate of incorporation and by-laws
may discourage, delay or prevent a merger or acquisition that stockholders may
consider favorable, including transactions in which you might otherwise
receive a premium for your shares. These provisions include:
. authorizing the issuance of "blank check" preferred stock without any
need for action by stockholders;
. providing for a classified board of directors with staggered terms;
. requiring supermajority stockholder voting to effect certain amendments
to our certificate of incorporation and by-laws;
. eliminating the ability of stockholders to call special meetings of
stockholders;
. prohibiting stockholder action by written consent; and
. establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
See "Management--Board Composition" and "Description of Capital Stock--
Delaware Anti-Takeover Law and Provisions of our Certificate of Incorporation
and Bylaws."
16
Purchasers in this offering will experience immediate and substantial
dilution of their investment
We expect that the initial public offering price per share will
significantly exceed the net tangible book value per share of the outstanding
common stock. Accordingly, purchasers of common stock in this offering will
suffer immediate and substantial dilution of their investment. In the past, we
have issued options to acquire common stock at prices below the initial public
offering price. To the extent these outstanding options are ultimately
exercised, there will be further dilution to investors in this offering.
17
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," and elsewhere in this prospectus are forward-looking
statements. These statements involve known and unknown risks, uncertainties,
and other factors that may cause our or our industry's actual results, levels
of activity, performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievements expressed or
implied by forward-looking statements. Such factors include, among other
things, those listed under "Risk Factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue" or the
negative of these terms or other comparable terminology. You should read
statements that contain these words carefully, because they discuss our
expectations about our future operating results or our future financial
condition or state other "forward-looking" information. There may be events in
the future that we are not able to accurately predict or control. Before you
invest in our common stock, you should be aware that the occurrence of any of
the events described in these risk factors and elsewhere in this prospectus
could substantially harm our business, results of operations and financial
condition, and that upon the occurrence of any of these events, the trading
price of our common stock could decline and you could lose all or part of your
investment.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, growth rates,
levels of activity, performance, or achievements. Moreover, neither we nor any
other person assumes responsibility for the accuracy and completeness of these
statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform these statements to
actual results.
18
USE OF PROCEEDS
The net proceeds from the sale of the shares of common stock in
this offering are estimated to be approximately $ million, based upon an
assumed initial public offering price of $ per share and after deducting
estimated underwriting discounts and commissions and our estimated offering
expenses. If the underwriters' over-allotment option is exercised in full, the
net proceeds would be approximately $ million.
We currently intend to use the net proceeds from this offering to fund the
research, development, manufacture and commercialization of existing and
future products and for general corporate purposes, including working capital
and capital expenditures. We may use a portion of the net proceeds to fund,
acquire or invest in complementary businesses or technologies, although we
have no present commitments with respect to any acquisition or investment. The
amount of cash that we actually expend for any of the described purposes will
vary significantly based on a number of factors, including the progress of our
research and development programs and clinical trials, the establishment of
collaborative relationships, the cost and pace of establishing and expanding
our manufacturing capabilities, the development of sales and marketing
activities if undertaken by us and competing technological and market
developments. Our management will have significant discretion in applying the
net proceeds of this offering. Pending the uses described above, we will
invest the net proceeds in investment-grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock or
other securities and do not intend to pay any cash dividends with respect to
our common stock in the foreseeable future. We intend to retain any earnings
for use in the operation of our business and to fund future growth. The terms
of our credit agreement prohibit the payment of dividends on our stock (except
for dividends payable solely in stock) without prior written consent.
19
CAPITALIZATION
The following table sets forth our total capitalization as of December 31,
1999 on an actual basis, on a pro forma basis to reflect the sale of 3,571,429
shares of our Series C preferred stock in March 2000 for net proceeds of
approximately $24.8 million, the issuance of 1,000,000 shares of our common
stock in April 2000, and the conversion of all outstanding shares of preferred
stock into 27,502,660 shares of common stock upon the completion of this
offering, and on a pro forma as adjusted basis to reflect the application by
us of the estimated net proceeds from the sale of the shares of
common stock in this offering at the initial public offering price of $
per share after deducting estimated underwriting discounts and commissions and
our estimated offering expenses.
You should read this table in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements and related notes to the financial
statements.
December 31, 1999
------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- -------------- -----------
(in thousands) (unaudited)
Equipment Loan, noncurrent portion........ $ 189 $ 189 $ 189
-------- -------- --------
Stockholders' equity:
Preferred stock, $0.0001 par value;
24,242 shares authorized, 23,931 shares
issued and outstanding, actual;
shares authorized, no shares issued and
outstanding pro forma; shares
authorized, no shares issued or
outstanding, pro forma as adjusted..... 2 -- --
Common stock, $0.0001 par value: 41,542
shares authorized, 8,502 shares issued
and outstanding actual; shares
authorized, 37,005 shares issued and
outstanding pro forma; shares
authorized, shares issued and
outstanding, pro forma as adjusted..... 1 3
Additional paid-in capital................ 34,642 66,392
Notes receivable from stockholders........ (33) (33) (33)
Deferred stock compensation............... (3,252) (3,252) (3,252)
Deficit accumulated during the development
stage.................................... (10,632) (10,632) (10,632)
-------- -------- --------
Total stockholders' equity.............. 20,728 52,478
-------- -------- --------
Total capitalization.................. $ 22,463 $ 52,667 $
======== ======== ========
The number of shares of common stock shown as outstanding in the table
above excludes the following:
. 1,605,000 shares of common stock issuable upon the exercise of options
outstanding December 31, 1999 with a weighted-average exercise price of
$0.23 per share;
. 296,500 shares reserved for issuance under our 1998 Stock Option Plan at
December 31, 1999;
. 31,395 shares of common stock issuable upon the exercise of a warrant
outstanding at December 31, 1999, with an exercise price of $2.15 per
share; and
. 1,000,000 shares of common stock issuable upon the exercise of a warrant
issued in April 2000 with an exercise price equal to the price at which
our common stock is sold in this offering.
20
DILUTION
Our pro forma net tangible book value as of December 31, 1999 was
approximately $44.1 million, or $1.22 per share of common stock. Pro forma net
tangible book value per share represents our pro forma stockholders' equity
less intangible assets divided by the pro forma number of shares of common
stock outstanding after giving effect to the sale of 3,571,429 shares of our
Series C preferred stock in March 2000 for net proceeds of approximately $24.8
million and the conversion of all outstanding shares of preferred stock into
27,502,660 shares of common stock. Pro forma net tangible book value per share
does not reflect the issuance of 1,000,000 shares of our common stock in April
2000 and the issuance of a warrant to purchase 1,000,000 shares of our common
stock in April 2000. Dilution per share represents the difference between the
amount per share paid by purchasers of shares of common stock in this offering
and the pro forma net tangible book value per share of common stock
immediately after completion of this offering. After giving effect to the sale
of shares of common stock offered by us, at an assumed initial public
offering price of $ per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by us, and
the application of the estimated net proceeds, our pro forma net tangible book
value at December 31, 1999 would have been $ million, or $ per
share. This represents an immediate increase in pro forma net tangible book
value to existing stockholders of $ per share and an immediately dilution
to new investors of $ per share. The following table illustrates the per
share dilution:
Assumed initial public offering price per share..................... $
-----
Pro forma net tangible book value per share as of December 31,
1999.............................................................
----
Increase per share attributable to new investors..................
----
Pro forma net tangible book value per share after this offering.....
-----
Dilution per share to new public investors.......................... $
=====
The following table sets forth as of December 31, 1999, on the pro forma
basis described above, the number of shares of common stock purchased from us,
the total consideration paid and the average price per share paid by existing
stockholders and by the new investors purchasing shares of common stock in
this offering, before deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us:
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
Existing stockholders..... 36,004,660 % $55,988,000 % $1.56
New public investors......
---------- ----- ----------- ------- -----
Totals.................. 100.0% $ 100.0%
========== ===== =========== ======= =====
The above discussion and tables assume no exercise of any options or
warrants to purchase our capital stock. As of March 31, 2000, there were
options outstanding to purchase a total of 738,350 shares of common stock,
with a weighted average exercise price of $0.45 per share, and a warrant to
purchase a total of 31,395 shares of common stock, with an exercise price of
$2.15 per share. In addition, in April 2000 we issued to ALZA a warrant to
purchase a total of 1,000,000 shares of our common stock, with an exercise
price equal to the price per share at which our common stock is sold in this
offering. To the extent that any of the outstanding options or warrants are
exercised, there will be further dilution to new public investors.
21
SELECTED FINANCIAL AND OPERATING DATA
The following selected financial and operating data should be read in
conjunction with and are qualified by reference to "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
financial statements and related notes, which are included elsewhere in this
prospectus. The statement of operations data for the period from inception
(February 6, 1998) to December 31, 1998, the year ended December 31, 1999 and
the period from inception (February 6, 1998) to December 31, 1999 and the
balance sheet data at December 31, 1999 are derived from, and are qualified by
reference to, the audited financial statements included elsewhere in this
prospectus. Historical operating results are not necessarily indicative of
results in the future, and the results for interim periods are not necessarily
indicative of the results that may be expected for the entire year. See Note 1
of notes to financial statements for an explanation of the determination of
the shares used in computing net loss per share and pro forma net loss per
share amounts.
Period from Period from
inception inception
(February 6, 1998) (February 6, 1998)
to Fiscal Year Ended to
December 31, 1998 December 31, 1999 December 31, 1999
------------------ ----------------- -------------------
(in thousands, except per share data)
Consolidated Statement
of Operations Data:
Revenue, net............ $ -- $ 86 $ 86
Costs of goods sold..... -- 39 39
------- ------- --------
Gross margin............ -- 47 47
------- ------- --------
Operating costs and
expenses:
Research and
development.......... 466 5,181 5,647
Research and
development to
related party........ 243 1,182 1,425
Selling, general and
administrative....... 585 2,178 2,763
Stock-based
compensation......... 149 865 1,014
------- ------- --------
Total operating
expenses........... 1,443 9,406 10,849
------- ------- --------
Loss from
operations......... (1,443) (9,359) (10,802)
Interest income......... 121 678 799
Interest expense........ -- (27) (27)
------- ------- --------
Net loss............ (1,322) (8,708) (10,030)
Accretion of cumulative
dividend on Series B
convertible preferred
stock.................. -- 602 602
Net loss applicable to
common stockholders.... $(1,322) $(9,310) $(10,632)
======= ======= ========
Basic and diluted net
loss per common share.. $ (0.36) $ (1.76)
Shares used in computing
basic and diluted net
loss per common share.. 3,655 5,291
Pro forma basic and
diluted net loss per
common share
(unaudited)............ $ (0.37)
Shares used in computing
pro forma basic and
diluted net loss per
common share
(unaudited)............ 23,771
As of December 31,
------------------------------------
1998 1999
------------------ -----------------
Balance Sheet Data:
Cash, cash equivalents
and investments........ $ 7,975 $18,933
Working capital......... 7,664 15,921
Total assets............ 8,283 22,463
Equipment loan, net of
current portion........ 83 189
Stockholders' equity.... 7,749 20,728
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Financial
Data" and our financial statements and related notes appearing elsewhere in
this prospectus. This discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. The actual
results may differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to,
those set forth under "Risk Factors" and elsewhere in this prospectus.
Overview
DURECT Corporation is pioneering the treatment of chronic diseases and
conditions by developing and commercializing pharmaceutical systems to deliver
the right drug to the right place in the right amount at the right time. These
capabilities can enable new drug therapies or optimize existing therapies
based on a broad range of compounds, including small molecule pharmaceuticals
as well as biotechnology molecules such as proteins, peptides and genes.
From our inception in February 1998 through December 31, 1998, we were
engaged in negotiating a licensing agreement with ALZA Corporation to gain
specified rights to use its DUROS system, raising capital, recruiting
scientific and management personnel and commencing research and development
activities. In late 1998, we filed an investigational new drug application
relating to our first product, DUROS sufentanil, a DUROS-based pharmaceutical
system for the treatment of chronic pain. In 1999, we began a Phase I clinical
trial for DUROS sufentanil using an external pump to test the safety of
continuous chronic infusion of this drug, initiated the development of a
spinal hydromorphone product, and initiated the research and development of
other products based on the DUROS system. Through December 31, 1999, we
financed operations primarily through the sale of private equity securities,
resulting in net proceeds of approximately $28.2 million.
We have incurred significant net losses and negative cash flows from
operations since our inception. As of December 31, 1999, we had an accumulated
deficit of $10.6 million.
Our expenses have primarily been the result of research and development
activities, and general and administrative costs associated with our
operations. We expect our research and development expenses to increase in the
future as we expand clinical trials and research and development activities.
To support these activities, we also expect to expand our infrastructure. We
do not anticipate revenues from our pharmaceutical systems, should they be
approved, for at least several years. We also expect to incur substantial non-
cash expenses relating to stock-based compensation. As a result of these
factors, we expect to incur significant losses and negative cash flow for the
foreseeable future.
In October 1999, we acquired substantially all of the assets of IntraEAR,
Inc, a developer and marketer of catheters that permit controlled fluid
delivery to the round window membrane of the ear for the treatment of ear
disorders. The total purchase price consisted of 325,023 shares of Series B-1
preferred stock and $320,000 in cash. The acquisition was accounted for using
the purchase method of accounting. As a result of this acquisition, we
recorded approximately $1.5 million of intangible assets, which will be
amortized over 2 to 6 years. From the time of the acquisition through December
31, 1999, our sales of catheters resulted in revenues of $86,000. We do not
anticipate that revenues derived from catheter sales will increase
significantly in the near future. In the future, we may research and develop
products that incorporate technology acquired from IntraEAR.
In April 2000, we acquired from ALZA the ALZET product and assets used
primarily in the manufacture, sale and distribution of this product. This
acquisition provides us with an ongoing business making and selling this
product worldwide. The total purchase price consisted of approximately $8.2
million in cash, including approximately $3.2 million of inventory, of which
$2.4 million is to be paid over twelve months. The acquisition will be
accounted for using the purchase method.
23
In April 2000, we amended our development and commercialization agreement
with ALZA. The amendments included a reduction in product royalties and
upfront payments to ALZA by us under the agreement. In addition, ALZA's option
to distribute the DUROS sufentanil product was amended to cover only the U.S.
and Canada instead of worldwide. As consideration, ALZA received 1,000,000
shares of our common stock and a warrant to purchase 1,000,000 shares of our
common stock at an exercise price equal to the price at which our common stock
is sold in this offering.
Limited Operating History
We have a limited history of operations and anticipate that our quarterly
results of operations will fluctuate for the foreseeable future. We believe
that period-to-period comparisons of our operating results should not be
relied upon as predictive of future performance. Our prospects must be
considered in light of the risks, expenses and difficulties encountered by
companies at an early stage of development, particularly companies in new and
rapidly evolving markets such as pharmaceuticals, drug delivery, and
biotechnology. To address these risks, we must, among other things, obtain
regulatory approval for and commercialize our products, which may not occur.
We may not be successful in addressing these risks and difficulties. We may
require additional funds to complete the development of our products and to
fund operating losses to be incurred in the next several years.
Results of Operations
Year ended December 31, 1999 compared to the period from inception (February
6, 1998) to December 31, 1998
Revenue. Following the acquisition of substantially all of the assets of
IntraEAR, Inc. on October 1, 1999, we began selling catheters that permit
controlled fluid delivery to the inner ear for the treatment of ear disorders.
Since this acquisition, we have derived revenues from these products of
approximately $86,000. In the near future, we do not anticipate that revenues
derived from these products will increase significantly.
Research and Development. Research and development expenses consist of
salaries and related expenses for research and development personnel, contract
research and development services, supplies and a portion of overhead
operating expenses. Research and development expenses increased to
approximately $6.4 million in 1999 from approximately $709,000 in 1998. The
increase was attributable to increases in contract research and development
services, research and development personnel and clinical activity for our
Phase I trial relating to DUROS sufentanil. In 1999, research and development
activities were initiated in other product areas. We expect research and
development expenses to increase significantly as we enter Phase II clinical
trials for DUROS sufentanil, continue to hire research and development
personnel, and develop other products.
In addition, we expect research and development expenses to continue to
increase in order to meet minimum product funding requirements under our
license agreement with ALZA. To maintain our rights under this agreement, we
must spend minimum amounts each year on product development, with the amount
and duration of funding in each field varying over time. For our two products
currently in development, we are required to fund each in the amount of at
least $3 million per year until the time of commercialization. Funding
requirements to maintain rights to additional products begin in 2001. The
future minimum annual product funding requirements for all fields of use are
as follows:
(in thousands)
Year ended December 31, --------------
2000.................................................... $ 6,000
2001.................................................... 8,000
2002.................................................... 13,000
2003.................................................... 14,000
2004*................................................... 17,000
-------
Total minimum funding required.......................... $58,000
=======
- --------
* Funding requirements after 2004 are to be mutually agreed upon by us and
ALZA.
24
Selling, General and Administrative. Selling, general and administrative
expenses consist primarily of salaries and related expenses for
administrative, finance, sales and executive personnel, legal, accounting and
other professional fees and overhead operating expenses. Selling, general and
administrative expenses increased to approximately $2.2 million in 1999 from
approximately $585,000 in 1998. The increase was primarily due to an increase
in selling, general and administrative personnel and infrastructure to support
our growth and other related expenses. We expect general and administrative
expenses to continue to increase as we increase the number of personnel and
related resources required to support our growth.
Stock-Based Compensation. Stock-based compensation expense was $149,000 for
the period from inception (February 1998) to December 31, 1998, and $865,000
for the year ending December 31, 1999. This compensation related to the
following: research and development expenses of $46,000 in 1998 and $485,000
in 1999, and selling, general and administrative expenses of $103,000 in 1998
and $380,000 in 1999. The remaining deferred stock compensation at December
31, 1999 was $3.3 million, which will be amortized as follows: $1.7 million
for the year ending December 31, 2000, $907,000 for the year ending December
31, 2001, $454,000 for the year ending December 31, 2002, and $154,000 for the
year ending December 31, 2003. Termination of option holders could cause
stock-based compensation in future years to be less than indicated. Between
January 1 and March 31, 2000, we granted options to purchase approximately
530,850 shares of common stock to our employees at exercise prices of from
$0.35 to $1.00 per share. We anticipate that we will record additional
deferred stock compensation related to these grants.
Other Income (Expense). Interest income increased to approximately $678,000
in 1999 from approximately $121,000 in 1998. The increase in interest income
was primarily attributable to higher average outstanding balance of cash and
investments resulting from the sale of convertible preferred stock in July
1999. Interest expense was approximately $27,000 in 1999 as we initiated
payments on debt obligations under an equipment loan. We expect interest
income to increase because of higher cash and investment balances resulting
from our sale of Series C preferred stock in March 2000 and our sale of common
stock in this offering.
Income Taxes
We had federal and state net operating loss carryforwards of approximately
$1.1 million at December 31, 1998 and approximately $9.2 million at December
31, 1999. The net operating losses and credit carryforwards will expire at
various dates beginning in 2006 through 2019, if not utilized. Financial
Accounting Standards Board Statement No. 109 provides for the recognition of
deferred tax assets if realization of such assets is more likely than not.
Based upon available data, which includes our historical operating performance
and the reported cumulative net losses in prior years, we have provided a full
valuation allowance against our net deferred tax assets as the future
realization of the tax benefit is not sufficiently assured. We intend to
evaluate the realization of the deferred tax assets on a quarterly basis.
The net operating loss carryforwards are subject to review by the Internal
Revenue Service. Ownership changes, as defined in the Internal Revenue Code,
may limit the amount of these tax attributes that can be utilized annually to
offset future taxable income or tax liabilities. The amount of annual
limitation is determined based on our value immediately prior to the ownership
change. Subsequent ownership changes may further affect the limitation in
future years.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily from the
sale of our convertible preferred stock. From inception through December 31,
1999, we raised approximately $28.2 million, net of issuance costs, through
convertible preferred stock financings. At December 31, 1998, we had cash,
cash equivalents and short-term investments totaling $8.0 million compared to
$16.6 million at December 31, 1999.
Working capital at December 31, 1998 was approximately $7.7 million
compared to $15.9 million at December 31, 1999. The increase was primarily
attributable to the sale of convertible preferred stock. This was
25
partially offset by operating losses of $9.4 million and increases in accounts
payable, accruals and other current liabilities of $1.0 million.
We used approximately $885,000 of cash for operations in 1998 compared to
$7.3 million in 1999. Cash used for operations in 1998 was primarily driven by
operating losses, offset by accrued liabilities and amortization of deferred
compensation. Cash used for operations during 1999 was primarily driven by
operating losses, offset by increases in accounts payable, amortization of
deferred compensation and accrued liabilities. We have used approximately $8.2
million for operations since our inception.
We used approximately $62,000 in 1998 for investing activities compared to
approximately $16.2 million in 1999. In 1998, we invested in equipment. In
1999, we invested $1.1 million in equipment and leasehold improvements, and
$15.1 million in investments. We have used approximately $16.2 million for
investing activities since our inception.
We received approximately $8.9 million of cash from financing activities in
1998 compared to $19.3 million in 1999. In both years, cash received from
financing activities was primarily the result of the sale of convertible
preferred stock. We have received approximately $28.2 million of cash from
financing activities since our inception through December 31, 1999.
We anticipate that cash used in operating and investing activities will
increase significantly in the future as we research, develop, and manufacture
our products, and meet our product funding requirements under our agreement
with ALZA.
In January 2000, we received $750,000 under an equipment loan, and had $1.5
million of equipment financing available for investment in our manufacturing
and other equipment. In March 2000, we received approximately $24.8 million
from the sale of convertible preferred stock, net of issuance costs.
We believe that our existing cash balances together with the net proceeds
of this offering will be sufficient to finance our planned operations and
capital expenditures through at least 18 months. We may consume available
resources more rapidly than currently anticipated, resulting in the need for
additional funding. Accordingly, we may be required to raise additional
capital through a variety of sources, including:
. the public equity market;
. private equity financing;
. collaborative arrangements; and
. public or private debt.
There can be no assurance that additional capital will be available on
favorable terms, if at all. If adequate funds are not available, we may be
required to significantly reduce or refocus our operations or to obtain funds
through arrangements that may require us to relinquish rights to certain of
our products, technologies or potential markets, either of which could have a
material adverse effect on our business, financial condition and results of
operations. To the extent that additional capital is raised through the sale
of equity or convertible debt securities, the issuance of such securities
would result in ownership dilution to our existing stockholders.
Disclosure About Market Risk
Our exposure to market risk is principally confined to our cash and
investments that have maturities of less than two years. We maintain a non-
trading investment portfolio of investment grade, liquid debt securities that
limits the amount of credit exposure to any issue, issuer or type of
instrument. The securities in our investment portfolio are not leveraged, are
classified as available for sale and are therefore subject to interest rate
risk. We do not use derivative instruments to hedge interest rate exposure.
Due to the nature of our investments, we believe there is no material risk
exposure.
26
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities, or SFAS
133. SFAS 133 requires us to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through net income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of the derivative are either offset
against the change in fair value of assets, liabilities, or firm commitments
through earnings or recognized in the other comprehensive income until the
hedged item is recognized in earnings. The ineffective portion of the
derivative's change in fair value will be immediately recognized in earnings.
SFAS 133 is effective for our fiscal year ending December 31, 2001. We do not
currently hold any derivatives and do not expect this pronouncement to
materially impact the results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, or SAB 101. SAB 101 summarizes certain
areas of the Staff's views in applying generally accepted accounting
principles to revenue in financial statements and specifically addresses
revenue recognition for non-refundable technology access fees. We believe that
our current revenue recognition principles comply with SAB 101, and thus the
adoption had no effect on results of operations.
