As filed with the Securities and Exchange Commission on April 25, 2002.
Registration No. 333-76612
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT No. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ADERIS PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 2834 54-1749283
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or organization) Classification Code
Number)
85 Main Street
Hopkinton, Massachusetts 01748
(Address, including zip code, and telephone number, including area code, of the
registrant's principal executive offices)
-----------------
Peter G. Savas
Chief Executive Officer and President
Aderis Pharmaceuticals, Inc.
85 Main Street
Hopkinton, Massachusetts 01748
(508) 497-2300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Alan W. Pettis, Esq. Frederick W. Kanner, Esq.
Jeevan B. Gore, Esq. Dewey Ballantine LLP
Michael D. Cohen, Esq. 1301 Avenue of the
Latham & Watkins Americas
650 Town Center Drive, New York, New York 10019
Suite 2000 (212) 259-8000
Costa Mesa, California
92626
(714) 540-1235
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] _
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _
If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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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 an offer to buy these
securities in any state where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS April 25, 2002
Subject to completion
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5,500,000 Shares
[LOGO] Logo of Aderis Pharmaceuticals
Common Stock
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This is our initial public offering of shares of our common stock. No public
market currently exists for our common stock. We anticipate the initial public
offering price will be between $12.00 and $14.00 per share.
We have applied to have our common stock approved on the Nasdaq National Market
for quotation under the symbol "ADPX."
Before buying any shares of our common stock, you should read the discussion of
material risks of investing in our common stock in "Risk factors" beginning on
page 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
Per share Total
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Public offering price $ $
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Underwriting discounts and commissions $ $
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Proceeds to Aderis $ $
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The underwriters may also purchase up to 825,000 additional shares of our
common stock from us at the public offering price, less the underwriting
discounts, to cover over-allotments, if any, within
30 days from the date of this prospectus.
The underwriters are offering the common stock as set forth under
"Underwriting." Delivery of the shares will be made on or about
, 2002.
UBS Warburg CIBC World Markets
RBC Capital Markets
Gerard Klauer Mattison
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Through and including , 2002 (the 25/th/ day after the
date of this prospectus), all dealers that buy, sell or trade in our common
stock, whether or not participating in this offering, are required to deliver a
prospectus. This prospectus delivery requirement is in addition to the
obligation of dealers to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
TABLE OF CONTENTS
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Prospectus summary..................... 3
The offering........................... 5
Summary financial data................. 6
Risk factors........................... 7
Special note regarding forward-looking
statements........................... 20
Use of proceeds........................ 21
Dividend policy........................ 21
Capitalization......................... 22
Dilution............................... 23
Selected financial data................ 25
Management's discussion and analysis of
financial condition and results
of operations........................ 26
Business............................... 33
Scientific advisory board.............. 51
Management............................. 52
Related party transactions............. 64
Principal stockholders................. 66
Description of capital stock........... 69
Shares eligible for future sale........ 72
Underwriting........................... 74
Legal matters.......................... 76
Experts................................ 76
Change in independent auditors......... 76
Where you can find more information.... 76
About this prospectus.................. 77
Index to financial statements.......... F-0
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Prospectus summary
This summary highlights information contained elsewhere in this prospectus. You
should read the entire prospectus carefully, especially the risks of investing
in our common stock, which we discuss under "Risk factors" and our consolidated
financial statements and related notes.
OVERVIEW
We are a biopharmaceutical company engaged in developing small molecule drugs
to treat central nervous system, cardiovascular and renal disorders. We
currently have four product candidates being investigated for five potential
indications in development, with one in Phase III clinical trials, three in
Phase II clinical trials and one that recently concluded its first Phase I
clinical trial. We have entered into collaboration agreements with Schwarz
Pharma AG, King Pharmaceuticals Research and Development, Inc. (King), a
subsidiary of King Pharmaceuticals, Inc. and Fujisawa Healthcare, Inc. We focus
on small molecule drug candidates that act selectively to either block
(antagonists) or increase (agonists) the activity of certain proteins, such as
adenosine or dopamine, to produce the desired therapeutic effect while
minimizing side effects. Small molecules generally offer the dosing flexibility
required for patients to be able to easily take the drug as prescribed
(commonly referred to as patient compliance), have a broader array of dosage
forms, lend themselves to easier formulation, have greater potential for
absorption and utilization by the body and are more efficiently manufactured
than large molecule therapies, such as proteins.
OUR PRODUCT CANDIDATES
We currently have four product candidates being investigated for five potential
indications.
... Our most advanced product candidate, Rotigotine-CDS, a dopamine agonist, is
formulated as a transdermal patch (which allows delivery of the drug
through the skin) for first line treatment of early stage and combination
therapy for late stage Parkinson's disease, an age-related,
neurodegenerative disorder. Parkinson's disease affects one million
patients in the United States. Current therapy is limited by erratic
patterns of drug release into the blood stream, causing patients to
experience often debilitating fluctuations in symptoms. Rotigotine-CDS is a
transdermal patch that is designed to provide a constant blood level of the
drug over a 24-hour period, thereby minimizing daily symptoms and side
effects associated with fluctuating levels of drug in the blood. Schwarz
Pharma has an exclusive, worldwide license to develop and commercialize
Rotigotine-CDS. Rotigotine-CDS is currently in Phase III clinical trials in
the United States and Europe.
... Rotigotine-CDS has also been formulated as a reduced-dose patch for the
treatment of Restless Legs Syndrome, a common, under-diagnosed neurologic
movement disorder, which studies indicate may affect up to 15% of the
population. Patients with this disorder have an almost irresistible urge to
move their legs because of disagreeable sensations associated with this
syndrome. There are currently no medications approved for the treatment of
Restless Legs Syndrome in the United States. Schwarz Pharma began
development of Rotigotine-CDS reduced dose with a pilot, Phase II safety
and efficacy clinical trial in late 2001 in Europe. If this initial
European trial has a successful outcome, we have been informed by Schwarz
that it plans to file an investigational new drug application with the FDA
and commence similar Phase II testing in the United States.
... MRE-470 is an adenosine agonist being developed as an alternative to
exercise stress testing, which allows a physician to monitor heart activity
during physical activity, in combination with coronary artery flow imaging
for the diagnosis of coronary artery disease. Because many patients cannot
perform the level of exercise necessary for an adequate study, many
patients use a chemical, or pharmacologic, stress agent in lieu of
exercise. We estimate that, in 1999, approximately 2.6 million coronary
blood flow imaging procedures were performed in the United States using a
pharmacologic
3
stress agent. Currently, the leading pharmacologic stress agent for imaging
studies is adenosine. MRE-470 is designed to minimize the side effects of
adenosine and can be delivered as a bolus, or syringe, injection rather
than the continuous infusion required with adenosine. King has the
exclusive, worldwide license to develop and commercialize MRE-470. MRE-470
is currently in Phase II clinical trials in the United States.
... DTI-0009 is an adenosine agonist designed to control heart rate in atrial
fibrillation by slowing conduction through the atrioventricular node.
Atrial fibrillation is the most common of the cardiac arrhythmias, or
abnormal heart rhythms, and currently affects approximately two million
patients in the United States. DTI-0009 is being developed as both an oral
formulation for chronic and an intravenous formulation for acute therapy.
Fujisawa Healthcare has the exclusive, clinical development and
commercialization rights, in the United States and Canada, for the
intravenous formulation of DTI-0009. The intravenous formulation of
DTI-0009 is in Phase II clinical trials in the United States.
... DTI-0017 is an adenosine antagonist designed to treat edema, or fluid
build-up, typically associated with congestive heart failure. Approximately
4.7 million people in the United States currently suffer from congestive
heart failure. DTI-0017 is being developed as both an oral formulation for
chronic and an intravenous formulation for acute therapy. We intend to
design a study to investigate whether adenosine antagonists such as
DTI-0017 act at a different site in the kidney from most diuretics, affect
potassium balance, prevent the decreased renal function experienced with
some other diuretics or prevent the development of resistance to the
diuretic effect occurring with some other agents. We have concluded our
first Phase I clinical trial of DTI-0017 and are currently reformulating
the product candidate and conducting additional animal testing.
We believe there may be additional therapeutic indications for our current
portfolio of product candidates. None of our product candidates have been
approved by the FDA or similar European regulators for commercialization. We
have a history of operating losses and, as of December 31, 2001, we had an
accumulated deficit of approximately $24.6 million. In addition, we are
dependent upon third parties, especially our collaborators, for the successful
commercialization of our clinical product candidates.