27
BUSINESS
Overview
We are pioneering the treatment of chronic diseases and conditions by
developing and commercializing pharmaceutical systems to deliver the right
drug to the right place in the right amount at the right time. Our
pharmaceutical systems combine engineering innovations and delivery technology
from the medical device and drug delivery industries with our proprietary
pharmaceutical and biotechnology drug formulations. By integrating these
technologies, we are able to control the rate and duration of drug
administration as well as target the delivery of the drug to its intended site
of action, allowing our pharmaceutical systems to meet the special challenges
associated with treating chronic diseases or conditions. Our pharmaceutical
systems can enable new drug therapies or optimize existing therapies based on
a broad range of compounds, including small molecule pharmaceuticals as well
as biotechnology molecules such as proteins, peptides and genes. Our initial
portfolio of products combine the DUROS technology, a proven and patented drug
delivery platform licensed for specified fields of use from ALZA Corporation,
with drugs for which data on medical efficacy and safety are available.
Our pharmaceutical systems are suitable for providing long-term drug
therapy because they store highly concentrated, stabilized drugs in a small
volume and can protect the drug from degradation by the body. This, in
combination with our ability to continuously deliver precise and accurate
doses of a drug, allows us to extend the therapeutic value of a wide variety
of drugs, including those which would otherwise be ineffective, too unstable,
too potent or cause adverse side effects. Delivering the drug directly to the
intended site of action can also improve efficacy while minimizing unwanted
side effects elsewhere in the body, which often limit the long-term use of
many drugs. Our pharmaceutical systems can thus provide better therapy for
chronic diseases or conditions by replacing multiple injection therapy or oral
dosing, improving drug efficacy, reducing side effects and ensuring dosing
compliance. Our pharmaceutical systems can improve patients' quality of life
by eliminating more repetitive treatments, reducing dependence on caregivers
and allowing them to lead more independent lives.
We are currently developing pharmaceutical systems based on the DUROS
technology in a variety of therapeutic areas, including chronic pain, central
nervous system disorders, cardiovascular diseases and inner ear disorders. The
DUROS technology is a miniature drug-dispensing pump that releases minute
quantities of concentrated drug formulations in a continuous, consistent flow
over months or years using an osmotic engine. The miniature pump, made out of
titanium, can be as small as a wooden matchstick and can be implanted under
the skin. Beyond the DUROS technology, we intend to develop other technologies
consistent with our objective of delivering the right drug to the right place
in the right amount at the right time.
Our lead product is for the treatment of chronic pain and combines the
DUROS technology with a proprietary formulation of sufentanil, a potent opioid
currently used in hospitals as an anesthetic. We completed an initial Phase I
trial in November 1999 using an external pump to test the safety of continuous
chronic infusion of the drug. We intend to commence a pharmacokinetic study
and a Phase II human clinical trial in late 2000. This product is aimed at the
approximately $1 billion market for the treatment of chronic pain and will
compete with oral opioids, analgesic patches and external and implantable
infusion pumps. We are also researching and developing pharmaceutical systems
based on the DUROS technology in a variety of other therapeutic areas,
including central nervous system disorders, cardiovascular disease and inner
ear disorders.
Our second product in development is designed to target the delivery of
hydromorphone via a catheter directly to its intended site of action in the
central nervous system for the treatment of end-stage cancer pain.
Hydromorphone is an opioid approved for use as an analgesic. We will be
conducting pre-clinical studies for this product in mid-2000.
Industry Background
Chronic Diseases and Conditions
Although the pharmaceutical, biotechnology and medical device industries
have played key roles in increasing life expectancy and improving health, many
chronic, debilitating diseases continue to be inadequately
28
addressed with current drugs or medical devices. Cardiovascular disease,
cancer, neurodegenerative diseases, diabetes, arthritis, epilepsy and other
chronic diseases claim the lives of millions of Americans each year. These
illnesses are prolonged, are rarely cured completely, and pose a significant
societal burden in mortality, morbidity and cost. The Centers for Disease
Control estimates that the major chronic diseases are responsible for
approximately 70% of all deaths in the U.S., and medical care costs for these
conditions totaled more than $400 billion annually. Currently, more than 60%
of total health care spending in the U.S. is devoted to the treatment of
chronic diseases. Demographic trends suggest that, as the U.S. population
ages, the cost of treating chronic disease as a proportion of total health
care spending will increase.
Current Approaches to Treatment
Drugs are available to treat many chronic diseases, but harmful side
effects can limit prolonged treatment. In addition, patients with chronic
diseases commonly take multiple medications, often several times a day, for
the remainder of their lives. If patients fail to take drugs as prescribed,
they often do not receive the intended benefits or may experience side effects
which are harmful or decrease quality of life. These problems become more
common as the number of drugs being taken increases, the regimen of dosing
becomes more complicated, or the patient ages or becomes cognitively impaired.
It is estimated that only half of prescribed medicines are taken correctly.
The Pharmaceutical Industry. The pharmaceutical industry has traditionally
focused on the chemical structure of small molecules to create drugs that can
treat diseases and medical conditions. The ability to use these molecules as
drugs is based on their potency, safety and efficacy. Therapeutic outcome and
ultimately the suitability of a molecule as a drug depends to a large extent
on how it gets into the body, distributes throughout the body, reacts with its
intended site of action and is eliminated from the body. However, small
molecules act at locations throughout the body and are often accompanied by
unwanted side effects.
Most drugs require a minimum level in blood and tissues to have significant
therapeutic effects. Above a maximum level, however, the drug becomes toxic or
has some unwanted side effects. These two levels define the therapeutic range
of the drug. With oral dosing and injections, typically a large quantity of
drug is administered to the patient at one time, which results in high blood
levels of drug immediately after dosing. Because of these high levels, the
patient can be over-medicated during the period immediately following dosing,
resulting in wasted drug and possible side effects. Due to distribution
processes and drug clearance, the blood level of drug falls as time elapses
from the last dose. For some duration, the patient is within the desired
therapeutic range of blood levels. Eventually, the blood level of drug falls
sufficiently such that the patient becomes under-medicated and experiences
little or no drug effect until the next dose is administered.
[Insert Injection-Infusion Graph Here]
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When drugs are administered orally, transdermally or by injection, they are
absorbed into the systemic circulation and distributed throughout the body.
Because the drug is dispersed throughout the body, relatively large quantities
are necessary to create the desired effect at the intended site of action. In
addition, systemic administration of drugs in this fashion may result in
unwanted side effects, because the drug has access to many tissues and organs
in the body other than the intended site of action.
The Biotechnology Industry. Over the past twenty years, the biotechnology
revolution and the expanding field of genomics have led to the discovery of
huge numbers of proteins and genes. Tremendous resources have been committed
in the hope of developing drug therapies that would better mimic the body's
own processes and allow for greater therapeutic specificity than is possible
with small molecule drugs. Unfortunately, this huge effort has led to only a
limited number of therapeutic products. The proteins and genes identified by
the biotechnology industry are large, complex, intricate molecules, and many
are unsuitable as drugs. If these molecules are given orally, they are often
digested before they can have an effect; if given by injection, they may be
destroyed by the body's natural processes before they can reach their intended
sites of action. The body's natural elimination processes require frequent,
high dose injections that may result in unwanted side effects. As a result,
the development of biotechnology molecules for the treatment of human diseases
has been limited.
The Drug Delivery Industry. In the last thirty years, a multibillion dollar
drug delivery industry has developed on the basis that medicine can be
improved by delivering drugs to patients in a precise, controlled fashion.
Several commercially successful oral controlled release products, transdermal
controlled release patches, and injectable depot formulations have been
developed. These products demonstrate that the delivery system can be as
important to the ultimate therapeutic value of a pharmaceutical product as the
drug itself. However, to date, most drug delivery products deliver drug
systemically and do not target delivery to the intended site of action. In
addition, drug delivery products are generally limited in duration and
therefore may be less desirable for treating chronic diseases.
The Medical Device Industry. Advances in the field of medical device
technology have dramatically improved device miniaturization and
sophistication and allowed minimally invasive surgical access to remote
locations within the body. For example, a coronary bypass patient can be
treated with a stent in a procedure with a relatively short recovery, rather
than with major surgery. Most devices, however, apply only mechanical
solutions, rather than addressing chemical or biological mechanisms of
disease.
The DURECT Solution: Pharmaceutical Systems
We are pioneering the treatment of chronic diseases and conditions by
developing and commercializing pharmaceutical systems that will deliver the
right drug to the right place in the right amount at the right time. By
integrating chemistry and engineering advancements, we can achieve what drugs
or devices alone cannot. Our pharmaceutical systems enable optimized therapy
for a given disease or patient population by controlling the rate and duration
of drug administration as well as targeting the delivery of the drug to its
intended site of action.
. The Right Drug: By precisely controlling the dosage and targeting
delivery to a specific site, we can expand the therapeutic use of
compounds that otherwise would be too potent to be administered
systemically, do not remain in the body long enough to be effective, or
have significant side effects when administered systemically. This
flexibility allows us to work with a variety of drug candidates
including small molecules, proteins, peptides or genes.
. The Right Place: We draw on innovations in the medical device industry
to enhance our products. With precise placement of proprietary
microcatheters, we can design our pharmaceutical systems to deliver
drugs directly to the intended site of action. This can ensure that the
drug reaches the target tissue in effective concentrations, eliminates
many side effects caused by delivery of drug to unintended sites in the
body, and may reduce the total amount of drug administered to the body.
30
. The Right Amount: Our pharmaceutical systems can automatically deliver
drug dosages continuously within the desired therapeutic range for the
duration of the treatment period, for up to one year, without the
fluctuations in drug levels associated with pills or injections.
[REPEAT GRAPH AND ADD INFUSION LINE]
This can reduce side effects, eliminate gaps in drug therapy,
conveniently ensure accurate dosing and patient compliance, and may
reduce the total amount of drug administered to the body.
. The Right Time: Our pharmaceutical systems technology allows drugs to be
delivered automatically without intervention of the patient or care-
giver. In addition to reducing the cost of care, continuous drug therapy
frees the patient from repeated treatment or hospitalization, improving
convenience and quality of life. Our systems are well-suited for
treating chronic, debilitating diseases such as chronic pain, cancer,
heart disease, and neurodegenerative diseases that last for months or
years. We believe that it is more effective to treat chronic diseases
with continuous, long-term therapy than with alternatives such as
multiple injections that create short-term effects. Because our
pharmaceutical systems are designed to operate automatically, patient
compliance is assured.
DURECT Pharmaceutical Systems Technology
The technological foundation of our initial products is the DUROS implant
technology, coupled with proprietary catheter and drug formulation technology.
The DUROS system is a miniature drug-dispensing pump made out of titanium
which can be as small as a wooden matchstick. We have licensed the DUROS
technology for specified fields of use from ALZA. The potential of the DUROS
technology as a platform for providing drug therapy was recently demonstrated
by the Food and Drug Administration's approval in March 2000 of ALZA's Viadur
(leuprolide acetate implant), a once-yearly implant for the palliative
treatment of prostate cancer, the first approved product to incorporate the
DUROS implant technology. By leveraging this proven technology, we believe we
can reduce our development risk and more rapidly introduce new products to the
market.
[INSERT CROSS SECTION OF DUROS PUMP]
Most of the volume of the DUROS system will contain our proprietary drug
formulation. The DUROS pump operates like a miniature syringe. Through
osmosis, water from the body is slowly drawn through a semi-permeable membrane
into the pump by salt residing in the engine compartment. This water fills the
engine compartment and slowly and continuously pushes a piston to dispense
minute amounts of drug formulation from the drug reservoir. The osmotic engine
does not require batteries, switches or other electromechanical parts in order
to operate. The amount of drug delivered by the system is regulated by the
semi-permeable membrane's control of the rate of body water entering the
engine compartment and the concentration of the drug formulation.
31
The DUROS system has performance characteristics that cannot be matched by
drug delivery pumps on the market today. First, the engine can generate
sufficient pressure to deliver highly concentrated and viscous formulations.
Second, the system can be engineered to deliver a drug formulation at the
desired dosing rate with a high degree of precision, to less than 1/100th of a
drop per day on a continuous basis. The titanium shell of the DUROS system
protects the drug formulation from degradation by enzymes and clearance
processes within the body. As a result, the DUROS system can store drugs for
up to one year as they are being released into the body.
The DUROS system can be used for therapies requiring systemic or site-
specific administration of drug. To deliver drugs systemically, the DUROS
system is placed just under the skin, for example in the upper arm, in an
outpatient procedure that is completed in just a few minutes using local
anesthetic. Removal or replacement of the product is also a simple, quick
procedure completed in the doctor's office.
To deliver drug to a specific site, we are developing proprietary
miniaturized catheter technology that can be attached to the DUROS system to
direct the flow of drug directly to the target organ, tissue or synthetic
medical structure, such as a graft. Site specific delivery enables a
therapeutic concentration of a drug to be present at the desired target
without exposing the entire body of the patient to a similar dose. The
precision, size and performance characteristics of the DUROS system will allow
for continuous site-specific delivery to a variety of precise locations within
the body.
By concentrating drug in proprietary formulations, we can store enough drug
in our pharmaceutical systems to dose a patient for extended periods of time,
for up to one year. Our proprietary formulations of traditional small molecule
drugs are much more concentrated than those currently available on the market.
Concentrated formulations allow our pharmaceutical systems to be significantly
smaller than alternative drug delivery systems available today. We also
believe that we can keep these formulations chemically and physically stable
for extended periods of time at body temperature. Our formulation expertise,
combined with the protection provided by the reservoir of the DUROS system,
may allow for the stable storage and delivery of proteins, peptides, and other
large molecule agents in a long-term continuous fashion, thus enabling the
full therapeutic potential of a wide range of biotechnology compounds.
DURECT Strategy
Our objective is to develop and commercialize pharmaceutical systems that
address significant medical needs and improve patients' quality of life. To
achieve this objective, our strategy includes the following key elements:
Focus on Chronic Debilitating Medical Conditions. Many of the diseases that
present the greatest challenges to medicine are chronic, debilitating diseases
such as chronic pain, central nervous system disorders, cardiovascular
disorders, cancer, degenerative neurological diseases and ear disorders. Our
initial efforts will focus on using the versatile DUROS platform technology to
develop products that address these diseases.
Minimize Product Development Risk and Speed Time-to-Market. Initially, we
intend to minimize product development risk and speed time-to-market by using
the proven DUROS platform to administer drugs for which medical data on
efficacy and safety are available. This strategy reduces much of the
development risk that is inherent in traditional pharmaceutical product
discovery. We anticipate that we can expand the medical usefulness of existing
well-characterized drugs in several ways:
. expand uses or create new uses for existing drugs with clear safety
profiles;
. create new uses for drugs which were previously thought to be too potent
to be used safely; and
. enhance drug performance by minimizing side effects.
We anticipate that our products can be more rapidly developed at lower cost
than comparable products that are developed purely based on chemical solutions
to the problems of efficacy, side effects, stability and delivery
32
of the active agent. This allows us to use potent agents that would otherwise
not be available as therapies to treat chronic diseases. It also allows us to
innovate more rapidly in the development of products and to respond to market
feedback by optimizing our existing products or developing line extensions
that address new market needs.
Enable the Development of Pharmaceutical Systems Based on Biotechnology and
Other New Compounds. We believe there is a significant opportunity for
pharmaceutical systems to add value to therapeutic medicine by administering
biotechnology products, such as proteins, peptides and genes. We believe our
technology will improve the specificity, potency, convenience and cost-
effectiveness of proteins, genes and other newly discovered drugs. Our systems
can enable these compounds to be effectively administered, thus allowing them
to become viable medicines. We can address the stability and storage needs of
these compounds through our advanced formulation technology and package them
in a suitable pharmaceutical system for optimum delivery. Through continuous
administration, the DUROS system may eliminate the need for multiple
injections of these drugs. In addition, through the use of our proprietary
miniature catheter technology, proteins and genes can be delivered to specific
tissues for extended periods of time, thus ensuring that large molecule agents
are present at the desired site of action and minimizing the potential for
adverse side effects elsewhere in the body.
Expand Our Technology Platforms. In addition to the DUROS technology, we
will continue to develop, license and acquire other technologies consistent
with our objective of delivering the right drug to the right place in the
right amount at the right time. For example, in our October 1999 acquisition
of IntraEAR, we acquired proprietary products and intellectual property that
allow for continuous delivery of fluids to treat inner and middle ear
disorders. We have and expect to continue to license or acquire technology
from others that will complement our core capabilities.
Product Development Programs
Our pharmaceutical systems are designed to provide improved treatment
efficacy with a high level of precision and quality. Our development efforts
are focused on the application of our pharmaceutical systems technologies to
potential products in the broad areas of focus set forth in the following
table:
Delivery
Areas of Focus Drug Method Indications Status
- -------------- --------------- ------------- ----------------------- -------------------
. Chronic Pain . Sufentanil . Systemic . Opioid-Responsive . Initial Phase I
Chronic Malignant completed;
and Non-Malignant Phase II to
Pain commence late
2000
. Central . Hydromorphone . Targeted . Cancer Pain . Preclinical Stage
Nervous
System . Others . Others in Development . Research Stage
Disorders
. Ear Disorders . Gentamycin . Targeted . Meniere's Disease . Preclinical Stage
. Others . Others in Development . Research Stage
. Cardiovascular . Various . Targeted . Various . Research Stage
Diseases
. Vascular Graft . Various . Targeted . Various . Research Stage
. Cancer . Various . Targeted or . Various . Research Stage
Immunotherapy Systemic
33
Chronic Pain
Market Opportunity. Chronic pain, defined as pain lasting 6 months or
longer, is a significant problem associated with chronic diseases, including
cancer and various neurological and skeletal disorders. Chronic nonmalignant
pain affects as many as 34 million Americans annually. In addition, the
National Cancer Institute estimates that 8.4 million Americans alive today
have a history of cancer. About 1.2 million new cancer cases are expected to
be diagnosed in 2000, and about 50%-70% of cancer patients experience chronic
pain during the course of the disease. Sales of opioids for the treatment of
chronic malignant and nonmalignant pain are approximately $1 billion. With our
lead product, DUROS sufentanil, we intend to target patients with chronic pain
that is stable and opioid responsive and results from a variety of causes.
Sufentanil is an off-patent, highly potent opioid that is currently used in
hospitals as an anesthetic. This product will provide an alternative to
current therapies for the treatment of chronic pain, as well as ensuring
improved patient compliance and convenience.
Development Strategy. We are developing a subcutaneous, implantable DUROS-
based system that delivers sufentanil systemically at a constant rate for 3
months. We will develop a family of dosage strengths, tailored to meet market
needs. An initial Phase I trial using an external pump to test the safety of
continuous chronic infusion of the drug was completed in 1999. Pharmacokinetic
and Phase II human clinical trials are planned to commence in late 2000. These
trials are designed to develop data in support of dose selection for later
trials and commercial use as well as data to guide physicians in converting
patients from previous therapies to the DUROS sufentanil implant.
Central Nervous System Disorders
Market Opportunity. Millions of people suffer from chronic diseases and
disorders of the central nervous system, including brain and spinal cord
tumors, epilepsy, spasticity, spinal meningitis, Parkinson's disease, multiple
sclerosis and back disorders. Opportunities exist to apply our pharmaceutical
systems for treatment of these disorders. The first central nervous system
disorder we will address is end-stage cancer pain. Roughly 550,000 people in
the U.S. will die from cancer and cancer-related complications this year. It
is estimated that over half of terminal cancer patients experience severe,
chronic pain. Infusion of opiates into the spinal fluid has become accepted
medical therapy in patients who find high dose oral or transdermal opioids
ineffective or who experience side effects that make systemic therapy
unacceptable. This method of delivery increases analgesic potency and reduces
side effects. However, patients with cancer pain are often not treated with
this therapeutic regimen because currently available implantable spinal
infusion pumps are only approved for patients with life expectancies of three
months or more. Furthermore, external infusion pumps are inconvenient and
expose a patient to a risk of infection. A need exists for a minimally
invasive, spinal infusion device that has improved cost benefit for end-stage
cancer patients with chronic pain.
Development Strategy. Our strategy is to develop an infusion system that
can deliver hydromorphone into the spinal fluid via a catheter. This product
will be considerably smaller and less invasive than currently available spinal
infusion pumps. Hydromorphone is an opioid that has been approved for
treatment of pain. Pre-clinical prototypes of this device are currently being
designed and tested. We anticipate that initial clinical trials with this
device will begin in 2001 and will focus on determining its safety, efficacy
and tolerability in cancer patients with 3 months or less to live.
Middle and Inner Ear Disorders
Market Opportunity. Inner ear disorders, including tinnitus, hearing loss
and Meniere's disease impact the lives of millions of people worldwide.
Opportunities may exist to treat these inner ear disorders through continuous
low dose application of drug. For example, Meniere's disease is a debilitating
inner ear disorder characterized by vertigo, tinnitus, fluctuating hearing
loss and aural pressure. In the U.S., it is estimated that Meniere's disease
afflicts at least 3 million people with 100,000 new cases being diagnosed each
year. Current first line treatments include vestibular suppressants, diet
modifications and diuretics. We estimate that about
34
30 percent of patients receive second line treatments such as large doses of
gentamycin or surgery that can destroy inner ear function. These destructive
treatments can result in permanent loss of hearing and impair balance. We are
researching treatments which therapeutically rather than destructively treat
Meniere's disease while minimizing risk of hearing loss and preserving balance
function.
Development Strategy. In October 1999, we acquired substantially all of the
assets of IntraEAR, Inc. This acquisition provided us with an extensive
intellectual property portfolio related to devices and methods for the
delivery of fluids to the round window niche of the middle ear. We are
researching pharmaceutical systems that include this proprietary catheter
technology to treat intractable inner ear disorders such as Meniere's disease,
hearing loss and tinnitus.
Ongoing Research
We plan to devote substantial resources to developing multiple products
based on our pharmaceutical systems technology in one or more of the areas of
focus in the above table or others. For example, we are currently engaged in
research on treating chronic cardiovascular diseases and other central nervous
system disorders.
Ear Catheter Business
Our acquisition in October 1999 of substantially all of the assets of
IntraEAR, Inc. provided us with catheter technology and products that had
previously received 510K marketing clearance from the FDA and European CE Mark
approval. We currently market these catheters through a direct sales force in
the U.S. and through a network of 13 distributors outside the U.S.
The Round Window ^-Cath and Round Window e-Cath products are dual- and
triple-lumen micro-catheters of proprietary design which allow controlled
fluid delivery to the round window membrane for treatment of ear disorders.
These catheters feature a proprietary tip which is designed to allow the
surgeon to secure it in the round window niche of the middle ear. When
attached to a commercially available, external infusion pump, such as those
manufactured by Disetronic Medical Systems, a variety of therapeutic fluids
can be continuously delivered to the round window membrane to potentially
treat ear disorders including Meniere's disease, hearing loss and tinnitus.
These catheters can be left in place for up to 29 days and can be connected to
a syringe or pump for continuous delivery. The dual-lumen design allows the
treating physician to add and remove fluid or flush the device without a
build-up of air or fluid pressure. The e-Cath design incorporates an
additional electrode to allow physicians to record electrical signals related
to activities in the ear.
ALZET Business
In April 2000, we acquired from ALZA the ALZET product and assets used
primarily in the manufacture, sale and distribution of this product. This
acquisition provides us with an ongoing business making and selling this
product worldwide. We currently market the ALZET product through a direct
sales force in the U.S. and through a network of 10 distributors outside the
U.S.
The ALZET product is a miniature, implantable osmotic pump used for
experimental research in mice, rats and other laboratory animals. These pumps
are not approved for use in humans, nor are they intended for such use. ALZET
pumps continuously deliver drugs, hormones and other test agents at controlled
rates from one day to four weeks without the need for external connections,
frequent handling or repeated dosing. In laboratory research, these infusion
pumps can be used for systemic administration when implanted under the skin or
in the body. They can be attached to a catheter for intravenous,
intracerebral, or intra-arterial infusion or for targeted delivery, where the
effects of a drug or test agent are localized in a particular tissue or organ.
We believe that the ALZET business provides us with innovative design and
application opportunities for potential new products.
35
Marketing and Sales
In general, we intend to establish strategic distribution and marketing
alliances for our products. We recognize that pharmaceutical companies have
established sales organizations in markets we are targeting. We plan to
leverage these sales organizations to achieve greater market penetration for
our products than we could on our own. Because our first products use proven
drugs with a proven technology platform, we have the flexibility to enter into
these alliances at a later stage of clinical development when the product
development risk is diminished in order to retain greater economic
participation. We may also establish our own sales force when strategically or
economically advantageous.
We have established a small sales force in the U.S. to market our approved
catheters for delivering fluids to the inner ear. In addition, we sell our
catheters through 13 distributors outside the U.S. We market and sell our
ALZET product in the U.S. through a direct sales force, and we have a network
of ten distributors for this product outside of the U.S.
ALZA has an option to exclusively market and distribute DUROS sufentanil in
the U.S. and Canada on terms to be negotiated by the parties at arms-length.
Depending on when ALZA exercises its option, it may be required to pay for all
or part of the clinical and development costs for this product. Should ALZA
decide not to exercise its option, we will market and distribute DUROS
sufentanil in the U.S. and Canada ourselves or through a third party.
Manufacturing
The process for manufacturing our pharmaceutical systems is technically
complex, requires special skill in aseptic processing, and must be performed
in a qualified facility. For our lead product, we subcontract to third-parties
the manufacture of components of the DUROS system, which we then assemble. We
have entered into a contract with Chesapeake Biological Labs, Inc. to finish
and fill the DUROS system for Phase II clinical testing of DUROS sufentanil.
We plan to construct a flexible manufacturing facility to produce materials
for Phase III clinical testing and market launch of DUROS sufentanil and to
serve as a pilot facility for additional products under development. In
addition, we are evaluating alternative strategies to meet our long-term
commercial manufacturing needs.
For the manufacture of our ear catheter products, we have a supply
agreement with a third party manufacturer of disposable medical products.
Under this agreement, renewable annually, the third party has responsibility
for all manufacturing and packaging of finished goods and some regulatory
responsibilities. We manufacture our ALZET product in a leased facility
located in Vacaville, California.
Development and Commercialization Agreement with ALZA Corporation
On April 21, 1998, we entered into a Development and Commercialization
Agreement with ALZA Corporation, which was amended and restated on April 28,
1999 and April 14, 2000. Pursuant to this agreement, ALZA granted to us
exclusive, world-wide rights under ALZA intellectual property, including
patents, trade secrets and know-how, to develop and commercialize products
using the DUROS drug delivery technology in the fields of the delivery of
drugs by catheter (except for the sufentanil product) to the central nervous
system to treat selected central nervous system disorders, the delivery of
drugs by catheter to the middle and inner ear, the delivery of drugs by
catheter into the pericardial sac of the heart, the delivery of selected drugs
by catheter into vascular grafts and the delivery of selected cancer antigens.
To maintain the rights granted to us in our licensed fields, we must meet
annual minimum development spending requirements and develop a minimum number
of products. We must also diligently procure required regulatory approvals and
commercialize the products in each country in order to maintain
commercialization rights for such product in that country.
Under this agreement, we initiate product development by sending ALZA a
written notice containing a description of the proposed product and proposed
target dates for key milestones. These target dates are subject
36
to ALZA's reasonable approval and may be adjusted from time to time by mutual
agreement. We have the right to subcontract to third parties product
development activities including development of components of the DUROS
system, provided that design of the DUROS system and other development
activities relating to the DUROS system must be performed by ourselves or ALZA
unless ALZA permits us to subcontract out such development. We also have the
right to partner with third parties to commercialize our products on a
product-by-product basis, provided that ALZA has options to distribute our
DUROS sufentanil product in the U.S. and Canada and our cancer antigen
products which do not incorporate proprietary molecules owned by a third party
throughout the world. We have the right to subcontract manufacturing
activities relating to our products other than the assemblage of the
components of the DUROS system itself. See "Risk Factor--Our agreement with
ALZA limits our field of operation for our DUROS-based pharmaceutical systems,
requires us to spend significant funds on product development and gives ALZA a
first right to distribute selected products for us."
In consideration for the rights granted to us under this agreement, ALZA
received 5,600,000 shares of our Series A-1 Preferred Stock pursuant to a
Series A-1 and Series A-2 Preferred Stock Purchase Agreement dated as of June
19, 1998. As additional consideration, ALZA is entitled to receive a royalty
on the net sales of products for so long as we sell the product and a
percentage of any up-front license fees, milestone or any special fees,
payments or other consideration we receive, excluding research and development
funding. In connection with an amendment to the agreement made in April 2000,
ALZA received 1,000,000 shares of our common stock and a warrant to purchase
1,000,000 shares of our common stock at an exercise price equal to the price
at which we sell our common stock in this offering. The amendments to our
development and commercialization agreement with ALZA include a reduction in
product royalties and up front payments payable to ALZA by us under the
agreement. In addition, ALZA's option to distribute the DUROS sufentanil
product was amended in geographic scope to cover only the U.S. and Canada,
instead of worldwide.
Under this agreement, we may engage ALZA to provide certain consulting and
development services agreed upon by the respective companies on a fee for
services basis.
The term of this agreement is for so long as we are obligated to make
product payments to ALZA. The agreement is assignable by either party to an
acquiror of all or substantially all of such party's business.
Patents, Licenses and Proprietary Rights
Our success depends in part on our ability to obtain patents, to protect
trade secrets, to operate without infringing upon the proprietary rights of
others and to prevent others from infringing on our proprietary rights. Our
policy is to seek to protect our proprietary position by, among other methods,
filing U.S. and foreign patent applications related to our proprietary
technology, inventions and improvements that are important to the development
of our business. As of February 29, 2000, we held four issued or allowed U.S.
patents and one issued or allowed foreign patent. Our patents expire at
various dates starting in the year 2012. In addition, we have 11 pending U.S.
patent applications and have filed six corresponding patent applications under
the Patent Cooperation Treaty, five of which are currently pending in Europe,
Australia and Canada. In addition, we have licensed from ALZA a portfolio of
pending, issued and future patents to permit us to develop and commercialize
products under our agreement with ALZA.
Proprietary rights relating to our planned and potential products will be
protected from unauthorized use by third parties only to the extent that they
are covered by valid and enforceable patents or are effectively maintained as
trade secrets. Patents owned by or licensed to us may not afford protection
against competitors, and our pending patent applications now or hereafter
filed by or licensed to us may not result in patents being issued. In
addition, the laws of certain foreign countries may not protect our
intellectual property rights to the same extent as do the laws of the U.S. The
patent positions of biopharmaceutical companies involve complex legal and
factual questions and, therefore, their enforceability cannot be predicted
with certainty. Our patents or patent applications, or those licensed to us,
if issued, may be challenged, invalidated or circumvented, and the rights
granted thereunder may not provide proprietary protection or competitive
advantages to us against competitors with similar technology. Furthermore, our
competitors may independently develop similar technologies or
37
duplicate any technology developed by us. Because of the extensive time
required for development, testing and regulatory review of a potential
product, it is possible that, before any of our products can be
commercialized, any related patent may expire or remain in existence for only
a short period following commercialization, thus reducing any advantage of the
patent, which could adversely affect our ability to protect future product
development and, consequently, our operating results and financial position.
Because patent applications in the U.S. are maintained in secrecy until
patents issue and since publication of discoveries in the scientific or patent
literature often lag behind actual discoveries, we cannot be certain that we
were the first to make the inventions covered by each of our issued or pending
patent applications or that we were the first to file for protection of
inventions set forth in such patent applications. Our planned or potential
products may be covered by third-party patents or other intellectual property
rights, in which case we would need to obtain a license to continue developing
or marketing these products.
Any required licenses may not be available to us on acceptable terms, if at
all. If we do not obtain any required licenses, we could encounter delays in
product introductions while we attempt to design around these patents, or
could find that the development, manufacture or sale of products requiring
such licenses is foreclosed. Litigation may be necessary to defend against or
assert such claims of infringement, to enforce patents issued to us, to
protect trade secrets or know-how owned by us, or to determine the scope and
validity of the proprietary rights of others. In addition, interference
proceedings declared by the U.S. Patent and Trademark Office may be necessary
to determine the priority of inventions with respect to our patent
applications. Litigation or interference proceedings could result in
substantial costs to and diversion of effort by us, and could have a material
adverse effect on our business, financial condition and results of operations.
These efforts by us may not be successful.
We may rely, in certain circumstances, on trade secrets to protect our
technology. However, trade secrets are difficult to protect. We seek to
protect our proprietary technology and processes, in part, by confidentiality
agreements with our employees and certain contractors. There can be no
assurance that these agreements will not be breached, that we will have
adequate remedies for any breach, or that our trade secrets will not otherwise
become known or be independently discovered by competitors. To the extent that
our employees, consultants or contractors use intellectual property owned by
others in their work for us, disputes may also arise as to the rights in
related or resulting know-how and inventions.
Government Regulation
The FDA and comparable regulatory agencies in state and local jurisdictions
and in foreign countries impose substantial requirements upon the clinical
development, manufacture and marketing of pharmaceutical products. 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, advertising and
promotion of our products. We believe that our initial products will be
regulated as drugs by the FDA rather than as biologics or devices, whereas
later products may be regulated as combination products with a device
designation for all or some of the final product components.
The process required by the FDA under the new drug provisions of the
Federal Food, Drug and Cosmetics Act before our initial products may be
marketed in the U.S. generally involves the following:
. preclinical laboratory and animal tests;
. submission of an IND application which must become effective before
clinical trials may begin;
. adequate and well-controlled human clinical trials to establish the
safety and efficacy of the proposed pharmaceutical in our intended use;
and
. FDA approval of a new drug application.
The testing and approval process requires substantial time, effort, and
financial resources and we cannot be certain that any approval will be granted
on a timely basis, if at all.
38
Preclinical tests include laboratory evaluation of the product, its
chemistry, formulation and stability, as well as animal studies to assess the
potential safety and efficacy of the product. We then submit the results of
the preclinical tests, together with manufacturing information and analytical
data, to the FDA as part of an IND, which must become effective before we may
begin human clinical trials. The IND automatically becomes effective 30 days
after receipt by the FDA, unless the FDA, within the 30-day time period,
raises concerns or questions about the conduct of the trials as outlined in
the IND and imposes a clinical hold. In such a case, the IND sponsor and the
FDA must resolve any outstanding concerns before clinical trials can begin.
Our submission of an IND may not result in FDA authorization to commence
clinical trials. Further, an independent Institutional Review Board at each
medical center proposing to conduct the clinical trials must review and
approve any clinical study.
Human clinical trials are typically conducted in three sequential phases
which may overlap:
. PHASE I: The drug is initially introduced into healthy human subjects or
patients and tested for safety, dosage tolerance, absorption,
metabolism, distribution and excretion.
. PHASE II: Involves studies in a limited patient population to identify
possible adverse effects and safety risks, to determine the efficacy of
the product for specific targeted diseases and to determine dosage
tolerance and optimal dosage.
. PHASE III: When Phase II evaluations demonstrate that a dosage range of
the product is effective and has an acceptable safety profile, Phase III
trials are undertaken to further evaluate dosage, clinical efficacy and
to further test for safety in an expanded patient population, often at
geographically dispersed clinical study sites.
In the case of products for severe diseases, such as chronic pain, or life-
threatening diseases such as cancer, the initial human testing is often
conducted in patients with disease rather than in healthy volunteers. Since
these patients already have the target disease or condition, these studies may
provide initial evidence of efficacy traditionally obtained in Phase II trials
and thus these trials are frequently referred to as Phase I/II trials. We
cannot be certain that we will successfully complete Phase I, Phase II or
Phase III testing of our product candidates within any specific time period,
if at all. Furthermore, the FDA or the Institutional Review Board or the
sponsor may suspend clinical trials at any time on various grounds, including
a finding that the subjects or patients are being exposed to an unacceptable
health risk.
The results of product development, preclinical studies and clinical
studies are submitted to the FDA as part of a new drug application for
approval of the marketing and commercial shipment of the product. The FDA may
deny a new drug application if the applicable regulatory criteria are not
satisfied or may require additional clinical data. Even if such data is
submitted, the FDA may ultimately decide that the new drug application does
not satisfy the criteria for approval. Once issued, the FDA may withdraw
product approval if compliance with regulatory standards is not maintained or
if safety problems occur after the product reaches the market. In addition,
the FDA requires surveillance programs to monitor approved products which have
been commercialized, and the agency has the power to require changes in
labeling or to prevent further marketing of a product based on the results of
these post-marketing programs.
In addition to the drug approval requirements applicable to our initial
product for the treatment of chronic pain through the Center for Drug
Evaluation and Research (CDER), the FDA may require an intercenter
consultation review by the Center for Devices and Radiological Health (CDRH).
This request for consultation may be based on the device-like nature of a
number of aspects of the DUROS technology.
Satisfaction of the above FDA requirements or similar requirements of
state, local and foreign regulatory agencies typically takes several years and
the actual time required may vary substantially, based upon the type,
complexity and novelty of the pharmaceutical product. Government regulation
may delay or prevent marketing of potential products for a considerable period
of time and impose costly procedures upon our activities. We cannot be certain
that the FDA or any other regulatory agency will grant approval for any of our
products under
39
development on a timely basis, if at all. Success in preclinical or early
stage clinical trials does not assure success in later stage clinical trials.
Data obtained from preclinical and clinical activities is not always
conclusive and may be susceptible to varying interpretations which could
delay, limit or prevent regulatory approval. Even if a product receives
regulatory approval, the approval may be significantly limited to specific
indications. Further, even after regulatory approval is obtained, later
discovery of previously unknown problems with a product may result in
restrictions on the product or even complete withdrawal of the product from
the market. Delays in obtaining, or failures to obtain regulatory approvals
would have a material adverse effect on our business. Marketing our products
abroad will require similar regulatory approvals and is subject to similar
risks. In addition, we cannot predict what adverse governmental regulations
may arise from future U.S. or foreign governmental action.
Any products manufactured or distributed by us pursuant to FDA clearances
or approvals are subject to pervasive and continuing regulation by the FDA,
including record-keeping requirements and reporting of adverse experiences
with the drug. Drug manufacturers and their subcontractors are required to
register their establishments with the FDA and state agencies, and are subject
to periodic unannounced inspections by the FDA and state agencies for
compliance with good manufacturing practices, which impose procedural and
documentation requirements upon us and our third party manufacturers. We
cannot be certain that we or our present or future suppliers will be able to
comply with the GMP regulations and other FDA regulatory requirements.
The FDA regulates drug labeling and promotion activities. The FDA has
actively enforced regulations prohibiting the marketing of products for
unapproved uses. Under the FDA Modernization Act of 1997, the FDA will permit
the promotion of a drug for an unapproved use in certain circumstances, but
subject to very stringent requirements. We and our products are also subject
to a variety of state laws and regulations in those states or localities where
our products are or will be marketed. Any applicable state or local
regulations may hinder our ability to market our products in those states or
localities. We are also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control, and disposal of hazardous or
potentially hazardous substances. We may incur significant costs to comply
with such laws and regulations now or in the future.
The FDA's policies may change and additional government regulations may be
enacted which could prevent or delay regulatory approval of our potential
products. Moreover, increased attention to the containment of health care
costs in the U.S. and in foreign markets could result in new government
regulations that could have a material adverse effect on our business. We
cannot predict the likelihood, nature or extent of adverse governmental
regulation that might arise from future legislative or administrative action,
either in the U.S. or abroad.
Competition
We may face competition from other companies in numerous industries
including pharmaceuticals, medical devices and drug delivery. Our DUROS
sufentanil product will compete with oral opioids, transdermal opioid patches,
and implantable and external infusion pumps which can be used for infusion of
opioids. Products of these types are marketed by Purdue Pharma, Knoll,
Janssen, Medtronic, AstraZeneca, Arrow International, Tricumed and others. Our
spinal hydromorphone product will compete with implantable and external
infusion pumps marketed by Medtronic, Arrow International, Tricumed, Abbott,
Deltec and others. Numerous companies are applying significant resources and
expertise to the problems of drug delivery and several of these are focusing
or may focus on delivery of drugs to the intended site of action, including
Alkermes, Genetronics, The Liposome Company, Focal, Matrix Pharmaceuticals and
others. Although we have exclusivity with respect to our license of the DUROS
technology in specific fields of therapy, ALZA is also a potential competitor
with technologies other than DUROS.
Some of these competitors may be addressing the same therapeutic areas or
indications as us. Our current and potential competitors may succeed in
obtaining patent protection or commercializing products before us. Any
40
products we develop using our pharmaceutical systems technologies will compete
in highly competitive markets. Many of our potential competitors in these
markets have greater development, financial, manufacturing, marketing, and
sales resources than we do and we cannot be certain that they will not succeed
in developing products or technologies which will render our technologies and
products obsolete or noncompetitive. In addition, many of those potential
competitors have significantly greater experience than we do in their
respective fields.
Employees
As of March 31, 2000, we had 41 full-time employees, including 26 in
research, development and manufacturing and 15 in sales, general and
administrative. From time to time, we also employ independent contractors to
support our engineering and support and administrative organizations. None of
our employees are represented by a collective bargaining unit and we have
never experienced a work stoppage. We consider our relations with our
employees to be good.
Facilities
We are headquartered in Cupertino, California, where we lease approximately
30,000 square feet of space under a lease expiring in January 2004 with
options to extend for up to an additional ten years. This facility contains
both office and laboratory space. We sublease approximately 11,000 square feet
of this space under a sublease that terminates in March 2001. We are also in
the process of assuming a lease for approximately 7,800 square feet of space
in Vacaville, California. This facility contains manufacturing space for the
ALZET product. Our lease of this facility expires in March 2001 with an option
to extend for one year. We believe that our existing and planned facilities
are adequate to meet our current and foreseeable requirements or that suitable
additional or substitute space will be available as needed.
Legal Proceedings
We are not a party to any material legal proceedings.
Scientific and Medical Advisors
We have recruited and will continue to recruit leading researchers and
physicians in our fields of interest to serve as scientific and medical
advisors for each of our products under development. The scientific advisory
board advises our management on strategic issues related to our scientific
development program. In return for their services, these advisors may receive
compensation in the form of cash and/or option grants for the purchase of
common stock. Listed in alphabetical order, the following individuals serve as
scientific advisors for our lead product in the field of pain treatment:
Stuart L. DuPen, M.D.
Stuart DuPen, M.D. is an anesthesiologist specializing in pain management.
He is board certified in anesthesiology and pain management, with over twenty
years of experience. His interests include management of neuropathic pain
syndromes associated with both cancer and non-cancer sources. He lectures
widely on epidural analgesia in cancer pain management. He is the principal
investigator on two National Cancer Institute studies designed to enhance
education of doctors and nurses about pain, and to improve pain relief
outcomes. Dr. DuPen participated in our Phase I trial for DUROS sufentanil.
Elliot S. Krames, M.D.
Elliot Krames, M.D., is a board-certified anesthesiologist who has been
practicing pain medicine solely for the past 20 years. He is a pioneer and one
of the leading experts in the field of intraspinal analgesia. He is a world-
renowned leader and educator in the fields of neuromodulation for pain
control. He has written extensively on implantable technologies for pain
management and has conducted national and international symposia on this
41
topic. For the past 10 years, Dr. Krames has been the Medical Director of the
Pacific Pain Treatment Centers in the San Francisco Bay Area, an organization
of pain clinics dedicated to interdisciplinary pain medicine. He is co-founder
of the National Pain Foundation, a founding member of the American
Neuromodulation Society and he participates on the Boards of the International
and American Neuromodulation Societies, World Institutes of Pain, and the
American Academy of Pain Medicine. Dr. Krames is the Chairman of the Combined
Worldwide Pain Conference of the International and American Neuromodulation
Societies, the World Institutes of Pain and the World Society of Pain
Clinicians that will take place July 15-21, 2000 in San Francisco. In
addition, he is Editor-in-Chief of Neuromodulation, the Journal of the
International Neuromodulation Society.
Dwight E. Moulin, M.D.
Dwight Moulin, M.D., is an Associate Professor, Division of Neurology,
Department of Clinical Neurological Sciences at the University of Western
Ontario, Canada. He is also an associate professor in the department of
Oncology and an Honorary Lecturer in the Department of Medicine at the
University of Western Ontario. In addition, Dr. Moulin is a Consultant
Neurologist at St. Joseph's Health Center, Head of the Division of Neurology
at the Victoria Campus of the London Health Sciences Centre as well as
Attending Neurologist at the Victoria Campus and University Campus of the
London Health Sciences Centre. He has published widely in the field of chronic
pain, and has been very active in clinical trials in chronic pain, including
trials for controlled and sustained release opioids.
Russell K. Portenoy, M.D.
Russell K. Portenoy, M.D., is chairman of the Department of Pain Medicine
and Palliative Care at Beth Israel Medical Center and Professor of Neurology
at the Albert Einstein College of Medicine. Dr. Portenoy received his medical
degree from the University of Maryland School of Medicine. He completed a
residency in neurology at the Albert Einstein College of Medicine and a
fellowship in pain management at Memorial Sloan-Kettering Cancer Center. Dr.
Portenoy has been very active as both a researcher and an educator. He has
published extensively on topics related to pain and analgesics, treatments for
symptoms other than pain, symptom assessment and quality of life. He is the
immediate past president of the American Pain Society, and the recipient of
that society's Wilbert E. Fordyce Clinical Investigator Award and the
Distinguished Service Award. Dr. Portenoy also is Secretary of the
International Association for the Study of Pain and a Trustee of the American
Board of Hospice and Palliative Medicine. Dr. Portenoy is Editor-in-Chief of
an international, peer-reviewed medical journal, The Journal of Pain and
Symptom Management. He is also Associate Editor for cancer pain for the
journal Pain, and serves on several other editorial boards.
Peter Staats, M.D.
Peter S. Staats, M.D., is currently Chief of the Division of Pain Medicine
in the Department of Anesthesiology and Critical Care Medicine at the Johns
Hopkins Hospital, where he is also the Director of the Anesthesia Pain
Medicine Clinic. His academic posts at the Johns Hopkins University School of
Medicine include Associate Professorships in the Department of Anesthesiology
and Critical Care Medicine and the Department of Oncology. Prior to joining
the medical and teaching staff at Johns Hopkins in 1994, Dr. Staats received
his medical residency training in anesthesiology and critical care medicine at
the Johns Hopkins University School of Medicine and was subsequently awarded a
fellowship in Pain Medicine. Dr. Staats has lectured throughout the world and
has written over a hundred articles, book chapters and abstracts on the
management of chronic pain.
42
MANAGEMENT
The directors and executive officers of DURECT Corporation and their ages
as of March 31, 2000 are as follows:
Name Age Position
---- --- --------
Felix Theeuwes, D.S.C. .......... 62 Chairman, Chief Scientific Officer and
Director
James E. Brown, D.V.M. .......... 43 President, Chief Executive Officer and
Director
Thomas A. Schreck................ 42 Chief Financial Officer and Director
Edward M. Gillis................. 38 Vice President, Engineering
Randolph M. Johnson, Ph.D. ...... 49 Vice President, Pharmacology and
Toxicology, Director of CNS Programs
Jean I Liu....................... 31 Vice President, Legal & General Counsel
Judy A. Magruder................. 41 Vice President, Regulatory &
Development
Timothy S. Nelson................ 36 Vice President, Business and Commercial
Development
Scott M. Wheelwright, Ph.D. ..... 45 Vice President, Manufacturing
James R. Butler(2)............... 59 Director
John L. Doyle(2)................. 68 Director
Douglas A. Lee(1)................ 35 Director
Matthew V. McPherron(1)(2)....... 35 Director
Albert L. Zesiger(1)............. 70 Director
- --------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Felix Theeuwes, D.S.C. co-founded DURECT in February 1998 and has served as
our Chairman, Chief Scientific Officer and a Director since July 1998. He is
also currently a consultant to ALZA Corporation, a pharmaceutical and drug
delivery company which is an affiliate of us. Prior to that, Dr. Theeuwes held
various positions at ALZA Corporation, including President of New Ventures
from August 1997 to August 1998, President of ALZA Research and Development
from 1995 to August of 1997, President of ALZA Technology Institute from 1994
to April 1995 and Chief Scientist from 1982 to June 1997. Dr. Theeuwes is also
a director of Genetronics, a medical device company, and several private
companies. Dr. Theeuwes holds a D.Sc. degree in Physics from the University of
Leuven (Louvain), Belgium. He also served as a post-doctoral fellow and
visiting research assistant professor in the Department of Chemistry at the
University of Kansas and has completed the Stanford Executive Program.
James E. Brown, D.V.M. co-founded DURECT in February 1998 and has served as
our President, Chief Executive Officer and a Director since June 1998. He
previously worked at ALZA Corporation as Vice President of Biopharmaceutical
and Implant Research and Development from June 1995 to June 1998. Prior to
that, Dr. Brown held various positions at Syntex Corporation, a pharmaceutical
company, including Director of Business Development from May 1994 to May 1995,
Director of Joint Ventures for Discovery Research from April 1992 to May 1995,
and held a number of positions including Program Director for Syntex Research
and Development from October 1985 to March 1992. Dr. Brown holds a B.A. from
San Jose State University and a D.V.M. (Doctor of Veterinary Medicine) from
the University of California, Davis where he also conducted post-graduate work
in pharmacology and toxicology.
Thomas A. Schreck co-founded DURECT in February 1998 and served as Chief
Executive Officer, Chief Financial Officer and President from February 1998 to
June 1998. Since June 1998, he has served as our Chief Financial Officer and a
Director. Prior to founding DURECT, he founded and was President of Schreck
Merchant Group, Inc., an investment bank specializing in private placements
and mergers and acquisitions, from June 1994 to February 1998. Mr. Schreck
also founded and served as Risk Manager to Genesis Merchant Group/Portola
Capital Partners, L.P., a convertible arbitrage fund, from 1993 to 1994. He
also served as a Manager of the Convertible Securities Department at
Montgomery Securities, from 1988 to 1991. Mr. Schreck received a B.A. from
Williams College.
43
Edward M. Gillis has served as our Vice President of Engineering since
March 2000. Prior to that, Mr. Gillis served as our Executive Director of
Engineering from April 1999 to March 2000. Prior to that he served as our
Director of Engineering from October 1998 to April 1999. From March 1997 to
October 1998, Mr. Gillis served as the Director of Pilot Manufacturing and
Process Engineering at EndoTex Interventional Systems, a private medical
device company. From July 1993 to March 1997, Mr. Gillis served as Director of
Catheter Ablation Product Development and Manufacturing Engineering Manager at
Cardiac Pathways Corporation, a medical device company. Mr. Gillis holds a
B.S. in Biological Sciences and an M.S. in Plastics Engineering from the
University of Lowell.
Randolph M. Johnson, Ph.D. has served as our Vice President and Director of
Toxicology and Pharmacology and Director of CNS (Central Nervous System)
Programs since September 1998. From July 1995 to September 1998, Dr. Johnson
held various positions at Roche Bioscience, a pharmaceutical company. From
July 1995 to October 1997 Dr. Johnson served as the Department Head of
Neurobiology, Center for Biological Research and from October 1997 to
September 1998, as the Department Head of Molecular & Cellular Biochemistry,
Center for Biological Research. From January to June 1995, Dr. Johnson served
as the Director of Preclinical Development at Syntex Development Research, a
pharmaceutical company. Dr. Johnson received a B.S. in Zoology from California
State University, Long Beach, an M.A. in Biology-Physiology from California
State University, Long Beach and a Ph.D. in Biomedical Science-Pharmacology
from the University of South Carolina School of Medicine. In addition, he was
a Postdoctoral Research Associate in the Department of Pharmacology at the
University of Virginia School of Medicine.
Jean I Liu has served as our Vice President of Legal and General Counsel
since February 1999. Previously, from October 1998, Ms. Liu served as our Vice
President of Legal. Prior to that, Ms. Liu worked as an attorney at Venture
Law Group, a law firm, from May 1997 to October 1998. Ms. Liu worked as an
attorney at Pillsbury Madison & Sutro LLP, a law firm, from September 1993 to
May 1997. Ms. Liu received a B.S. in Cellular & Molecular Biology from
University of Michigan, an M.S. in Biology from Stanford University and a J.D.
from Columbia University School of Law.
Judy A. Magruder has served as our Vice President of Regulatory and
Development since February 2000. From March 1999 to February 2000, Ms.
Magruder served as our Executive Director of Regulatory and Product
Development. Prior to that, Ms. Magruder served as Director of Product
Development at Vascular Therapeutics, Inc., a private pharmaceuticals company,
from January 1998 to March 1999. Ms. Magruder held various positions at ALZA
Corporation, including Head of Program Management, Implant Development and a
Research Scientist from February 1996 to January 1998, Product Development
Manager/Program Manager as well as Research Scientist from January 1991 to
February 1996, and Chemist from May 1984 to April 1989. Ms. Magruder received
a B.S. in Animal Science from the University of California, Davis and an
M.B.A. from Santa Clara University.
Timothy S. Nelson has served as our Vice President of Business and
Commercial Development since September 1998. Previously, Mr. Nelson held
various positions at Medtronic, Inc., a medical device company, including
Business Director of Neurological Division, Europe, Middle East and Africa
from June 1996 to September 1998, and Manager of Drug Delivery Ventures and
Business Development from August 1992 to June 1996. Mr. Nelson holds a
Bachelor of Chemical Engineering degree from the University of Minnesota and a
Master of Management degree with Distinction from the J.L. Kellogg Graduate
School of Management, Northwestern University.
Scott M. Wheelwright, Ph.D. has served as our Vice President of
Manufacturing since February 2000. Previously, Dr. Wheelwright was the Vice
President of Development and Manufacturing at Calydon, Inc., a privately held
biotechnology company developing cancer therapeutics, from March 1998 to
February 2000. From October 1992 to March 1998, he served as Senior Director
of Process Development, Manufacturing and Engineering at Scios Inc., a
biotechnology company. Dr. Wheelwright holds a B.S. in Chemical Engineering
from the University of Utah, a Ph.D. in Chemical Engineering from the
University of California, Berkeley, and conducted post-doctoral research at
the Max Planck Institute for Biophysics in Frankfurt, Germany.
44
James R. Butler has served as a Director since July 1999. Mr. Butler is
currently an employee of ALZA where he holds two positions. Mr. Butler joined
ALZA in July 1993 as Vice President of Sales and Marketing and in January
2000, Mr. Butler became the Group Vice President of ALZA International. Mr.
Butler is also a director of Aronex Pharmaceuticals, a pharmaceutical company.
Mr. Butler holds a B.A. in Business Administration from the University of
Florida.
John L. Doyle has served as a Director since February 2000. Mr. Doyle is
currently an independent consultant. In 1957, he joined Hewlett-Packard, a
computer company, where from 1957 to 1991 he served in several manufacturing
and general management positions, including the Vice President of Personnel
from 1976 to 1980, Vice President of Research and Development from 1980 to
1984, Executive Vice President of the Computer Sector from 1984 to 1988, and
of Business Development until his retirement in 1991. Mr. Doyle studied naval
architecture at Glasgow University and holds a B.S. in Mechanical Engineering
as well as an M.S. in Electrical Engineering and Business from Stanford
University. Mr. Doyle is also a director of Analog Devices Inc., a
semiconductor company, Dupont Photomasks Inc., a manufacturer of semiconductor
manufacturing equipment, and Xilinx Inc., a semiconductor company.
Douglas A. Lee has served as a Director since June 1998. Since February
2000, he has been Senior Vice President of Business Development for
drspock.com, Inc., a health care internet company. From September 1997, until
joining drspock.com, Mr. Lee served as Managing Director of Premier Medical
Partner Fund L.P, a health care venture capital fund. From October 1995 to
February 1997, Mr. Lee worked at Guidant Corporation, a medical device
company, where he was Vice President and Chief Financial Officer of its new
ventures and corporate business development group. From March 1994 to April
1995, Mr. Lee was Vice President and Chief Financial Officer to Genelabs
Technologies, Inc., a biotechnology company. Mr. Lee is also a Director of
Atrionix, Inc., a private medical device company. Mr. Lee received a B.S. from
the University of California, Berkeley and an M.B.A. from the University of
Chicago.
Matthew V. McPherron has served as a Director since July 1999. Since June
1998, Mr. McPherron has been a Director of Brookside Capital Partners Fund,
L.P. Previously, Mr. McPherron served as the President and Chief Operating
Officer of US Carelink, a health care internet company from September 1997 to
March 1998. From August 1993 to September 1997, Mr. McPherron served in a
number of roles at Medtronic, Inc., most recently as the Global Marketing
Manager for Pain Therapy. Mr. McPherron holds a B.S. from the University of
Kansas and an M.B.A. from the Harvard Graduate School of Business
Administration.
Albert L. Zesiger has served as a Director since 1998. Mr. Zesiger is a
Founding Principal of Zesiger Capital Group, LLC, an investment advisory firm,
which Mr. Zesiger co-founded in October 1995. In 1968, Mr. Zesiger founded BEA
Associates, Inc., an investment advisory firm, which in 1995 became wholly-
owned by CS Holdings, the holding company for Credit Suisse Bank and CS First
Boston. Mr. Zesiger also serves on the Board of Directors of Eos
Biotechnology, Inc., Hayes Medical Inc., Praecis Pharmaceuticals Inc., and
ViroLogic Inc. Mr. Zesiger holds a B.S. in Engineering from the Massachusetts
Institute of Technology and an M.B.A. from the Harvard Graduate School of
Business Administration.
Board Composition
Directors are elected annually at our annual meeting of stockholders, and
serve for the term for which they are elected and until their successors are
duly elected and qualified. Our bylaws currently provide for a board of
directors comprised of eight directors.
Board Compensation
None of the directors is paid any fee or other cash compensation for acting
as a director. Our officers are appointed by the board of directors and serve
at its discretion. Directors who are our employees are eligible to participate
in our 1998 stock option plan and in our 2000 stock plan and, beginning upon
the effectiveness of the registration statement used in this offering, they
will also be eligible to participate in our 2000 employee stock
45
option plan. Mr. Butler acquired 15,000 shares of our common stock at a
purchase price of $.20 per share upon exercise of an option granted under the
1998 stock option plan. These shares our subject to our right of repurchase in
the event of a termination of Mr. Butler's services to us, which repurchase
right lapses at a rate of 1/3 of the shares on each anniversary of the date of
the grant. Mr. Doyle was granted an option to purchase 15,000 shares of common
stock under the 2000 stock plan at an exercise price of $.35 per share in
February 2000 and 1/3 of the shares vest on each anniversary of the date of
grant. Mr. Lee acquired 15,000 shares of our common stock at a purchase price
of $.20 per share upon exercise of an option granted under the 1998 stock
option plan. These shares are subject to our right of repurchase in the event
of a termination of Mr. Lee's services to us, which repurchase right lapses at
the rate of 1/3 of the shares on each anniversary of the date of grant. Upon
the effectiveness of the registration statement used in this offering,
directors who are not our employees will be eligible to participate in our
2000 directors' stock option plan. See "Employee Benefit Plans."
We have entered into indemnification agreements with each member of the
board of directors and our executive officers providing for the
indemnification of such person to the fullest extent authorized, permitted or
allowed by law.
Board Committees
The board of directors has a compensation committee that reviews and
recommends the compensation arrangements for our management. The members of
the compensation committee are James R. Butler, John L. Doyle, and Matthew V.
McPherron.
The board of directors has an audit committee that reviews our annual audit
and meets with our independent auditors to review our internal controls and
financial management practices. The board's audit committee currently consists
of Douglas A. Lee, Matthew V. McPherron and Albert L. Zesiger. The functions
of the audit committee are to make recommendations to the board of directors
regarding the selection of independent auditors, review the results and scope
of the audit and other services provided by our independent auditors and
review and evaluate our audit and control functions.
Compensation Committee Interlocks and Insider Participation
The members of the compensation committee of our board of directors are
currently James R. Butler, John L. Doyle, and Matthew V. McPherron. Neither
Mr. Butler, Mr. Doyle, nor Mr. McPherron has at any time been an officer or
employee of DURECT or any of our subsidiaries. The Chief Executive Officer,
President and Chief Scientific Officer are entitled to be non-voting
participants in each meeting of the compensation committee and are excused
from any discussion that relates to their own compensation.
Limitation on Liability and Indemnification Matters
Our certificate of incorporation and bylaws limit or eliminate the personal
liability of our directors for monetary damages for breach of the directors'
fiduciary duty of care. The duty of care generally requires that, when acting
on behalf of the corporation, directors exercise an informed business judgment
based on all material information reasonably available to them. Consequently,
our directors or officers will not be personally liable to us or our
stockholders for monetary damages for breach of their fiduciary duty as a
director, except for:
. any breach of the director's duty of loyalty to us or our stockholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases,
redemptions or other distributions; and
. any transaction from which the director derived an improper personal
benefit.
These provisions are permitted under Delaware law.
46
Our certificate of incorporation also provides that we will indemnify, to
the fullest extent permitted by law, any person made or threatened to be made
a party to any action or proceeding by reason of the fact that he or she is or
was one of our directors or officers or serves or served at any other
enterprise as a director, officer or employee at our request.
Our bylaws provide that we will, to the maximum extent and in the manner
permitted by Delaware law, indemnify each of the following persons against
expenses, including attorneys' fees, judgments, fines, settlements, and other
amounts incurred in connection with any proceeding arising by reason of the
fact that he or she is or was our agent:
. one of our current or past directors or officers;
. a current or past director or officer of another enterprise who served
at our request; or
. a current or past director or officer of a corporation that was our
predecessor corporation or of another enterprise at the request of a
predecessor corporation.
We have entered into indemnification agreements with each of our directors
and executive officers to give them additional contractual assurances
regarding the scope of the indemnification described above and to provide
additional procedural protections. These agreements, among other things,
indemnify our directors and executive officers for certain expenses, including
attorneys' fees, judgments, fines, penalties and settlement amounts incurred
by them in any action or proceeding arising out of their services to us, our
subsidiaries or any other enterprise to which they provide services at our
request. In addition, we have directors' and officers' insurance providing
indemnification for our directors, officers and certain employees for certain
liabilities. We believe that these indemnification provisions and agreements
are necessary to attract and retain qualified directors and officers.
The limited liability and indemnification provisions in our certificate of
incorporation and bylaws may discourage stockholders from bringing a lawsuit
against directors for breach of their fiduciary duty and may reduce the
likelihood of derivative litigation against directors and officers, even
though a derivative action, if successful, might otherwise benefit us and our
stockholders. Furthermore, a stockholder's investment in us may be adversely
affected to the extent we pay the costs of settlement and damage awards
against our directors and officers under these indemnification provisions.
47
Executive Compensation
The following table provides certain summary information concerning the
compensation earned for services rendered to us during the fiscal year ended
December 31, 1999 by our Chief Executive Officer and our four other most
highly compensated executive officers who earned more than $100,000 in 1999
and were serving as executive officers at the end of 1999, whom we refer to
collectively as the named executive officers.
Summary Compensation Table
Long-Term
Annual Compensation Compensation
---------------------------------- ------------
Securities
Name and Principal Other Annual Underlying All Other
Position Year Salary($) Bonus($) Compensation($) Options(#) Compensation($)
------------------ ---- --------- -------- --------------- ------------ ---------------
James E. Brown, D.V.M... 1999 225,000 -- -- -- --
President, Chief
Executive Officer and
Director
Felix Theeuwes, D.R.S... 1999 177,564 -- -- -- --
Chairman, Chief
Scientific Officer
Thomas A. Schreck(1).... 1999 200,000 -- -- -- --
Chief Financial Officer
and Director
Timothy S. Nelson....... 1999 165,000 -- -- 88,500 24,543(2)
Vice President,
Business & Commercial
Development
Randolph M. Johnson,
Ph.D................... 1999 160,000 -- -- 20,000 --
Vice President,
Pharmacology &
Toxicology, Director of
CNS Programs
- --------
(1) Pursuant to a Financial Advisory Services Agreement, dated May 29, 1998,
we paid an investment banking fee to Schreck Merchant Group, Inc., a
financial services company controlled by Mr. Schreck, in the amount of
$279,000. The Advisory Agreement was terminated effective December 18,
1998.
(2) Mr. Nelson receives $24,543 per year for three years, beginning in 1999,
for a housing allowance.
48
Option Grants During Year Ended December 31, 1999
The following table sets forth certain information for the year ended
December 31, 1999 with respect to grants of stock options to each of the named
executive officers. All options granted by us in 1999 were granted under our
1998 stock option plan. These options have a term of 10 years. See "Employee
Benefit Plans" for a description of the material terms of these options. We
granted options to purchase common stock and issued shares of common stock
pursuant to restricted stock purchase agreements equal to a total of
934,500 shares during 1999. Options were granted at an exercise price equal to
the fair market value of our common stock, as determined in good faith by our
board of directors. Potential realizable values are net of exercise price
before taxes, and are based on the assumption that our common stock
appreciates at the annual rate shown, compounded annually, from the date of
grant until the expiration of the ten-year term. These numbers are calculated
based on Securities and Exchange Commission requirements and do not reflect
our projection or estimate of future stock price growth. Unless the market
price of the common stock appreciates over the option term, no value will be
realized from the option grants made to executive officers. Actual gains, if
any, on stock option exercises will be dependent on the future performance of
our common stock. The assigned 5% and 10% rates of stock appreciation are
based on the fair market value of our common stock at December 31, 1999.
Individual Grants
---------------------------------------------
Potential Realizable
Value At Assumed
Number Of Percent Of Annual Rates of Stock
Securities Total Options Price Appreciation
Underlying Granted To Exercise for Option Term
Options Employees In Price Expiration ---------------------
Name Granted(#) Fiscal Year ($/Share) Date 5% 10%
- ---- ---------- ------------- --------- ---------- ---------- ----------
James E. Brown.......... -- -- -- -- -- --
Felix Theeuwes.......... -- -- -- -- -- --
Thomas A. Schreck....... -- -- -- -- -- --
Timothy S. Nelson....... 88,500 9.5% $0.35 (1) $ 19,480 $ 49,366
Randolph M. Johnson..... 20,000 2.1% $0.35 12/9/2009 $ 4,402 $ 11,156
- --------
(1) Mr. Nelson's option to purchase 20,000 shares expires May 10, 2009; his
option to purchase 68,500 shares expires December 9, 2009.
Aggregated Option Exercises in Last Fiscal year and 1999 Year-End Option
Values
The following table sets forth information with respect to the named
executive officers concerning exercisable and unexercisable options held as of
December 31, 1999. The value of in-the-money options is based on an assumed
offering price of $ per share and net of the option exercise price.
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options at In-the-Money Options at
Acquired on Value December 31, 1999 December 31, 1999
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ----------- ------------------------- -------------------------
James E. Brown.......... 0 -- --/--
Felix Theeuwes.......... 0 -- --/--
Thomas A. Schreck....... 0 -- --/--
Timothy S. Nelson....... 0 -- 302,500/0
Randolph M. Johnson..... 0 -- 170,000/0
Options shown above were granted under the 1998 stock option plan and vest
at a rate of 25% of the shares on each twelve month anniversary of the vesting
commencement date. Notwithstanding the foregoing, all options are immediately
exercisable; however, the underlying shares are subject to our right of
repurchase at the original purchase price. Such repurchase right will lapse
with respect to 25% of the shares on each twelve month anniversary of the
vesting commencement date.
49
Employment Agreements
We have entered into an employment agreement with James E. Brown, our Chief
Executive Officer and President, for a term of three years starting on June
19, 1998. The agreement acknowledges that for the first twelve months of
employment Dr. Brown would perform services for ALZA Corporation, but after
that period, he became a full time employee of DURECT. The agreement also
provides that Dr. Brown will be paid an annual salary of $225,000 and makes
him eligible for any salary, stock option, bonus and other benefits we offer.
In the event of involuntary termination, Dr. Brown is entitled to his regular
monthly salary for the remainder of the original term of the employment
agreement, any bonus payable, and continued health insurance benefits. In the
event of termination for cause, Dr. Brown is entitled to his accrued unpaid
salary and vacation. In the event of termination by reason of death or
disability, Dr. Brown or his estate is entitled to all salary and unpaid
vacation accrued and any other benefits payable under our then existing
benefit plans. In the event of a constructive termination, Dr. Brown is
entitled to a lump sum payment of the salary we would have paid him during the
twelve-month period following his termination, as well as continuing health
insurance benefits for the twelve-month period following his termination.
We have entered into an employment agreement with Felix Theeuwes, our
Chairman and Chief Scientific Officer, for a term of three years starting on
June 19, 1998. His duties also include arranging funding and participating in
overall management of the company. The agreement acknowledges that for the
first twelve months of employment Dr. Theeuwes would perform services for ALZA
Corporation, but after that period, he became a full time employee of DURECT.
The agreement also provides that Dr. Theeuwes will be paid an annual salary of
$250,000 to be reduced by an amount to reflect his time and work for ALZA
Corporation and makes him eligible for any salary, stock option, bonus and
other benefits we may offer. In the event of involuntary termination,
Dr. Theeuwes is entitled to his regular monthly salary for the remainder of
the original term of the employment agreement, any bonus payable, and
continued health insurance benefits. In the event of termination for cause,
Dr. Theeuwes is entitled to his accrued unpaid salary and vacation. In the
event of termination by reason of death or disability, Dr. Theeuwes or his
estate is entitled to all salary and unpaid vacation accrued and any other
benefits payable under our then existing benefit plans. In the event of a
constructive termination, Dr. Theeuwes is entitled to a lump sum payment of
the salary we would have paid him during the twelve-month period following his
termination, as well as continuing health insurance benefits for the twelve-
month period following his termination.
We have entered into an employment agreement with Thomas A. Schreck, the
Chief Financial Officer for a term of three years starting June 19, 1998. The
agreement acknowledges the financial relationship with Schreck Merchant Group
Inc., of which Mr. Schreck is a principal, for financial services. The
agreement also provides for an annual salary of $100,000 for Mr. Schreck for
the first two years of the term and an increase in his annual salary to
$200,000 effective on June 19, 2000. The agreement also makes him eligible for
any salary, stock option, bonus and other benefits we may offer. In the event
of involuntary termination, Mr. Schreck is entitled to his regular monthly
salary for the remainder of the original term of the employment agreement, any
bonus payable, and continued health insurance benefits. In the event of
termination for cause, Mr. Schreck is entitled to accrued unpaid salary and
vacation. In the event of termination by reason of death or disability, Mr.
Schreck or his estate is entitled to all salary and unpaid vacation accrued
and any other benefits payable under our then existing benefit plans. In the
event of a constructive termination, Mr. Schreck is entitled to a lump sum
payment of the salary we would have paid him during the twelve-month period
following his termination, as well as continuing health insurance benefits for
the twelve-month period following his termination.
We have entered into change of control agreements with Randolph M. Johnson
and Timothy S. Nelson. These agreements provide that, in the event of a change
in our control, one half of the unvested portion of any stock option or
restricted stock held by Dr. Johnson and Mr. Nelson on the effective date of
the change of control is automatically accelerated so as to become completely
vested as of the effective date, unless such acceleration would make us
ineligible for "pooling of interests" accounting treatment in a transaction.
In addition, in the event of a termination without cause within the twelve
months following the change in our control, the number
50
of shares which would have vested in the second twelve month period following
the change of control is automatically accelerated so as to become completely
vested as of the effective date of the termination unless the acceleration
would make us ineligible for "pooling of interests" accounting treatment in
the change in control transaction.
Employee Benefit Plans
2000 Stock Plan.
Adoption and Reserved Shares. Our 2000 stock plan was adopted by our board
of directors and approved by our stockholders in March 2000. It provides for
the grant of incentive stock options to employees and nonstatutory stock
options and stock purchase rights to employees and consultants, including
nonemployee directors. As of March 31, 2000, 1,796,500 shares were reserved
for issuance under the 2000 stock plan of which 1,265,650 remain available for
future grants. In addition, the 2000 stock plan was amended in April 2000 to
provide for an automatic annual increase to the shares reserved under the plan
(an "evergreen" provision) on the first day of each of our fiscal years
beginning in 2001 and ending in 2010 in an amount equal to the lesser of:
. 2,250,000 shares;
. 5% of our outstanding common stock on the last day of the immediately
preceding fiscal year; or
. a lesser number of shares as determined by the board of directors.
Purposes of the 2000 Stock Plan. The purposes of the 2000 stock plan are to
attract and retain the best available personnel, to provide additional
incentives to our employees and consultants and to promote the success of our
business.
Eligible Persons and Types of Options. The 2000 stock plan provides for the
granting to employees, including officers and directors, of incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended. The 2000 stock plan also provides for the granting to
employees and consultants, including non-employee directors, of nonstatutory
stock options and stock purchase rights.
Administration. The 2000 stock plan may be administered by the board of
directors or a committee of the board, each known as the administrator. The
administrator determines the terms of options and stock purchase rights
granted under the 2000 stock plan, including the number of shares subject to
the award, the exercise or purchase price, the term and the vesting and
exercisability of the award and other conditions to which the award is
subject. In no event, however, may an individual employee receive awards for
more than 1,500,000 shares under the 2000 stock plan in any fiscal year.
Decisions of the administrator are final and binding on all 2000 stock plan
participants.
Exercise Price. The exercise price of all incentive stock options granted
under the 2000 stock plan must be at least equal to the fair market value of
our common stock on the date of grant. The exercise price of any incentive
stock option granted to a person who owns stock representing more than 10% of
the total combined voting power of all classes of our outstanding capital
stock or the stock of our parent or subsidiary corporations must equal at
least 110% of the fair market value of the common stock on the date of grant.
Before this offering, the exercise of nonstatutory stock options and stock
purchase rights granted under the 2000 stock plan must have been at least
equal to 85% of the fair market value of our common stock on the date of
grant. After the date of this offering, the exercise price of nonstatutory
stock options and the purchase price of stock purchase rights will no longer
be subject to these limitations. However, incentive stock options and stock
purchase rights granted to our Chief Executive Officer and our four other most
highly compensated officers will be at least 100% of the fair market value of
the common stock on the date of grant if the award is intended to qualify as
performance based compensation under Section 162(m) of the Internal Revenue
Code. Payment of the exercise price may be made in cash or other consideration
as determined by the administrator.
Other Option Terms. The administrator determines the term of options, which
may not exceed 10 years, or 5 years in the case of an incentive stock option
granted to an employee who owns stock representing more
51
than 10% of the total voting power of our outstanding capital stock or a
parent or subsidiary's stock. Generally, an option may not be transferred by
the option holder other than by will or the laws of descent or distribution
and may be exercised during the lifetime of the option holder only by such
option holder. However, the administrator may in its discretion provide for
the limited transferability of nonstatutory stock options granted under the
2000 stock plan under specified circumstances. The administrator determines
when options become exercisable. Options granted under the 2000 stock plan are
generally subject to vesting at a rate of 25% of the shares granted on each of
the first, second, third and fourth anniversaries of the date of grant. Stock
purchased pursuant to stock purchase rights granted under the 2000 stock plan
is generally subject to a repurchase right at the purchaser's original
purchase price. This repurchase right will lapse according to the terms of the
stock purchase right determined by the administrator and is exercisable by us
upon termination of the purchaser's employment or consulting relationship with
us, for any reason, including death or disability. Stock options under the
2000 stock plan generally remain exercisable for a period of three months
following termination of the optionee's employment or consulting relationship
with us (with longer periods applying in the event such termination occurs as
a result of death or disability).
Change of Control. In a merger, reorganization or similar transaction
involving us, each outstanding option shall be assumed by the successor
corporation or an equivalent option substituted for it, with appropriate
adjustments made to both the price and number of shares subject to each
option. If the successor corporation does not assume the options or substitute
new options, then the outstanding options will be fully vested and exercisable
immediately prior to the effective date of the transaction. Outstanding
repurchase rights will terminate on the effective date of the transaction
unless assigned to the successor corporation. Outstanding options will adjust
in the event of a stock split, stock dividend or other similar change in our
capital structure.
Amendment and Termination. The administrator has the authority to amend or
terminate the 2000 stock plan as long this action does not adversely affect
any outstanding option and provided that stockholder approval shall be
obtained as required by applicable law. The 2000 stock plan will terminate in
March 2010 unless the board of directors terminates it earlier.
1998 Stock Option Plan.
Adoption and Initial Reserve. Our 1998 stock option plan was originally
adopted by our board of directors and approved by our stockholders in March
1998. As of March 31, 2000, an aggregate of 1,703,500 shares was reserved for
issuance under the 1998 stock option plan, 418,500 shares of common stock were
issuable upon exercise of outstanding options granted under the 1998 stock
option plan at a weighted average exercise price of $0.24, 1,222,750 shares of
common stock have been issued upon exercise of options at purchase prices
ranging between $0.10 and $0.35, and no shares of common stock remained
available for future issuance under the 1998 stock option plan. In connection
with the adoption of the 2000 stock plan, the board of directors determined
that no further grants would be made under the 1998 stock option plan.
Option Terms. The terms of the options under the 1998 stock option plan are
generally the same as those that may be issued under the 2000 stock plan,
except for the following features. Only options could be granted under the
1998 stock option plan. Nonstatutory stock options granted under the 1998
stock option plan are nontransferable in all cases and must be granted with an
exercise price of at least 85% of the fair market value of the common stock on
the date of grant. The 1998 stock option plan does not impose a limitation on
the number of shares subject to options that may be issued to any individual
employee.
Change of Control. In a merger, reorganization or similar transaction
involving us, each outstanding option shall be assumed by the successor
corporation or an equivalent option substituted for it, with appropriate
adjustments made to both the price and number of shares subject to each
option. If the successor corporation does not assume the options or substitute
new options, then the outstanding options will be fully vested and exercisable
immediately prior to the effective date of the transaction. Outstanding
options will adjust in the event of a stock split, stock dividend or other
similar change in our capital structure.
52
2000 Employee Stock Purchase Plan.
Adoption and Reserved Shares. Our 2000 employee stock purchase plan was
adopted by the board of directors in April 2000 and will be submitted to our
stockholders for approval before completion of this offering. A total of
150,000 shares of common stock has been reserved for issuance under the
purchase plan, none of which have been issued as of the date of this offering.
The number of shares reserved for issuance under the purchase plan will be
subject to an automatic annual increase on the first day of each of our fiscal
years beginning in 2001 and ending in 2010 in an amount equal to the lesser
of:
. 225,000 shares;
. 0.5% of our outstanding common stock on the last day of the immediately
preceding fiscal year; or
. a lesser number of shares as determined by the board of directors.
The purchase plan becomes effective on the date of this offering. Unless
terminated earlier by our board of directors, the purchase plan will terminate
in 2010.
Offering Periods. The purchase plan, which is intended to qualify under
Section 423 of the Code, will be implemented by a series of overlapping
offering periods of approximately 24 months' duration, with new offering
periods, other than the first offering period, beginning on August 1 and
February 1 of each year and ending on July 31 and January 31, respectively,
two years later. Each offering period will consist of four consecutive
purchase periods of approximately six months' duration. The initial offering
period is expected to begin on the date of this offering and end on July 31,
2002; the initial purchase period is expected to end on January 31, 2001.
Administration. The purchase plan will be administered by the board of
directors or by a committee appointed by the board.
Plan Terms. Our employees, including our officers, or employees of any
majority-owned subsidiary designated by the board of directors, are eligible
to participate in the purchase plan if they are employed by us or any such
subsidiary for at least 20 hours per week and more than five months per year.
The purchase plan permits eligible employees to purchase common stock through
payroll deductions, which may not exceed 20% of an employee's base salary, at
a price equal to the lower of 85% of the fair market value of our common stock
at the beginning of each offering period or at the end of each purchase
period. Employees may end their participation in an offering at any time
during an offering period, and participation ends automatically on termination
of employment with us. An employee cannot be granted an option under the
purchase plan if immediately after the grant the employee would own stock or
hold outstanding options to purchase stock equaling 5% or more of the total
voting power or value of all classes of our stock or stock of our
subsidiaries, or if the option would permit an employee's rights to purchase
stock under the purchase plan to accrue at a rate that exceeds $25,000 of the
fair market value of the stock for each calendar year in which an option is
outstanding. In addition, no employee may purchase more than 2,000 shares of
common stock under the purchase plan in any one purchase period.
Change of Control. The purchase plan provides that in the event of our
merger with or into another corporation or a sale of all or substantially all
of our assets, each right to purchase stock under the purchase plan will be
assumed or an equivalent right substituted by the successor corporation.
However, if the successor corporation refuses to assume each purchase right or
to substitute an equivalent right, our board of directors will shorten any
ongoing offering period so that employees' rights to purchase stock under the
purchase plan are exercisable before the effective date of the transaction.
Outstanding options will adjust in the event of a stock split, stock dividend
or other similar change in our capital structure.
Amendment and Termination. The board of directors has the power to amend or
terminate the purchase plan as long as the action does not adversely affect
any outstanding rights to purchase stock under the plan. However, our board of
directors may amend or terminate the purchase plan or an offering period even
if it would adversely affect outstanding options to avoid our incurring
adverse accounting charges or if the board of directors
53
determines that termination of the plan or offering period is in our best
interests and the best interests of our stockholders. We must obtain
stockholder approval for any amendment to the purchase plan to the extent
required by applicable law.
2000 Directors' Stock Option Plan.
Adoption and Initial Reserve. The 2000 directors' stock option plan was
adopted by the board of directors in April 2000 and will be submitted to our
stockholders for approval before completion of this offering. A total of
300,000 shares of common stock has been reserved for issuance under the
directors' plan. No shares have been issued under the directors' plan. The
directors' plan becomes effective on the date of this offering.
Eligible Persons and Administration. The directors' plan provides for the
grant of nonstatutory stock options to our nonemployee directors. The
directors' plan is designed to work automatically without administration.
However, to the extent administration is necessary, it will be performed by
the board of directors.
Option Terms. The directors' plan provides that each person who becomes one
of our nonemployee directors after the effective date of this offering will be
granted a nonstatutory stock option to purchase 20,000 shares of common stock
on the date on which the optionee first becomes a nonemployee director of
ours. On the date of our annual stockholder meeting each year, each of our
nonemployee directors will be granted an option to purchase 5,000 shares of
common stock if, on such date, the director has served on our board of
directors for at least six months. The directors' plan sets neither a maximum
nor a minimum number of shares for which options may be granted to any one
nonemployee director. The directors' plan specifies the number of shares that
may be included in any grant and the method of making a grant.
The directors' plan provides that each option granted to a new director
shall vest at the rate of 33 1/3% per year and each annual option granted to a
director shall vest in full at the end of one year. No option granted under
the directors' plan is transferable by the option holder other than by will or
the laws of descent or distribution or pursuant to a qualified domestic
relations order, and each option is exercisable, during the lifetime of the
option holder, only by that option holder. If a nonemployee director ceases to
serve as a director for any reason other than death or disability, he or she
may, but only within 90 days after the date he or she ceases to be a director
of DURECT, exercise vested options granted under the directors' plan. If the
director does not exercise the option which the director was entitled to
exercise within this 90-day period, the option shall terminate. The exercise
price of all stock options granted under the directors' plan shall be equal to
the fair market value of a share of our common stock on the date of grant of
the option. Options granted under the directors' plan have a term of ten
years. Outstanding options will adjust in the event of a stock split, stock
dividend or other similar change in our capital structure.
Change of Control. If we sell all or substantially all of our assets or
merge with another company or conduct another similar transaction, whether or
not options are assumed, substituted for or terminated in connection with the
transaction, the vesting of each outstanding option shall accelerate in full
such that each option holder shall have the right to exercise his or her
option as to all of the optioned stock, including shares as to which the
option would not otherwise be exercisable, immediately prior to consummation
of the transaction.
Amendment and Termination. The board of directors may amend or terminate
the directors' plan. However, no action may adversely affect any outstanding
option and we must obtain stockholder approval for any amendment to the extent
required by applicable law. If not terminated earlier, the directors' plan
will terminate in April 2010.
Limitation of Liability and Indemnification Matters
As permitted by the Delaware General Corporation Law, we have included in
our restated certificate of incorporation a provision eliminating the personal
liability of our officers and directors for monetary damages for breach or
alleged breach of their fiduciary duties as officers or directors,
respectively, subject to certain
54
exceptions. In addition, our bylaws provide that we are required to indemnify
our officers and directors under certain circumstances and we are required to
advance expenses to our officers and directors as incurred in connection with
proceedings against them for which they may be indemnified. We have entered
into indemnification agreements with our officers and directors containing
provisions that are in some respects broader than the specific indemnification
provisions contained in the Delaware Law. The indemnification agreements
require us, among other things, to indemnify our officers and directors
against certain liabilities that may arise by reason of their status or
service as officers and directors (other than liabilities arising from willful
misconduct of a culpable nature), to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified,
and to obtain directors' and officers' insurance if available on reasonable
terms. We have also obtained directors' and officers' liability insurance.
At present, we are not aware of any pending or threatened litigation or
proceeding involving any of our directors, officers, employees or agents in
which indemnification would be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification. We believe that our charter provisions and indemnification
agreements are necessary to attract and retain qualified persons as directors
and officers.
55
CERTAIN TRANSACTIONS
Private Placements of Securities
In June 1998, we sold 5,600,000 shares of our Series A-1 preferred stock to
ALZA Corporation in consideration of the execution and delivery of our
Development and Commercialization Agreement, dated April 21, 1998 with ALZA
Corporation. This agreement is for the development, manufacture and marketing
of pharmaceutical products utilizing proprietary technology of ALZA relating
to the DUROS system for controlled delivery of drugs in select fields.
In June 1998, we sold 5,636,000 shares of our Series A-2 preferred stock
for $1.00 per share and in December 1998, we sold 3,005,867 shares of our
Series A-2 preferred stock for $1.25 per share. The purchasers of the
Series A-2 preferred stock included among others, Premier Medical Partner Fund
L.P., State of Oregon PERS/ZCG, James R. Butler, a director of DURECT, Albert
L. Zesiger, a director of DURECT, Barrie Ramsay Zesiger, the spouse of Albert
L. Zesiger, and the Zesiger Capital Group LLC, whose principal is Albert L.
Zesiger.
In July 1999, we sold an aggregate of 9,364,341 shares of our Series B
preferred stock for $2.15 per share. The purchasers of the Series B preferred
stock included, among others, Brookside Capital Partners Fund, L.P., Morgan
Guaranty Trust Company of New York, as Trustee for the Co-Mingled Pension
Trust Fund and the Multi-Market Special Investment Trust Fund, Morgan Guaranty
Trust Company of New York, as Agent and Investment Manager of The Alfred P.
Sloan Foundation, and Premier Medical Partners Fund L.P.
In October 1999, we sold 325,023 shares of our Series B-1 preferred stock
to IntraEAR, Inc. in consideration of the execution and delivery of the Asset
Purchase Agreement, dated September 24, 1999 between IntraEAR, Inc. and
DURECT.
In March 2000, we sold an aggregate of 3,571,429 shares of our Series C
preferred stock for $7.00 per share. The purchasers of the Series C preferred
stock included, among others, Biotech Growth S.A. (funds controlled by BB
Biotech), Brookside Capital Partners Fund, L.P., and the Zesiger Capital Group
LLC, whose principal, Albert L. Zesiger, is also a director of DURECT.
In April 2000, we amended our development and commercialization agreement
with ALZA. The amendments included a reduction in product royalties and
upfront payments to ALZA by us under the agreement. In addition, ALZA's option
to distribute the DUROS sufentanil product was amended to cover only the U.S.
and Canada instead of worldwide. As consideration, ALZA received 1,000,000
shares of our common stock and a warrant to purchase 1,000,000 shares of our
common stock at an exercise price equal to the price at which our common stock
is sold in this offering.
The following members of our board of directors are affiliated with certain
private investors that participated in the foregoing transactions:
. Albert L. Zesiger, principal of the Zesiger Capital Group LLC.
. Matthew V. McPherron, a director of Brookside Capital Partners, L.P.
. Douglas A. Lee, a former managing director of Premier Medical Partner
Fund L.P.
. James R. Butler, an employee of ALZA Corporation.
Other Transactions
In June and December 1998, we paid the Schreck Merchant Group, Inc., a
financial services company controlled by Mr. Schreck, an investment banking
fee of $279,000 in the aggregate. Mr. Schreck is our Chief Financial Officer
and one of our directors.
In April 2000, we acquired from ALZA the ALZET product and assets used
primarily in the manufacture, sale and distribution of this product. This
acquisition provides us with an ongoing business making and selling this
product worldwide. The total purchase price consisted of approximately
$8.2 million in cash, including approximately $3.2 million of inventory, of
which $2.4 million is to be paid over twelve months.
Since inception, from time to time we have issued and sold shares of our
common stock and granted options to purchase common stock to our employees,
directors and consultants.
56
PRINCIPAL STOCKHOLDERS
The following table presents information concerning the beneficial
ownership of the shares of our common stock as of April 15, 2000 and as
adjusted to reflect the sale of the shares of common stock in this offering
by:
. each person who is known by us to beneficially own more than 5% of our
common stock;
. each of our directors;
. each of the named executive officers; and
. all of our directors and executive officers of as a group.
The number and percentage of shares beneficially owned are based on
38,336,410 shares of common stock outstanding as of April 15, 2000, assuming
conversion of all outstanding shares of preferred stock into common stock.
Beneficial ownership is determined under the rules and regulations of the
Securities and Exchange Commission. Shares of common stock subject to options
or warrants that are currently exercisable or exercisable within 60 days of
April 15, 2000 are deemed to be outstanding and beneficially owned by the
person holding the options or warrants for the purpose of computing the number
of shares beneficially owned and the percentage ownership of that person, but
are not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person. Except as indicated in the footnotes to this
table, and subject to applicable community property laws, these persons have
sole voting and investment power with respect to all shares of our common
stock shown as beneficially owned by them. Percentage ownership figures after
the offering do not include shares that may be purchased by each person in the
offering.
Percentage of Shares
Beneficially Owned
------------------------
Number of Shares Before After
Beneficially Owned Offering Offering
------------------ ---------- ----------
ALZA Corporation.............. 6,600,000 17.2%
1900 Charleston Road
Mountain View, CA 94043
Brookside Capital Partners(1) 3,845,514 10.0
.............................
Two Copley Place
Boston, MA 02116
Morgan Trust(2)............... 2,325,583 6.1
522 Fifth Avenue
New York, NY 10036
State of Oregon PERS/ZCG(3)... 2,208,000 5.8
c/o Zesiger Capital Group LLC
320 Park Avenue
New York, NY 10022
Biotech Growth S.A.(4)........ 2,142,857 5.6
Swiss Bank Tower
Obarie Street
Panama 1
Republic of Panama
Premier Medical Partner Fund 1,931,316 5.0
L.P.(5)......................
12225 El Camino Real
San Diego, CA 92130
Albert L. Zesiger(6).......... 6,075,000 15.8
Matthew V. McPherron(1)....... 3,845,514 10.0
Felix Theeuwes, Ph.D.(7)...... 2,884,430 7.5
Thomas A. Schreck(8).......... 2,846,568 7.4
James E. Brown, D.V.M.(9)..... 2,800,000 7.3
Randolph M. Johnson,
Ph.D.(10).................... 60,500 *
Timothy S. Nelson(11)......... 347,000 *
Douglas A. Lee(5)............. 1,931,316 5.0
James R. Butler............... 15,000 *
John L. Doyle................. * *
All executive officers and
directors as a group (13
persons)(12)................. 21,206,828 55.3
57
- --------
* Less than 1% of the outstanding shares of common stock.
Except as otherwise noted, the address of each person listed in the table
is c/o DURECT Corporation, 10240 Bubb Road, Cupertino, California 95104.
(1) Represents shares held by Brookside Capital Partners Fund, L.P. Matthew
V. McPherron, one of our directors, is a director of this partnership.
Mr. McPherron disclaims beneficial ownership of these shares except to
the extent of his pecuniary interest in these shares.
(2) Includes 1,627,907 shares held by Morgan (Co-Mingled) Guaranty Trust
Company of New York, 348,838 held by Morgan (Multi-Market) Guaranty Trust
Company of New York, and 348,838 shares held by BOST & Co.
(3) These shares of common stock are held in an account managed by Zesiger
Capital Group LLC, an investment advisor, for which Albert L. Zesiger is
a principal. Mr. Zesiger, in his capacity as principal, has voting and
investment power with respect to these shares but disclaims beneficial
ownership with respect hereto.
(4) Includes 714,286 shares held by Medgrowth S.A.
(5) Includes 15,000 shares held by Douglas A. Lee (of which 10,000 shares are
subject to repurchase by us at the original purchase price in the event
of termination of Mr. Lee's employment with us, which repurchase right
lapses over time) and 1,916,316 shares held by Premier Medical Partners
Fund L.P. Douglas A. Lee, one of our directors, is a former managing
director of this partnership. Mr. Lee disclaims beneficial ownership of
these shares except to the extent of his pecuniary interest in these
shares.
(6) Includes 230,000 shares held by Albert L. Zesiger and 92,000 shares held
by Barrie Ramsay Zesiger also includes an aggregate of 5,753,000 shares
of common stock held in accounts managed for various parties by Zesiger
Capital Group LLC, an investment advisor, for which Albert L. Zesiger is
a principal. Mr. Zesiger, in his capacity as a principal, has voting and
investment power with respect to these shares but disclaims beneficial
ownership with respect hereto.
(7) Includes 1,680,001 shares held by Felix and Marie-Therese Theeuwes Family
Trust (of which 519,960 shares are subject to repurchase by us at the
original purchase price in the event of termination of Dr. Theeuwes
employment with us, which repurchase right lapses over time), 80,930
shares held by Jan Frans Theeuwes, 376,833 shares held by Marc Theeuwes,
373,333 shares held by Margaret Theeuwes and 373,333 shares held by
Myriam Theeuwes.
(8) Includes 1,860,000 shares held by Thomas A. Schreck (of which 519,960
shares are subject to repurchase by us at the original purchase price in
the event of termination of Mr. Schreck's employment with us, which
repurchase right lapses over time), 840,000 shares held by Thomas A.
Schreck, Trustee for Mason and Thomas Schreck, 100,000 shares held by
Portola Capital Partners, L.P. for the benefit of Albert R. Schreck, Joel
Schreck and the Thomas A. Schreck 1959 Trust, 23,312 shares held by Joel
W. Schreck and 23,256 shares held by Albert R. Schreck.
(9) Includes 2,240,000 shares held by James E. Brown (of which 519,960 shares
are subject to repurchase by us at the original purchase price in the
event of termination of Dr. Brown's employment with us, which repurchase
right lapses over time), and 560,000 shares held by James & Karen Brown
1998 Trust U/A.
(10) Includes 20,000 shares held by Randolph M. Johnson, Ph.D. (of which
20,000 shares are subject to repurchase by us at the original purchase
price in the event of termination of Dr. Johnson's employment with us,
which repurchase right lapses over time) and 3,000 shares held by Dean
Witter Reynolds Inc. c/f Randolph M. Johnson IRA Rollover dtd. 11/10/98.
Also includes 37,500 shares issuable upon exercise of options exercisable
within 60 days of April 14, 2000.
(11) Includes 322,000 shares held by Timothy S. Nelson (of which 249,000
shares are subject to repurchase by us at the original purchase price in
the event of termination of Mr. Nelson's employment with us, which
repurchase right lapses over time) and 25,000 shares held by PaineWebber
Incorporated, not in its individual capacity but solely as Custodian of
the IRA of Timothy S. Nelson.
(12) Includes an aggregate of 37,500 shares issuable pursuant to the exercise
of outstanding stock options. Also includes an aggregate of 20,000 shares
which are subject to repurchase by us at the original purchase price in
the event of termination of consulting relationship with us, which
repurchase right terminates with respect to each consultant at the rate
of 1/3 of the consultant's shares on each annual anniversary of the
58
consultant's consulting relationship with us. Also includes an aggregate
of 626,750 shares which are subject to repurchase by us at the original
purchase price in the event of the termination of individual employees'
employment with us, which repurchase right terminates with respect to each
employee at the rate of 1/4 of the employee's shares on each annual
anniversary of such employee's original option grant date. Also includes
an aggregate of 1,559,880 shares which are subject to repurchase by us at
the original purchase price in the event of termination of employment with
us, which repurchase right terminates with respect to each employee over
time.
59
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, our authorized capital stock will
consist of shares of common stock, $0.0001 par value, and 10,000,000
shares of undesignated preferred stock, $0.0001 par value. Upon completion of
this offering, there will be outstanding shares of common stock
outstanding, no outstanding shares of preferred stock, options to purchase
shares of common stock and outstanding warrants to purchase 1,031,395
shares of common stock.
Common Stock
As of March 31, 2000, there were 37,336,410 shares of common stock
outstanding (as adjusted to reflect the conversion of all outstanding shares
of Series A-1 preferred stock, Series A-2 preferred stock, Series B preferred
stock, Series B-1 preferred stock and Series C preferred stock into common
stock upon the completion of this offering, held of record by 169
stockholders. In addition, options to purchase an aggregate of 738,350 shares
of common stock were outstanding.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferential rights with respect to any outstanding preferred stock, holders
of common stock are entitled to receive ratably such dividends as may be
declared by the board of directors out of funds legally available therefor.
See "Dividend Policy." In the event of our liquidation, dissolution or winding
up, the holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities and satisfaction of preferential rights
of any outstanding preferred stock. The common stock has no preemptive or
conversion rights or other subscription rights. There are no sinking fund
provisions applicable to the common stock. The outstanding shares of common
stock are, and the shares of common stock to be issued upon completion of this
offering will be, fully paid and non-assessable.
Preferred Stock
Upon the closing of the offering, all outstanding shares of preferred stock
will be converted into 27,502,660 shares of common stock and automatically
retired. Thereafter, the board of directors is authorized to issue preferred
stock in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the
designation of such series, without further vote or action by the
stockholders.
The issuance of preferred stock may have the effect of delaying, deferring
or preventing a change in our control without further action by the
stockholders. The issuance of preferred stock with voting and conversion
rights may adversely affect the voting power of the holders of common stock,
including voting rights, of the holders of common stock. In certain
circumstances, such issuance could have the effect of decreasing the market
price of the common stock. As of the closing of the offering, no shares of
preferred stock will be outstanding and we currently have no plans to issue
any shares of preferred stock.
Options
As of March 31, 2000, options to purchase a total of 738,350 shares of
common stock were outstanding with a weighted-average exercise price of $0.45
per share. Up to 1,265,650 additional shares of common stock may be subject to
options granted in the future under the 2000 stock plan. See "Employee Benefit
Plans--2000 stock plan."
Warrants
As of April 15, 2000, we had an outstanding warrant for the purchase of
31,395 shares of Series B-1 preferred stock at an exercise price of $2.15.
This warrant expires on December 16, 2006. We also had an outstanding warrant
for the purchase of 1,000,000 shares of common stock at an exercise price
equal to the price per share at which our common stock sold in this offering.
This warrant expires four years from the date of this offering.
60
Registration Rights
The holders of 35,363,295 shares of common stock and common stock issuable
upon conversion of Series A-1, A-2, B, B-1 and C preferred stock or their
transferees are entitled to certain rights with respect to the registration of
such shares under the Securities Act. These rights are provided under the
terms of an agreement between us and the holders of the registrable
securities. Pursuant to the agreement, on the written demand of holders of
more than 40% of the then outstanding registrable securities, we shall use our
best efforts to register these shares and those of any other stockholders who,
by prompt notice, request registration, subject to certain cutbacks in
participation made by the managing underwriter. We are not required to effect
more than three demand registrations on Form S-1 at any time and more than two
demand registrations on Form S-3 in any twelve-month period. These holders are
also entitled to unlimited piggyback registration rights, subject to certain
cutbacks in participation made by the managing underwriter. All offering
expenses in connection with the registration will be borne by us, excluding
underwriting discounts and commissions.
At any time after six months following the effective date of this offering,
the holders of at least 40% of the registrable securities then outstanding may
require us to file a registration statement covering registrable securities if
an aggregate offering price, net of underwriting discounts and commissions,
would exceed $10.0 million. In addition, beginning 180 days after this
offering, holders of registrable securities may require, up to two times a
year, that we register their shares for public resale on Form S-3 or any
successor form, provided we can use Form S-3 or any such successor form, and
provided that the holders of registrable securities propose to sell securities
with an anticipated aggregate offering price of not less than $2.0 million,
net of underwriting discounts and commissions. Furthermore, in the event we
elect to register any of our shares of common stock or other securities for
purposes of effecting any public offering, the holders of registrable
securities are entitled to include their registrable securities in the
registration, subject to our right to reduce the number of shares proposed to
be registered in view of market conditions. All expenses in connection with
any registration, other than underwriting discounts and commissions, will be
borne by us. Registration rights, other than the right to require us to
register shares on Form S-3 or any successor form, will terminate at such time
as our shares are publicly traded and the holder is entitled to sell all of
its shares in any three-month period under Rule 144 of the Securities Act. If
our stockholders with registration rights cause a large number of securities
to be registered and sold in the public market, those sales could have an
adverse effect on the market price for our common stock. If we were to
initiate a registration and include registrable securities because of the
exercise of registration rights, the inclusion of registrable securities could
have an adverse effect on our ability to raise capital.
Effect of Certain Certificate of Incorporation and Bylaw Provisions
In April 2000, our board of directors and stockholders approved certain
amendments to our certificate of incorporation and bylaws to provide, among
other things, that our directors will be elected without the application of
cumulative voting. This provision shall become effective at the first meeting
of stockholders following the annual meeting of stockholders when we shall
have had at least 800 stockholders. These amendments also provide that, after
the closing of the offering contemplated by this prospectus, any action
required or permitted to be taken by our stockholders may be taken only at a
duly called annual or special meeting of the stockholders. The bylaws also
establish procedures, including advance notice procedures with regard to the
nomination, other than by or at the direction of the board of directors, of
candidates for election as directors. See "Description of Capital Stock--
Common Stock."
The foregoing provisions could have the effect of making it more difficult
for a third party to effect a change in the control of our board of directors.
In addition, these provisions could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, a majority of our outstanding voting stock.
61
Certain Anti-Takeover Effects of Provisions of Our Certificate of
Incorporation and Bylaws and Of Delaware Law
General. Certain provisions of Delaware law and our certificate of
incorporation and bylaws could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from acquiring,
control of us. Such provisions could limit the price that certain investors
might be willing to pay in the future for shares of our common stock. These
provisions of Delaware law and the certificate of incorporation and bylaws may
also have the effect of discouraging or preventing certain types of
transactions involving an actual or threatened change in our control,
including unsolicited takeover attempts, even though such a transaction may
offer our stockholders the opportunity to sell their stock at a price above
the prevailing market price.
Delaware Takeover Statute. Following consummation of this offering, we will
be subject to the "business combination" provisions of Section 203 of the
Delaware General Corporation Law. In general, those provisions prohibit a
publicly-held Delaware corporation from engaging in various "business
combination" transactions with any interested stockholder for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless:
. the transaction is approved by the board of directors prior to the date
the interested stockholder obtained interested stockholder status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the stockholder owned at least 85%
of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number
of shares outstanding those shares owned by (a) persons who are
directors and also officers and (b) employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
. on or subsequent to the date the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested
stockholder. A "business combination" is defined to include mergers,
asset sales and other transactions resulting in financial benefit to a
stockholder. In general, an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years,
did own, 15% or more of a corporation's voting stock.
The statute could prohibit or delay mergers or other takeover or change in
control attempts with respect to us and, accordingly, may discourage attempts
to acquire us.
Certificate of Incorporation and Bylaws. Our certificate of incorporation
provides that any action to be taken by our stockholders must be effected at
an annual or special stockholder meeting and may not be taken by written
consent. Our bylaws provide that special meetings of our stockholders may be
called by the board of directors, the Chairman of the board or by our
President. Our bylaws also require advance written notice by a stockholder of
a proposal or director nomination that such stockholder desires to present at
an annual or special stockholders meeting. No business other than that stated
in the notice may be transacted at any special meeting. These provisions will
delay consideration of a stockholder proposal until the next annual meeting
unless a special meeting is called by the board of directors.
Our bylaws provide that the authorized number of directors may be changed
by an amendment to the bylaws adopted by the board of directors or by the
stockholders. Vacancies on the board of directors may be filled either by
holders of a majority our voting stock or a majority of directors in office,
although less than a quorum. Our certificate of incorporation also provides
for a staggered board of directors. Under a staggered board of directors, each
director is designated to one of three categories. Each year the directors'
positions in one of the three categories are subject to election so that it
would take three years to replace the entire board, absent resignation or
premature expiration of a director's term, which may have the effect of
deterring a hostile takeover or delaying or preventing changes in our control
or management.
62
Limitations on Liability and Indemnification of Officers and Directors
Our certificate of incorporation limits the liability of directors to the
fullest extent permitted by the Delaware law. In addition, the certificate of
incorporation and bylaws provide that we will indemnify our directors and
officers to the fullest extent permitted by Delaware law. We have entered into
separate indemnification agreements with its directors and executive officers
that provide these persons indemnification protection in the event the
certificate of incorporation is subsequently amended.
Transfer Agent and Registrar
Equiserve has been appointed as transfer agent and registrar for our common
stock.
Listing
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "DRRX."
63
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of common stock in the public
market, or the perception that such sales may occur, could adversely affect
prevailing market prices.
Upon consummation of the offering, we will have an aggregate of shares
of common stock outstanding, based on the number of shares of common stock
outstanding as of April 15, 2000, assuming that the underwriters do not
exercise their over-allotment option and none of the outstanding options and
warrants are exercised. Of the shares outstanding after the offering, only
the shares sold in this offering will be freely tradable without
restriction under the Securities Act, except for any shares that may be
purchased by our "affiliates." Shares purchased by our affiliates will be
subject to the volume and other limitations of Rule 144 of the Securities Act,
or "Rule 144" described below. As defined in Rule 144, an "affiliate" of an
issuer is a person who, directly or indirectly, through one or more
intermediaries, controls, is controlled by or is under common control with the
issuer. Upon the expiration of certain contractual "lock-up" restrictions
described below, 23,863,617 shares will be eligible for sale 180 days after
the date of this prospectus, with 14,029,867 of these shares subject to the
volume and other limitations of Rule 144. The remaining 14,472,793 shares will
become eligible for sale at various times after that date. All of these
remaining shares will be subject to the volume and other limitations of Rule
144.
Each of our directors and officers and certain of our other stockholders
have agreed with Morgan Stanley & Co. Incorporated, for a period of 180 days
after the date of this prospectus, not to:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock, whether any such transaction described above is to be
settled by delivery of common stock or other securities, in cash or
otherwise.
Morgan Stanley & Co. Incorporated may choose to release some of these
shares from such restrictions prior to the expiration of the 180-day period
"lock-up" period, although it has no current intention of doing so.
Under Rule 144 as currently in effect, beginning 90 days after the date of
this prospectus, a person who has beneficially owned restricted shares of
common stock for at least one year, including the holding period of any prior
owner who is not an affiliate, would be entitled to sell a number of the
shares within any three-month period equal to the greater of 1% of the then
outstanding shares of the common stock or the average weekly reported volume
of trading of the common stock on the Nasdaq National Market during the four
calendar weeks preceding such sale. Immediately after the offering, 1% of our
outstanding shares of common stock would equal approximately shares.
Under Rule 144, restricted shares are subject to manner of sale and notice
requirements and requirements as to the availability of current public
information concerning us. Under Rule 144(k), a person who is not deemed to
have been an affiliate at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two
years, including the holding period of any prior owner who is not an
affiliate, is entitled to sell such shares without regard to the volume or
other limitations of Rule 144 just described.
The holders of approximately 35,363,295 shares of common stock are also
entitled to certain rights with respect to registration of their shares of
common stock for offer or sale to the public. If the holders, by exercising
their registration rights, cause a large number of shares to be registered and
sold in the public market, the sales could have a material adverse effect on
the market price for our common stock.
64
Immediately after this offering, there will be options to purchase
approximately 738,350 shares of common stock outstanding, based on the number
of options outstanding as of March 31, 2000. Subject to the provisions of the
lock-up agreements described above, holders of these options may rely on the
resale provisions of Rule 701 under the Securities Act. Rule 701 permits non-
affiliates to sell their shares without having to comply with the volume,
holding period or other limitations of Rule 144 and permits affiliates to sell
their shares without having to comply with the holding period limitation of
Rule 144, in each case beginning 90 days after the consummation of this
offering. In addition, shortly after this offering, we intend to file a
registration statement on Form S-8 covering the 1,585,500 shares of common
stock reserved for issuance under the 2000 Stock Plan based upon the number of
options outstanding as of March 31, 2000. Shares of common stock registered
under any registration statement will, subject to Rule 144 volume limitations
applicable to affiliates, be available for sale in the open market, unless the
shares are subject to vesting restrictions with us or the lock-up agreements
described above.
65
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date hereof, or the "underwriting agreement," the
underwriters named below have severally agreed to purchase, and we have agreed
to sell to them, severally, the respective number of shares of common stock
set forth opposite the names of such underwriters below:
Number of
Name Shares
---- ---------
Morgan Stanley & Co. Incorporated............................
Chase Securities Inc. .......................................
CIBC World Markets Corp. ....................................
---
Total....................................................
---
The underwriters are collectively referred to as the "underwriters." The
underwriting agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the shares of common stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The underwriters are obligated to
take and pay for all of the shares of common stock offered by this prospectus
if any shares are taken. However, the underwriters are not required to take
the shares covered by the underwriters' over-allotment option described below.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the
cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering
price. Any underwriter may allow, and such dealers may reallow, a concession
not in excess of $ a share to other underwriters or to certain other
dealers. After the initial offering of the shares of common stock, the
offering price and other selling terms may from time to time be varied by the
representatives.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of
additional shares of common stock at the public offering price set forth on
the cover page hereof, less underwriting discounts and commissions. The
underwriters may exercise such option solely for the purpose of covering over-
allotments, if any, made in connection with the offering of the shares of
common stock offered hereby. To the extent such option is exercised, each U.S.
underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of common stock as
the number set forth next to such U.S. underwriter's name in the preceding
table bears to the total number of shares of common stock set forth next to
the names of all underwriters in the preceding table.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
We have requested that the underwriters reserve up to shares of
common stock to be offered at the public offering price to employees, friends
and families of employees, service providers, employees of customers and
others in the U.S. These people will agree to hold their shares for at least
180 days after the date of this prospectus. This directed share program will
be administered by Morgan Stanley & Co. Incorporated. The number of shares of
common stock available for sale to the general public will be reduced to the
extent such individuals purchase such reserved shares. Any reserved shares
which are not so purchased will be offered by the underwriters to the general
public on the same basis as the other shares offered hereby.
66
Each of our directors, officers and certain of our other stockholders has
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, it will not, during the period
ending 180 days after the date of this prospectus:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock,
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.
The restrictions described above do not apply to:
. the sale of shares to the underwriters,
. the issuance by us of shares of common stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advised in
writing, provided that purchasers enter into similar "lock-up"
agreements, or
. transactions by any person other than us relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the common stock, the underwriters may bid for, and purchase,
shares of common stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering if the syndicate repurchases
previously distributed common stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the common stock above
independent market levels. The underwriters are not required to engage in
these activities, and may end any of these activities at any time.
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
Entities affiliated with Chase H&Q purchased an aggregate of 309,471 shares
of our preferred stock for an aggregate amount of approximately $551,332
million. These shares will convert into 309,471 shares of common stock upon
the completion of this offering.
Certain of the underwriters from time to time perform various investment
banking services for us, for which such underwriters receive customary
compensation.
Pricing of the Offering
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between us and the underwriters. Among the factors will be considered in
determining the initial public offering price will be our future prospects and
our industry in general, sales, earnings and certain of our other financial
and operating information in recent periods, and the price-earnings ratios,
price-sales ratios, market prices of securities and certain financial and
operating information of companies engaged in activities similar to ours. The
estimated initial public offering price range set forth on the cover page of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.
67
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
DURECT by Venture Law Group, A Professional Corporation, Menlo Park,
California. Mark B. Weeks, a director of Venture Law Group, is our Secretary.
Certain legal matters in connection with this offering will be passed upon for
the underwriters by Gray Cary Ware & Freidenrich LLP, Palo Alto, California.
Mr. Weeks, employees of Venture Law Group and an investment partnership
affiliated with Venture Law Group own a total of 23,256 shares of our Series B
preferred stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1998 and 1999 and for the period from inception
(February 6, 1998) to December 31, 1998, the year ended December 31, 1999 and
the period from inception (February 6, 1998) to December 31, 1999, as set
forth in their report. We have included our financial statements in the
prospectus and elsewhere in the registration statement in reliance on Ernst &
Young LLP's report, given on their authority as experts in accounting and
auditing.
68
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act, and the rules and regulations
promulgated thereunder, with respect to the common stock offered hereby. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement and the
exhibits thereto. Statements contained in this prospectus as to the contents
of any contract or other document that is filed as an exhibit to the
registration statement are not necessarily complete and each such statement is
qualified in all respects by reference to the full text of such contract or
document. For further information with respect to us and the common stock,
reference is hereby made to the registration statement and the exhibits
thereto, which may be inspected and copied at the principal office of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at Seven World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and copies of all or any part thereof may
be obtained at prescribed rates from the Commission's Public Reference Section
at such addresses. Also, the Commission maintains a World Wide Web site on the
Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Exchange Act and, in accordance
therewith, will file periodic reports, proxy and information statements and
other information with the Commission. Such periodic reports, proxy and
information statements and other information will be available for inspection
and copying at the regional offices, public reference facilities and Web site
of the Commission referred to above.
69
DURECT CORPORATION
(a development stage company)
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors............................................. F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statement of Stockholders' Equity.......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
DURECT Corporation
We have audited the accompanying balance sheets of DURECT Corporation (a
development stage company) as of December 31, 1998 and 1999, and the related
statements of operations, stockholders' equity, and cash flows for the period
from inception (February 6, 1998) to December 31, 1998, the year ended
December 31, 1999, and the period from inception (February 6, 1998) to
December 31, 1999. 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 audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DURECT Corporation (a
development stage company) at December 31, 1998 and 1999, and the results of
its operations and its cash flows for the period from inception (February 6,
1998) to December 31, 1998, the year ended December 31, 1999, and the period
from inception (February 6, 1998) to December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Palo Alto, California
February 9, 2000
F-2
DURECT CORPORATION
(a development stage company)
BALANCE SHEETS
(in thousands, except per share amounts)
Pro forma
December 31, stockholders' equity
----------------- at December 31,
1998 1999 1999
------- -------- --------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents............ $ 7,975 $ 3,863
Short-term investments............... -- 12,735
Accounts receivable, net of allowance
of $0 and $5 at December 31, 1998
and 1999, respectively.............. -- 97
Inventory............................ -- 188
Prepaid expenses and other current
assets.............................. 140 584
------- --------
Total current assets................... 8,115 17,467
Property and equipment, net............ 168 1,271
Intangible assets, net................. -- 1,390
Long-term investments.................. -- 2,335
------- --------
Total assets........................... $ 8,283 $ 22,463
======= ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable..................... $ 53 $ 483
Accrued liabilities.................. 155 429
Accrued liabilities to related
party............................... 203 321
Contract research liability.......... 12 180
Equipment loan, current portion...... 28 133
------- --------
Total current liabilities.............. 451 1,546
Equipment loan, noncurrent portion..... 83 189
Commitments
Stockholders' equity:
Preferred stock, issuable in series--
$0.0001 par value, 14,800 and 24,242
shares authorized at December 31,
1998 and 1999, respectively; 14,143
and 23,931 shares issued and
outstanding in December 31, 1998 and
1999, respectively; aggregate
liquidation preference of $9,394 and
$30,226 at December 31, 1998 and
1999, respectively; pro forma
shares authorized, no shares issued
and outstanding..................... 1 2 $ --
Common stock, $0.0001 par value:
25,200 and 41,542 shares authorized
at December 31, 1998 and 1999
respectively; 8,400 and 8,502 shares
issued and outstanding at December
31, 1998 and 1999, respectively; pro
forma shares authorized,
shares issued and outstanding....... 1 1 3
Additional paid-in capital........... 9,626 34,642 34,642
Notes receivable from stockholders... (36) (33) (33)
Deferred compensation................ (521) (3,252) (3,252)
Deficit accumulated during the
development stage................... (1,322) (10,632) (10,632)
------- -------- --------
Stockholders' equity................... 7,749 20,728 $ 20,728
------- -------- ========
Total liabilities and stockholders'
equity................................. $ 8,283 $ 22,463
======= ========
The accompanying notes are an integral part of these statements.
F-3
DURECT CORPORATION
(a development stage company)
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Period from Period from
inception inception
(February 6, (February 6,
1998) to Year ended 1998) to
December 31, December 31, December 31,
1998 1999 1999
------------ ------------ ------------
Revenue, net........................... $ -- $ 86 $ 86
Cost of goods sold..................... -- 39 39
------- ------- --------
Gross margin........................... -- 47 47
------- ------- --------
Operating expenses:
Research and development............. 466 5,181 5,647
Research and development to related
party............................... 243 1,182 1,425
Selling, general and administrative.. 585 2,178 2,763
Stock-based compensation(1).......... 149 865 1,014
------- ------- --------
Total operating expenses............... 1,443 9,406 10,849
------- ------- --------
Loss from operations................... (1,443) (9,359) (10,802)
Other income (expense):
Interest income...................... 121 678 799
Interest expense..................... -- (27) (27)
------- ------- --------
Net other income....................... 121 651 772
------- ------- --------
Net loss............................... $(1,322) $(8,708) $(10,030)
Accretion of cumulative dividends on
Series B convertible preferred stock.. -- 602 602
------- ------- --------
Net loss attributable to common
stockholders.......................... $(1,322) $(9,310) $(10,632)
======= ======= ========
Net loss per common share, basic and
diluted............................... $ (0.36) $ (1.76)
======= =======
Shares used in computing basic and
diluted net loss per share............ 3,655 5,291
======= =======
Pro forma net loss per share, basic and
diluted (unaudited)................... $ (0.37)
=======
Shares used in computing pro forma net
loss per share........................ 23,771
=======
- --------
Research and development............... $ 46 $ 485 $ 531
Selling, general and administrative.... 103 380 483
------- ------- --------
$ 149 $ 865 $ 1,014
======= ======= ========
(1) Stock-based compensation related to the following:
The accompanying notes are an integral part of these statements.
F-4
DURECT CORPORATION
(a development stage company)
STATEMENT OF STOCKHOLDERS' EQUITY
For the period from inception (February 6, 1998) to December 31, 1999
(in thousands, except per share amounts)
Convertible Deficit
Preferred Notes Accumulated
Stock Common Stock Additional Receivable During the Total
------------- ------------- Paid-In From Deferred Development Stockholders'
Shares Amount Shares Amount Capital Stockholders Compensation Stage Equity
------ ------ ------ ------ ---------- ------------ ------------ ----------- -------------
Issuance of common
stock to founders at
$0.0036 per share for
cash in April 1998.... -- $ -- 8,400 $ 1 $ 29 $ -- $ -- $ -- $ 30
Issuance of Series A-1
convertible preferred
stock in June 1998 for
license rights........ 5,600 -- -- -- -- -- -- -- --
Issuance of Series A-2
convertible preferred
stock at $1.00 per
share in June 1998 for
cash, net of issuance
costs of $277......... 5,636 1 -- -- 5,359 -- -- -- 5,360
Issuance of Series A-2
convertible preferred
stock at $1.25 per
share in December 1998
for cash, net of
issuance costs of
$66................... 2,907 -- -- -- 3,568 (36) -- -- 3,532
Deferred compensation
related to stock
options............... 670 (521) 149
Net loss............... -- -- -- -- -- -- (1,322) (1,322)
------ ----- ----- --- ------- ---- ------- -------- -------
Balance at December 31,
1998................... 14,143 1 8,400 1 9,626 (36) (521) (1,322) 7,749
Issuance of common
stock upon exercise of
stock options for
notes receivable and
cash at $0.35 per
share................. -- -- 102 -- 34 (33) -- -- 1
Repayment of notes
receivable............ -- -- -- -- -- 36 -- -- 36
Issuance of Series A-2
convertible preferred
stock at $1.25 per
share in May 1999 for
cash, net of issuance
costs of $21.......... 99 -- -- -- 103 -- -- -- 103
Issuance of Series B
convertible preferred
stock at $2.15 per
share in July 1999 for
cash, net of issuance
costs of $880......... 9,364 1 -- -- 19,251 -- -- -- 19,252
Issuance of Series B-1
convertible preferred
stock at $4.40 per
share in October 1999
in connection with the
acquisition of
IntraEar.............. 325 -- -- -- 1,430 -- -- -- 1,430
Deferred compensation
related to stock
options............... -- -- -- -- 3,596 -- (2,731) -- 865
Accretion of cumulative
dividends on Series B
convertible preferred
stock -- -- -- -- 602 -- -- (602) --
Net loss............... -- -- -- -- -- -- (8,708) (8,708)
------ ----- ----- --- ------- ---- ------- -------- -------
Balance at December 31,
1999................... 23,931 $ 2 8,502 $ 1 $34,642 $(33) $(3,252) $(10,632) $20,728
====== ===== ===== === ======= ==== ======= ======== =======
The accompanying notes are an integral part of these statements.
F-5
DURECT CORPORATION
(a development stage company)
STATEMENTS OF CASH FLOWS
(in thousands)
Period from Period from
inception inception
(February 6, (February 6,
1998) to Year ended 1998) to
December 31, December 31, December 31,
1998 1999 1999
------------ ------------ ------------
Cash flows from operating activities
Net loss............................... $(1,322) $ (8,708) $(10,030)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization........ 5 311 311
Amortization of deferred
compensation........................ 149 865 1,014
Changes in assets and liabilities:
Accounts receivable................ -- (97) (97)
Inventory.......................... -- (188) (188)
Prepaid expenses and other assets.. (140) (444) (584)
Accounts payable................... 53 430 483
Accrued liabilities................ 155 274 429
Accrued liabilities to related
party............................. 203 118 321
Contract research liability........ 12 168 180
------- -------- --------
Total adjustments.................... 437 1,437 1,874
------- -------- --------
Net cash and cash equivalents used in
operating activities................ (885) (7,271) (8,156)
Cash flows from investing activities
Purchase of equipment.................. (62) (1,016) (1,078)
Purchase of investments................ -- (15,070) (15,070)
Payment for acquisition of IntraEar,
net................................... -- (69) (69)
------- -------- --------
Net cash and cash equivalents used in
investing activities................ (62) (16,155) (16,217)
------- -------- --------
Cash flows from financing activities
Payments on equipment loan............. -- (78) (78)
Net proceeds from issuances of common
stock................................. 30 1 31
Net proceeds from notes receivable from
stockholders.......................... -- 36 36
Net proceeds from issuances of
convertible preferred stock........... 8,892 19,355 28,247
------- -------- --------
Net cash and cash equivalents
provided by financing activities.... 8,922 19,314 28,236
------- -------- --------
Net increase (decrease) in cash and
cash equivalents...................... 7,975 (4,112) 3,863
Cash and cash equivalents at beginning
of periods/year....................... -- 7,975 --
------- -------- --------
Cash and cash equivalents at end of
periods/year.......................... $ 7,975 $ 3,863 $ 3,863
======= ======== ========
Supplemental disclosure of cash flow
information
Equipment financed through an equipment
loan.................................. $ 111 $ 289 $ 400
======= ======== ========
Cash paid during the year for
interest.............................. $ -- $ 27 $ 27
======= ======== ========
Notes receivable issued in connection
with exercise of stock options $ 36 $ 33 $ 33
======= ======== ========
Issuance of Series B-1 convertible
preferred stock for assets acquired in
acquisition of IntraEar............... $ -- $ 1,430 $ 1,430
======= ======== ========
The accompanying notes are an integral part of these statements.
F-6
DURECT CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Operations and Basis of Presentation
DURECT Corporation (the "Company") was incorporated in the state of
Delaware on February 6, 1998. The Company is a pharmaceutical company
developing therapies for chronic disorders that require continuous drug
dosing. The Company's lead product is for the treatment of chronic pain.
The Company's activities in 1998 consisted principally of raising capital,
arranging for facilities, acquiring equipment and licensing rights, recruiting
managerial and technical personnel, and commencing research and development
efforts. In 1999, the Company expanded its research and development
activities, acquired licensing rights, raised capital, and continued to
recruit managerial and technical personnel. Accordingly, the Company is
classified as a development stage enterprise as of December 31, 1999.
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 of assets and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reported period.
Actual results could differ materially from those estimates.
Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments with maturities of 90
days or less from the date of purchase to be cash equivalents. Investments
with maturities of greater than 90 days but less than one year are classified
as short-term investments. Management determines the appropriate
classification of its cash equivalents and investment securities at the time
of purchase and reevaluates such determination as of each balance sheet date.
Management has classified the Company's cash equivalents and marketable
securities as available-for-sale securities in the accompanying financial
statements. Available-for-sale securities are carried at fair value, with
unrealized gains and losses reported in a separate component of stockholders'
equity, when material. Realized gains and losses are included in interest
income. The cost of securities sold is based on the specific identification
method.
The Company invests its excess cash in debt instruments of financial
institutions and corporations, and money market funds with high credit
ratings. The Company has established guidelines regarding diversification of
its investments and their maturities with the objectives of maintaining safety
and liquidity, while maximizing yield.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist principally of interest-bearing investments and trade receivables. The
Company maintains cash and cash equivalents and investments with various major
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these financial institutions and limits the amount
of credit exposure with any one institution.
Hospitals and other health-care providers account for a substantial portion
of the trade receivables; collateral for these receivables is generally not
required by the Company. The risk associated with this concentration is
limited due to the large number of accounts and their geographic dispersion.
The Company monitors the creditworthiness of its customers to which it grants
credit terms in the normal course of business. The Company is exposed to
credit-related losses in the event of nonperformance by counterparties to
financial instruments, but management believes credit risk exposure to such
contracts is limited by periodically reviewing the
F-7
DURECT CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
creditworthiness of the counterparties to the transactions. As of December 31,
1999, the Company has not experienced significant credit losses.
The Company maintains cash, cash equivalents and investments with various
financial institutions. The Company performs periodic evaluations of the
relative credit quality of its investments.
Inventories
Inventories are stated at the lower of cost or market, with cost determined
on a first-in, first-out basis. At December 31, 1999, inventories consisted of
finished goods.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation,
which is computed using the straight-line method over the estimated useful
lives of the assets, which range from three to five years. Leasehold
improvements are amortized using the straight-line method over the estimated
useful lives of the assets or terms of the related leases, whichever are
shorter.
Acquisition of IntraEAR
On October 1, 1999, the Company acquired substantially all of the assets of
IntraEAR, Inc. ("IntraEAR") for a total cost of approximately $1,797,000
(consisting of $320,000 in cash, 325,023 shares of Series B-1 convertible
preferred stock, and transaction costs of approximately $46,000). IntraEAR
developed and commercialized products aimed at the treatment of inner-ear
disorders. The purchase price was allocated to the tangible and identifiable
intangible assets acquired on the basis of their fair values, as follows:
Tangible assets............................................... $ 297,000
Patents....................................................... 368,000
Developed technology.......................................... 75,000
Other intangibles............................................. 154,000
Goodwill...................................................... 903,000
----------
Total purchase price........................................ $1,797,000
==========
The acquisition of IntraEAR has been accounted for as a purchase, with the
result of IntraEAR's operations included in the Company's results of
operations from the date of acquisition.
Intangible assets represent the excess of total acquisition cost of
IntraEAR over the fair value of identifiable net assets of businesses
acquired. Intangible assets are amortized using the straight-line method over
their estimated useful lives over periods ranging from two to six years.
Management periodically reviews the carrying amount of goodwill and other
intangible assets to assess their continued recoverability. Accumulated
amortization of patents, developed technology and other intangibles totaled
$69,000 at December 31, 1999.
Impairment of Long-Lived Assets
In accordance with the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121"), the Company reviews long-
lived assets, including property and equipment, for impairment whenever events
or changes in business circumstances indicate that the carrying amount of the
assets may not be fully recoverable. Under SFAS 121, an impairment loss would
be recognized when estimated undiscounted future cash flows expected to result
from the use of the asset and its eventual disposition is less than the
carrying amount. Impairment, if any, is assessed using discounted cash flows.
Through December 31, 1999, there have been no such losses.
F-8
DURECT CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions and related interpretations of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and has elected to follow the "disclosure only" alternative prescribed by
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
Under APB No. 25, stock-based compensation is based on the difference, if any,
on the date of grant, between the fair value of the Company's stock and the
exercise price. Unearned compensation is amortized and expensed over the
vesting period of the respective options. The Company accounts for stock
options issued to nonemployees in accordance with the provisions of SFAS 123
and Emerging Issues Task Force 96-18, "Accounting for Equity Instruments that
are Issued to other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services." The fair value of options granted to non-
employees is periodically remeasured as the underlying options vest.
Revenue Recognition
Revenue from the sale of products is primarily recognized at the time
product is shipped to customers, provided no continuing obligation exists. The
Company maintains consigned inventory at customer locations for certain
products. For these products, revenue is recognized at the time the Company is
notified that the device has been used. The Company provides credit, in the
normal course of business, to its customers. The Company also maintains an
allowance for doubtful customer accounts and charges actual losses when
incurred to this allowance.
Research and Development Expenses
Research and development costs are expensed as incurred. Research and
development costs paid to third parties under sponsored research agreements
are recognized as the related services are performed, generally ratably over
the period of service. Purchased research and development is recognized in
purchase business combinations for the portion of the purchase price allocated
to the appraised value of in-process technologies. The portion assigned to in-
process technologies excludes the value of core and developed technologies,
which are recorded as intangible assets.
Comprehensive Loss
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," which establishes standards for
reporting comprehensive loss and its components in the financial statements.
To date, the Company's comprehensive loss has equaled its net loss.
Segment Reporting
Effective January 1, 1999, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). 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 did not have any separately reportable
business segments during any of the periods from inception to December 31,
1999.
Net Loss Per Share
Basic net loss per share and diluted net loss per share are computed in
conformity with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" ("SFAS 128"). In accordance with SFAS 128,
F-9
DURECT CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
basic net loss per share excludes dilutive common stock equivalents and is
calculated as net loss divided by the weighted-average number of common shares
outstanding. Diluted net loss per share is computed using the weighted-average
number of common shares outstanding and dilutive common stock equivalents
outstanding during the period. Common equivalent shares from common stock
issued to founders, investors, and employees that are subject to repurchases
(using the treasury stock method) are excluded from the calculation of net
loss per share as their effect is antidilutive. Pursuant to the Securities and
Exchange Commission Staff Accounting Bulletin No. 98, common stock and
convertible preferred stock issued or granted for nominal consideration prior
to the anticipated effective date of the initial public offering must be
included in the calculation of basic and diluted net loss per share as if they
had been outstanding for all periods presented. Through December 31, 1999, the
Company had not had any issuances or grants for nominal consideration.
Pro forma basic and diluted pro forma net loss per share has been computed
as described above and also gives effect, under SEC guidance, to the
conversion of the convertible preferred stock (using the if-converted method)
as though it had happened on the original date of issuance. The following
table presents the calculations of basic and diluted and pro forma basic and
diluted net loss per share (in thousands, except per share amounts):
Period from
inception
(February 6, 1998) Year ended
to December 31, December 31,
1998 1999
------------------ ------------
Net loss.................................... $(1,322) $(8,708)
Less: accumulated dividend on Series B
preferred stock.......................... -- 602
------- -------
Net loss available to common stockholders... $(1,322) $(9,310)
======= =======
Basic and diluted weighted average shares:
Weighted-average shares of common stock
outstanding.............................. 8,400 8,407
Less: weighted-average shares subject to
repurchase............................... (4,745) (3,116)
------- -------
Weighted-average shares used in computing
basic and diluted net loss per share..... 3,655 5,291
======= =======
Basic and diluted net loss per share........ $ (0.36) $ (1.76)
======= =======
Pro forma:
Net loss.................................. $(1,322) $(8,708)
======= =======
Shares used above......................... 3,655 5,291
Pro forma adjustment to reflect weighted
effect of assumed conversion of
convertible preferred stock.............. 8,080 18,480
------- -------
Shares used in computing pro forma basic
and diluted net loss per share
(unaudited).............................. 11,735 23,771
======= =======
Pro forma basic and diluted net loss per
share (unaudited).......................... $ (0.11) $ (0.37)
======= =======
Unaudited Pro Forma Balance Sheet
If the initial public offering discussed in Note 11 is consummated, all of
the convertible preferred stock outstanding will automatically be converted
into common stock upon the closing of the offering. The conversion
F-10
DURECT CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
of the convertible preferred stock that was outstanding as of December 31,
1999 has been reflected in the accompanying unaudited pro forma balance sheet.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through net income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative are either offset against the change in fair
value of assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized
in earnings. The ineffective portion of the derivative's change in fair value
will be immediately recognized in earnings. SFAS 133 is effective for the
Company's year ending December 31, 2001. The Company does not currently hold
any derivatives and does not expect the adoption of SFAS 133 to materially
impact the results of its operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"). SAB 101 summarizes certain areas of
the Staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company believes that its
current revenue recognition principles comply with SAB 101.
2. Agreements with ALZA and Others
In April 1998, the Company entered into a development and commercialization
agreement with ALZA Corporation ("ALZA") for certain product development
rights, patent rights, and other know-how relating to the DUROS system. The
Company issued 5,600,000 shares of Series A-1 preferred stock to ALZA in
connection with this agreement and is required to pay ALZA a royalty on the
net sales of products and a percentage of up front license fees, milestone
payments, or any other payments or consideration received by the Company,
excluding research and development funding. Under the terms of this agreement,
the Company is required to meet annual minimum development spending
requirements and develop a minimum number of products.
As provided for in the license agreement, the Company may pursue a number
of products in specified fields of use using the DUROS technology. However, to
maintain its rights under the agreement, the Company must commit to a minimum
annual level of product development funding with the amount and duration of
such funding in each field varying over time.
The future minimum annual product development funding required under the
ALZA agreement for all fields of use is as follows (in thousands):
Year ended December 31,
2000.......................................................... $ 6,000
2001.......................................................... 8,000
2002.......................................................... 13,000
2003.......................................................... 14,000
2004.......................................................... 17,000
-------
Total minimum funding required.................................. $58,000
=======
The agreement may be terminated by the Company, by providing ninety days
written notice to ALZA, or when the Company ceases to have royalty payment
obligations to ALZA (at least 20 years).
F-11
DURECT CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In the period from inception (February 6, 1998) to December 31, 1998, the
year ended December 31, 1999, and the period from inception (February 6, 1998)
to December 31, 1999, the Company incurred development expenses of $243,000,
$1,182,000, and $1,425,000, respectively, for work performed by ALZA, of which
$40,000, $861,000, and $901,000 was paid during the period from inception
(February 6, 1998) to December 31, 1998, the year ended December 31, 1999, and
the period from inception (February 6, 1998) to December 31, 1999,
respectively. At December 31, 1998 and 1999, $203,000 and $321,000,
respectively, were included in accrued liabilities.
In 1998 and 1999, the Company entered into several contract research
agreements with numerous consultants, clinics and hospitals focused on the
general research and clinical study support. Total contract research expenses
recognized under research and development expenses for the period from
inception (February 6, 1998) to December 31, 1998, the year ended December 31,
1999, and the period from inception (February 6, 1998) to December 31, 1999
was approximately $39,000, $1,028,000, and $1,067,000, respectively. The
Company has the right to terminate these agreements at any time upon 30 days'
written notice.
3. Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
The following is a summary of available-for-sale securities as of December
31, 1999:
Amortized Cost and
Estimated
Fair Value
------------------
(In thousands)
Money market fund..................................... $ 82
Commercial paper...................................... 18,783
-------
$18,865
=======
Reported as:
Cash equivalents.................................... $ 3,795
Short-term marketable securities.................... 12,735
Long-term marketable securities..................... 2,335
-------
$18,865
=======
As of December 31, 1999, the difference between the fair value and the
amortized cost of available-for-sale securities was immaterial.
The following is a summary of the cost and estimated fair value of
available-for-sale securities at December 31, 1999, by contractual maturity:
Cost and Estimated
Fair Value
------------------
Mature in one year or less............................ $12,735
Mature after one year through two years............... 2,335
-------
Total............................................... $15,070
=======
F-12
DURECT CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Property and Equipment
Property and equipment consist of the following:
December 31,
--------------
1998 1999
------ -------
(In
thousands)
Equipment.................................................. $ 120 $ 1,161
Leasehold improvement...................................... 12 155
Construction-in-progress................................... 41 162
----- -------
173 1,478
Less accumulated depreciation.............................. (5) (207)
----- -------
Equipment, net............................................. $ 168 $ 1,271
===== =======
At December 31, 1998 and 1999, equipment financed under an equipment loan
totaled approximately $111,000 and $289,000, respectively. Accumulated
depreciation for this equipment was $5,000 and $102,000 as of December 31,
1998 and 1999, respectively.
5. Equipment Loan
In October 1998, the Company financed the purchase of certain equipment
through a bank loan. The loan was renewed in April 1999 and the amount of the
loan was increased to $400,000 from $250,000 in June 1999, with an interest
rate increase to 1.25% plus the bank's base rate from 0.5% plus the bank's
base rate, respectively. This loan is repayable in equal monthly installments
over three years (payments commence April 1999). This equipment loan is
secured by substantially all of the Company's assets.
Payment on equipment loan is due as follows (in thousands):
December 31,
---------------
1998 1999
------- -------
(In thousands)
1999..................................................... $ 28 $ --
2000..................................................... 41 133
2001..................................................... 42 133
2002..................................................... -- 56
------- -------
$111 $ 322
======= =======
The carrying value of the Company's equipment loan approximates its fair
value. The fair value of the Company's equipment loan is estimated using a
discounted cash flow analysis based on the company's current incremental
borrowing rates for similar types of borrowing arrangements.
6. Commitments
The Company leases its office and research facility under a noncancelable
operating lease which expires in January 2004, with two options to extend the
lease for 5 years each. The Company is required to pay certain maintenance
expenses in addition to monthly rent. Rent expense is recognized on a
straight-line basis over the
F-13
DURECT CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
lease term which has scheduled rental payment increases. Rent expense under
this operating lease was $80,000, $313,000, and $393,000 for the period from
inception (February 6, 1998) to December 31, 1998, the year ended December 31,
1999, and the period from inception (February 6, 1998) to December 31, 1999,
respectively.
Future minimum lease payments under this noncancelable lease are as follows
(in thousands):
Operating
Leases
---------
Year ended December 31,
2000........................................................ $ 613
2001......................................................... 775
2002......................................................... 798
2003......................................................... 806
2004 and thereafter.......................................... 34
------
Total minimum payments required................................ $3,127
======
Future minimum rentals have been reduced by minimum sublease rental income
of $184,000 due in the future under noncancelable subleases. The Company
subleases office space to a third party. Rental income under this lease was
$0, $360,000, and $360,000 for the period from inception (February 6, 1998) to
December 31, 1998, the year ended December 31, 1999, and the period from
inception (February 6, 1998) to December 31, 1999, respectively.
At December 31, 1999, the Company had outstanding commitments to purchase
laboratory equipment totaling approximately $368,000.
7. Stockholders' Equity
Preferred Stock
Convertible preferred stock is issuable in series, with rights and
preferences designated by series. The shares outstanding are as follows:
December 31, 1998 December 31, 1999
---------------------------------- ------------------------------------
Shares Shares Issued
Shares Issued and Liquidation Shares and Liquidation
Authorized Outstanding Preference Authorized Outstanding Preference
---------- ----------- ----------- ---------- ------------- -----------
Series A-1.............. 5,600 5,600 $ -- 5,600 5,600 $ --
Series A-2.............. 9,200 8,543 9,286 8,642 8,642 9,394
Series B................ -- -- -- 9,378 9,364 20,133
Series B-1.............. -- -- -- 450 325 699
Undesignated............ -- -- -- 172 -- --
------ ------ ------ ------ ------ -------
14,800 14,143 $9,286 24,242 23,931 $30,226
====== ====== ====== ====== ====== =======
All series of preferred stock are convertible at any time at the
stockholders' option into common stock on a one-for-one basis, subject to
adjustment for certain dilutive events. Conversion is automatic upon at the
earlier of (i) the closing of an underwritten public offering with aggregate
offering proceeds in excess of $25,000,000 (as adjusted for stock splits,
stock dividends, recapitalization, or similar events) or (ii) upon agreement
of the majority of holders of all outstanding shares of preferred stock voting
together as a single class.
F-14
DURECT CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Holders of Series A-1, A-2, and B-1 convertible preferred stock are
entitled to noncumulative dividends of $0.05, $0.05, and $0.13975,
respectively, if and when declared by the board of directors. These dividends
are to be paid in advance of any distributions to common stockholders. No
dividends have been declared through December 31, 1999.
Holders of Series B convertible preferred stock are entitled to receive
cumulative dividends at the rate of $0.13975 per share per annum on each
outstanding share of Series B convertible preferred stock, payable quarterly
when, as, and if declared by the board of directors. Such dividends shall
accrue on each share from July 16, 1999, and shall accrue on a day-to-day
basis whether or not declared. Accumulation of dividends on the Series B
convertible preferred stock bear no interest. As of December 31, 1999, the
accrued dividend payable is $602,000. Cumulative dividends with respect to
Series B convertible preferred stock which are accrued and/or in arrears shall
be forgiven upon conversion of such shares to common stock.
In the event of a liquidation or winding up of the Company, holders of
Series A-2, B, and B-1 convertible preferred stock shall have a liquidation
preference of $1.087, $2.15, and $2.15, respectively, per share, together with
any declared but unpaid dividends, over holders of Series A-1 convertible
preferred stock and common shares. After payments have been made to the Series
A-2, B and B-1 stockholders, the remaining assets of the Company legally
available for distribution, if any, shall be distributed ratably to the
holders of common stock and Series A-1 preferred stock pro rata based on the
number of shares of common stock that are or would be held by each on an as-
converted basis.
Preferred stockholders are entitled to the number of votes they would have
upon conversion of their preferred shares into common stock.
Common Stock
As of December 31, 1999, the Company's founders owned 8,400,000 shares of
common stock.
The founders' common stock is subject to the Company's right of repurchase
upon termination of their employment at the original issue price, and to the
extent the Company elects not to exercise its right of repurchase, the
remaining founders and certain stockholders may exercise the repurchase right.
Initially 66- 2/3% of the founders shares were subject to repurchase, but
such repurchase rights lapse over time at the rate of 1.85% for each completed
month of employment (until all shares are released from the repurchase
option).
As of December 31, 1999, an aggregate of 2,181,480 shares of the founders'
stock remained subject to repurchase.
As of December 31, 1999, shares of common stock reserved for future
issuance consisted of the following:
December 31,
1999
------------
Series A-1, A-2, B, and B-1 convertible preferred stock...... 23,931,231
Stock options outstanding.................................... 1,605,000
Stock options available for grant............................ 296,500
----------
25,832,731
==========
F-15
DURECT CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
1998 Incentive Stock Plan
In March 1998, the Company adopted the DURECT Corporation Stock Option Plan
(the "Stock Plan") under which incentive stock options and nonstatutory stock
options may be granted to employees, directors of, or consultants to, the
Company and its affiliates.
Options granted under the Stock Plan expire no later than ten years from
the date of grant. Options may be granted with different vesting terms from
time to time but not to exceed five years from the date of grant.
The option price of an Incentive Stock Option granted to an employee or of
a Nonstatutory Stock Option granted to any person who owns stock representing
more than 10% of the total combined voting power of all classes of stock of
the Company (or any Parent or Subsidiary) shall be no less than 110% of the
fair market value per share on the date of grant. The option price of an
incentive stock option granted to any other employee shall be no less than
100% of the fair market value per share on the date of grant. The option price
of a Nonstatutory Stock Option that is granted to any other person shall be no
less than 85% of the fair market value per share on the date of grant.
Activity under the Stock Plan through December 31, 1999 is as follows:
Weighted-
Shares Average
Available Number of Exercise
for Grant Shares Price
--------- --------- ---------
Shares authorized............................. 1,000,000 -- --
Options granted............................... (804,000) 804,000 $0.10
Options exercised............................. -- -- --
Options canceled.............................. -- -- --
Balance at December 31, 1998.................... 196,000 804,000 $0.10
--------- ---------
Shares authorized............................. 1,000,000 -- --
Options granted............................... (934,500) 934,500 $0.35
Options exercised............................. -- (98,500) $0.35
Options canceled.............................. 35,000 (35,000) $0.35
--------- ---------
Balance at December 31, 1999.................... 296,500 1,605,000 $0.23
========= =========
The Company recorded deferred compensation in connection with certain stock
option grants, net of forfeitures, of $3,596,000 in 1999 and $670,000 in 1998.
The Company amortized deferred compensation of $865,000 in 1999 and $149,000
in 1998. The remaining unamortized deferred compensation of $3,252,000 at
December 31, 1999 will be recognized as compensation expense over the vesting
term of the related options.
The weighted-average grant-date fair value of options granted was $0.02 in
1998 and $0.12 in 1999.
The following table summarizes the information about stock options
outstanding at December 31, 1999:
Weighted-
Average Weighted- Weighted-
Range of Number of Remaining Average Number of Average
Exercise Options Contractual Exercise Options Exercise
Price Outstanding Life Price Exercisable Price
-------- ----------- ----------- --------- ----------- ---------
(In years)
$0.10 774,000 8.70 $0.10 774,000 $0.10
$0.20 30,000 8.95 $0.20 30,000 $0.20
$0.35 801,000 9.34 $0.35 801,000 $0.35
--------- ---------
$0.10-$0.35 1,605,000 9.03 $0.23 1,605,000 $0.23
========= =========
F-16
DURECT CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1999, outstanding options to purchase an aggregate of
211,000 shares of common stock were vested and exercisable at a weighted-
average exercise price per share of $0.10.
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock-based compensation plans. Because the
exercise price of the employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is generally
recognized. Pro forma information regarding net loss has been determined as if
the Company accounted for its employee stock options under the fair value
method prescribed by SFAS 123. The resulting effect on pro forma net loss
disclosed is not likely to be representative of the effects on net loss on a
pro forma basis in future years, due to additional grants and years of vesting
in subsequent years. The fair value of each option granted through the period
from inception (February 6, 1998) to December 31, 1998 and for the year ended
December 31, 1999 were estimated on the date of grant using the minimum value
method, with the following weighted-average assumptions:
Period from
inception
(February 6,
1998) to Year ended
December 31, December 31,
1998 1999
------------ ------------
Risk-free interest rate........................ 4.5% 6.00%
Expected dividend yield........................ -- --
Expected life of option 5 years 5 years
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period, and results
in a pro forma net loss that is not materially different from actual net loss
for all periods presented.
8. Income Taxes
No provision for income taxes has been recorded due to operating losses
with no current tax benefit.
As of December 31, 1998 and 1999, the Company had federal and state net
operating loss carryforwards of approximately $1,100,000 and $9,200,000,
respectively. The net operating losses and credit carryforwards will expire at
various dates beginning in 2006 through 2019, if not utilized.
Utilization of the net operating losses may be subject to a substantial
annual limitation due to federal and state ownership change limitations. The
annual limitation may result in the expiration of net operating losses before
utilization.
Deferred tax assets and liabilities reflect the net tax effects of net
operating loss and credit carryforwards and of temporary differences between
the carrying amounts of assets and liabilities for financial reporting and the
amounts used for income tax purposes. Significant components of the Company's
deferred tax assets are as follows (in thousands):
December 31,
--------------
1998 1999
----- -------
Deferred tax assets:
Net operating loss carryforwards......................... $ 550 $ 3,600
Other individually immaterial items...................... -- (100)
----- -------
Total deferred tax assets.................................. 550 3,500
Valuation allowance for deferred tax assets................ (550) (3,500)
----- -------
Net deferred tax assets.................................... $ -- $ --
===== =======
F-17
DURECT CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company has provided a full valuation allowance against the net
deferred tax assets at December 31, 1998 and 1999 because the future
realization of such assets is uncertain.
9. Related Party Transactions
In connection with the Series A-2 preferred stock financing, the Company
incurred $279,000 of advisory fees from a company controlled by an executive
officer of the Company for the period from inception (February 6, 1998) to
December 31, 1998.
10. Subsequent Event
Term Loan and Capital Lease Line
In January 2000, the Company obtained a term loan and capital lease line
with one financial institution on January 26, 2000 for $750,000 and
$1,500,000, respectively. In connection with this borrowing, the Company
issued warrants to purchase 31,395 shares of Series B-1 preferred stock at
$2.15 per share. Both the term loan and capital lease line are secured by all
equipment and other property acquired through these borrowings.
11. Subsequent Events (unaudited)
Amended Articles of Incorporation
In March 2000, the board of directors authorized an amendment to the
Company's articles of incorporation to increase the authorized stock of the
Company to 77,641,436 shares, consisting of 50,000,000 shares of common stock
and 27,641,436 shares of preferred stock.
Series C Financing
In March 2000, the Company completed a private placement of 3,571,429
shares of Series C convertible preferred stock at $7.00 per share, resulting
in net cash proceeds of approximately $24.8 million. Holders of Series C
preferred stock are entitled to annual noncumulative dividends of $0.35 per
share when and if declared by the board of directors. In the event of
voluntary or involuntary liquidation of DURECT, holders of Series C preferred
stock are entitled to a liquidation preference of $7.00 per share plus all
declared and unpaid dividends. Holders of Series C preferred stock are
entitled to one vote for each share of common stock into which the preferred
stock is convertible, currently on a one-for-one basis. Each share of Series C
preferred stock will be automatically converted into one share of common stock
upon the closing of a firm commitment underwritten initial public offering of
DURECT common stock with a per share price of at least $7.00 per share with
gross proceeds of at least $25 million.
2000 Stock Option Plan
In March 2000, the Company's Board of Directors adopted the Durect
Corporation 2000 Stock Option Plan which will be submitted to the Company's
stockholders for approval before completion of the Company's proposed initial
public offering. Under the 2000 Stock Option Plan, incentive stock options and
nonstatutory stock options and stock purchase rights may be granted to
employees and consultants, including nonemployee directors. A total of
1,796,000 shares of common stock have been reserved for issuance under this
plan.
F-18
DURECT CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
2000 Employee Stock Purchase Plan
The Company's Board of Directors adopted the 2000 Employee Stock Purchase
Plan which will be submitted to the Company's stockholders for approval before
completion of this offering. A total of 150,000 shares of common stock have
been reserved for issuance under the purchase plan. This purchase plan will be
implemented by a series of overlapping offering periods of approximately 24
months' duration, with new offering periods, other than the first offering
period, beginning on August 1 and February 1 of each year and ending July 31
and January 31, respectively, two years later. The purchase plan allows
eligible employees to purchase common stock through payroll deductions at a
price equal to the lower of 85% of the fair market value of DURECT's common
stock at the beginning of each offering period or at the end of each purchase
period. The initial offering period will commence on the effectiveness of the
initial public offering.
2000 Directors' Stock Option Plan
In March 2000, the Board of Directors adopted the 2000 Directors' Stock
Option Plan. A total of 300,000 shares of common stock have been reserved for
issuance under this plan. The directors' plan provides that each person who
becomes a nonemployee director of DURECT after the effective date of this
offering will be granted a nonstatutory stock option to purchase 20,000 shares
of common stock on the date on which the optionee first becomes a nonemployee
director of DURECT. This plan also provides that each option granted to a new
director shall vest at the rate of 33 1/3% per year and each annual option
shall vest in full at the end of one year. No shares have been issued under
the directors' plan.
Initial Public Offering
In April 2000, the board of directors authorized the Company to file a
registration statement with the SEC for an initial public offering of the
Company's common stock.
Arrangements with Alza
In April 2000, ALZA and DURECT amended and restated their development and
commercialization agreement by entering into the Second Amended and Restated
Development and Commercialization Agreement. These amendments include a
reduction in product royalties and upfront payments in certain instances
payable to ALZA by DURECT under the Agreement. In addition, ALZA's option to
distribute the DUROS sufentanil product was amended in geographic scope to
cover only the U.S. and Canada instead of worldwide. As consideration for
these amendments, ALZA received 1,000,000 shares of the Company's common stock
and subject to conditions on exercise, a warrant to purchase 1,000,000 shares
of common stock at an exercise price equal to the price at which the Company
sells its common stock in its proposed initial public offering.
In April 2000, the Company acquired from ALZA Corporation the ALZET product
and certain assets used primarily in the manufacture, sale and distribution of
this product. This acquisition provides the Company with an ongoing business
making and selling this product worldwide. The total purchase price consisted
of approximately $8.2 million in cash, including approximately $3.2 million in
inventory, $2.4 million of which will be paid over twelve months. The
acquisition will be accounted for using the purchase method of accounting.
F-19
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fee and the Nasdaq
National Market listing fee.
Amount
to be Paid
----------
SEC registration fee............................................. $ 30,600
NASD filing fee.................................................. 12,000
Nasdaq National Market listing fee............................... 95,000
Printing and engraving expenses.................................. 200,000
Legal fees and expenses.......................................... 400,000
Accounting fees and expenses..................................... 300,000
Blue Sky qualification fees and expenses......................... 10,000
Transfer Agent and Registrar fees................................ 2,000
Miscellaneous fees and expenses.................................. 60,400
Total.......................................................... $1,200,000
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "Delaware Law")
authorizes a court to award, or a corporation's Board of Directors to grant,
indemnity to directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII of the Company's Certificate of
Incorporation (Exhibit 3.2 hereto) and Article VI of the Company's Bylaws
(Exhibit 3.3 hereto) provide for indemnification of the Company's directors,
officers, employees and other agents to the maximum extent permitted by
Delaware Law. In addition, the Company has entered into Indemnification
Agreements (Exhibit 10.1 hereto) with its officers and directors. The
Underwriting Agreement (Exhibit 1.1) also provides for cross-indemnification
among the Company and the Underwriters with respect to certain matters,
including matters arising under the Securities Act.
Item 15. Recent Sales of Unregistered Securities
(a) Since inception, we have sold and issued the following unregistered
securities:
(1) From inception to March 31, 2000, we issued options to purchase an
aggregate of 1,738,500 shares of common stock under the 1998 stock
plan at exercise prices of $0.10 to $0.35 per share, of which options
to purchase 1,222,750 shares have been exercised.
(2) From inception to March 31, 2000, we issued options to purchase an
aggregate of 530,850 shares of common stock under our 2000 stock
option plan at exercise prices of $0.35 to $1.00 per share, of which
options to purchase 211,000 shares have been exercised.
(3) On June 19, 1998, we issued and sold 5,600,000 shares of Series A-1
preferred stock to ALZA Corporation, a principal stockholder of
DURECT, in consideration of the executed and delivered
Commercialization and Development Agreement with ALZA.
(4) On June 19, 1998, we issued and sold 5,636,000 shares of Series A-2
preferred stock to 43 private investors at a price of $1.00 per share
for a total price of $5,636,000.
(5) On December 18, 1998, we sold 3,005,867 shares of our Series A-2
preferred stock to 43 private investors at a price of $1.25 per share
for a total price of $3,757,334.
II-1
(6) On July 19, 1999, we sold 9,364,341 shares of our Series B preferred
stock to 56 private investors at a price of $2.15 per share for a
total price of $20,133,333.
(7) On October 1, 1999, we sold 325,023 shares of our Series B-1 preferred
stock to IntraEAR in consideration of the executed and delivered Asset
Purchase Agreement.
(8) On December 31, 1999, in connection with a loan, we issued a warrant
to Silicon Valley Bank to purchase 31,395 shares of our Series B-1
preferred stock.
(9) On March 28, 2000, we sold 3,571,429 shares of our Series C preferred
stock to 12 private investors at a price of $7.00 per share for a
total purchase price of $25,000,003.
(10) On April 14, 2000, in connection with an amendment to our development
and commercialization agreement, we issued to ALZA Corporation
1,000,000 shares of our common stock and a warrant to purchase
1,000,000 shares of our common stock.
There were no underwriters employed in connection with any of the transactions
set forth in Item 15.
For additional information concerning these equity investment transactions,
please see the section entitled "Certain Transactions" in the prospectus.
The issuances described in Items 15(a)(3) thru 15(a)(10) were deemed exempt
from registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving a public offering.
Certain issuances described in Items 15(a)(1) and 15(a)(2) were deemed exempt
from registration under the Securities Act in reliance on Rule 701 promulgated
thereunder as transactions pursuant to compensatory benefit plans and
contracts relating to compensation. The recipients of securities in each such
transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about us or had access, through
employment or other relationships, to such information.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
Number Description
------ -----------
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the Company.
3.2 Amendment to Amended and Restated Certificate of Incorporation of the
Company.
3.3 Amended and Restated Certificate of Incorporation of the Company
(proposed).
3.4 Amended and Restated Bylaws of the Company.
3.5 Amended and Restated Bylaws of the Company (proposed).
3.6 Certificate of Designation of Rights, Preferences and Privileges of
Series B-1 Preferred Stock.
3.7 Certificate of Designation of Rights, Preferences and Privileges of
Series C Preferred Stock.
4.1* Specimen Stock Certificate.
4.2 Second Amended and Restated Investors' Rights Agreement.
5.1 Form of Opinion of Venture Law Group regarding the legality of the
common stock being registered.
10.1 Form of Indemnification Agreement between the Company and each of its
Officers and Directors.
10.2 1998 Stock Option Plan.
10.3 2000 Stock Plan.
10.4 2000 Employee Stock Purchase Plan.
10.5 2000 Directors' Stock Option Plan.
II-2
Number Description
------ -----------
10.6** Second Amended and Restated Development and Commercialization
Agreement between the Company and ALZA Corporation effective April
28, 1999.
10.7** Product Acquisition Agreement between the Company and ALZA
Corporation dated as of April 14, 2000.
10.8 Amended and Restated Loan and Security Agreement between the Company
and Silicon Valley Bank dated as of October 28, 1998.
10.9** Manufacturing and Supply Agreement between Neuro-Biometrix, Inc. and
Novel Biomedical, Inc. dated as of November 24, 1997.
10.10** Master Services Agreement between the Company and Quintiles, Inc.
dated as of November 1, 1999.
10.11 Modified Net Single Tenant Lease Agreement between the Company and
DeAnza Enterprises, Ltd. dated as of February 18, 1999.
10.12 Sublease Amendment between the Company and Ciena Corporation dated
as of November 29, 1999 and Sublease Agreement between Company and
Lightera Networks, Inc. dated as of March 10, 1999.
10.13** Project Proposal between the Company and Chesapeake Biological
Laboratories, Inc. dated as of October 11, 1999.
10.14 Employment Agreement with James E. Brown.
10.15 Employment Agreement with Felix Theeuwes.
10.16 Employment Agreement with Thomas A. Schreck.
10.17 Common Stock Purchase Agreement between the Company and ALZA
Corporation dated April 14, 2000.
10.18 Warrant issued to ALZA Corporation dated April 14, 2000.
10.19 Amended and Restated Market Stand-off Agreement between the Company
and ALZA Corporation dated as of April 14, 2000.
10.20* Asset Purchase Agreement between the Company and IntraEAR, Inc.
dated as of September 24, 1999.
10.21 Warrant issued to Silicon Valley Bank dated December 16, 1999.
10.22* Amendment to Second Amended and Restated Investors' Rights Agreement
dated as of April 14, 2000.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Attorneys (included in Exhibit 5.1).
24.1 Power of Attorney (see II-5).
27.1 Financial Data Schedule.
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* To be filed by amendment.
** Confidential treatment requested as to certain portions of this Exhibit.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
II-3
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the Offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Palo Alto, State of
California on April 20, 2000.
Durect Corporation
/s/ James E. Brown
By: _________________________________
James E. Brown
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints, jointly and severally, James
Brown and Felix Theeuwes as his or her attorney-in-fact, with full power of
substitution, for him or her in any and all capacities, to sign any and all
amendments to this Registration Statement (including post-effective
amendments), and any and all Registration Statements filed pursuant to Rule
462 under the Securities Act of 1933, as amended, in connection with or
related to the Offering contemplated by this Registration Statement and its
amendments, if any, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be
signed by our said attorney to any and all amendments to said Registration
Statement.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ James E. Brown President, Chief Executive April 20, 2000
______________________________________ Officer and Director
James E. Brown
/s/ Felix Theeuwes Chairman, Chief Scientific April 20, 2000
______________________________________ Officer
Felix Theeuwes
/s/ Thomas A. Schreck Chief Financial Officer, April 20, 2000
______________________________________ Director
Thomas A. Schreck
/s/ James R. Butler Director April 20, 2000
______________________________________
James R. Butler
/s/ Douglas A. Lee Director April 20, 2000
______________________________________
Douglas A. Lee
/s/ Albert L. Zesiger Director April 20, 2000
______________________________________
Albert L. Zesiger
/s/ Matthew V. McPherron Director April 20, 2000
______________________________________
Matthew V. McPherron
/s/ John L. Doyle Director April 20, 2000
______________________________________
John L. Doyle
II-5
EXHIBIT INDEX
Number Description
------ -----------
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the Company.
3.2 Amendment to Amended and Restated Certificate of Incorporation of
the Company.
3.3 Amended and Restated Certificate of Incorporation of the Company
(proposed).
3.4 Amended and Restated Bylaws of the Company.
3.5 Amended and Restated Bylaws of the Company (proposed).
3.6 Certificate of Designation of Rights, Preferences and Privileges of
Series B-1 Preferred Stock.
3.7 Certificate of Designation of Rights, Preferences and Privileges of
Series C Preferred Stock.
4.1* Specimen Stock Certificate.
4.2 Second Amended and Restated Investors' Rights Agreement.
5.1 Form of Opinion of Venture Law Group regarding the legality of the
common stock being registered.
10.1 Form of Indemnification Agreement between the Company and each of
its Officers and Directors.
10.2 1998 Stock Option Plan.
10.3 2000 Stock Plan.
10.4 2000 Employee Stock Purchase Plan.
10.5 2000 Directors' Stock Option Plan.
10.6** Second Amended and Restated Development and Commercialization
Agreement between the Company and ALZA Corporation effective April
28, 1999.
10.7** Product Acquisition Agreement between the Company and ALZA
Corporation dated as of April 14, 2000.
10.8 Amended and Restated Loan and Security Agreement between the Company
and Silicon Valley Bank dated as of October 28, 1998.
10.9** Manufacturing and Supply Agreement between Neuro-Biometrix, Inc. and
Novel Biomedical, Inc. dated as of November 24, 1997.
10.10** Master Services Agreement between the Company and Quintiles, Inc.
dated as of November 1, 1999.
10.11 Modified Net Single Tenant Lease Agreement between the Company and
DeAnza Enterprises, Ltd. dated as of February 18, 1999.
10.12 Sublease Amendment between the Company and Ciena Corporation dated
as of November 29, 1999 and Sublease Agreement between Company and
Lightera Networks, Inc. dated as of March 10, 1999.
10.13** Project Proposal between the Company and Chesapeake Biological
Laboratories, Inc. dated as of October 11, 1999.
10.14 Employment Agreement with James E. Brown.
Number Description
------ -----------
10.15 Employment Agreement with Felix Theeuwes.
10.16 Employment Agreement with Thomas A. Schreck.
10.17 Common Stock Purchase Agreement between the Company and ALZA
Corporation dated April 14, 2000.
10.18 Warrant issued to ALZA Corporation dated April 14, 2000.
10.19 Amended and Restated Market Stand-off Agreement between the Company
and ALZA Corporation dated as of April 14, 2000.
10.20* Asset Purchase Agreement between the Company and IntraEAR, Inc. dated
as of September 24, 1999.
10.21 Warrant issued to Silicon Valley Bank dated December 16, 1999.
10.22* Amendment to Second Amended and Restated Investors' Rights Agreement
dated as of April 14, 2000.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Attorneys (included in Exhibit 5.1).
24.1 Power of Attorney (see II-5).
27.1 Financial Data Schedule.
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* To be filed by amendment.
** Confidential treatment requested as to certain portions of this Exhibit.