OUR BUSINESS STRATEGY
We intend to develop and commercialize adenosine-based and other therapies for
cardiovascular, central nervous system and renal diseases. To achieve this
objective, we intend to concentrate on the following key strategies:
... focus our internal research and pre-clinical development on predominantly
cardiovascular, central nervous system and renal disease pathways;
... maintain and expand our in-house expertise and capabilities in synthetic
chemistry, pharmacology and key elements of clinical development while
outsourcing routine drug development activities;
... wherever economically feasible, retain development responsibility and
marketing rights to our drug candidates through late stage clinical
development and/or regulatory approval to maximize the value of each of our
drug candidates; and
... in-license clinical stage drug candidates and acquire companies with
complementary product pipelines and technologies to supplement our internal
research and development efforts.
We are at an early stage of development and face significant challenges in
achieving our business objectives, including successful completion of clinical
trials, obtaining regulatory approvals, market acceptance of our products and
competition from competitors with greater resources.
4
The offering
Common stock being offered.......................... 5,500,000 shares
Common stock to be outstanding after the offering... 20,621,938 shares
Use of proceeds..................................... Research and development activities, including
clinical trials, acquisition of new technologies
or products, working capital and other general
corporate purposes. See "Use of proceeds."
Proposed Nasdaq National Market symbol.............. ADPX
The number of shares of common stock outstanding after this offering is based
on shares outstanding on April 25, 2002 and excludes:
... 1,916,597 shares of common stock issuable upon exercise of options
outstanding under our 1995 stock option plan and our 2001 incentive award
plan with a weighted average price of $0.56 per share;
... 225,060 shares of common stock issuable upon exercise of warrants with a
weighted average price of $3.64 per share; and
... up to 406,387 additional shares of common stock reserved for issuance under
our 1995 stock option plan and 2001 incentive award plan.
Unless otherwise indicated, all information in this prospectus has been
adjusted to reflect:
... a 1.65-for-1 stock split, in the form of a stock dividend, completed in
March 2002;
... the conversion of all outstanding shares of our preferred stock into common
stock upon the closing of this offering;
... the filing of our amended and restated certificate of incorporation
immediately following the closing of this offering;
... no exercise by the underwriters of their overallotment option; and
... the issuance of 366,851 shares of common stock to the former shareholders
of Renalogics, Inc.
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We were incorporated as Discovery Therapeutics, Inc. in Delaware in 1994 and
changed our name to Aderis Pharmaceuticals, Inc. in January 2002. Our principal
executive offices are located at 85 Main Street, Hopkinton, Massachusetts
01748, and our telephone number is (508) 497-2300. References in this
prospectus to "Aderis," "we," "our" and "us" refer to Aderis Pharmaceuticals,
Inc. Our web site is located at www.aderis.com. Information contained in our
web site is not incorporated by reference into and does not form any part of
this prospectus.
5
Summary financial data
The following table sets forth certain of our summary financial data. The data
presented below have been derived from our audited and unaudited financial
statements included elsewhere in this prospectus.
You should read this information together with the financial statements and the
notes to those statements appearing elsewhere in this prospectus and the
information under "Selected financial data" and "Management's discussion and
analysis of financial condition and results of operations."
Year ended
December 31,
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Statements of operations data 1999 2000 2001
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(In thousands, except per share data)
Revenues................................................................ $6,851 $ 2,967 $ 5,829
Costs and expenses...................................................... 5,800 8,160 17,800
Operating income (loss)................................................. 1,051 (5,193) (11,971)
Net income (loss)....................................................... 1,073 (4,943) (11,081)
Net income (loss) per common share, basic............................... 0.47 (1.87) (3.97)
Net income (loss) per common share, diluted............................. 0.20 (1.87) (3.97)
Shares used in computing net income (loss) per common share, basic...... 2,288 2,638 2,790
Shares used in computing net income (loss) per share, diluted........... 5,369 2,638 2,790
Pro forma net loss per share, basic and diluted (unaudited)(1).......... (0.93)
Shares used in computing pro forma net loss per share, basic and diluted
(unaudited)(1)......................................................... 11,921
As of December 31,
2001
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Pro forma
Balance sheet data Actual as adjusted(2)
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(In thousands) (unaudited)
Cash and cash equivalents................... $ 42,821 $107,745
Working capital............................. 40,828 105,752
Total assets................................ 43,462 108,263
Convertible preferred stock................. 56,215 --
Deferred stock compensation................. 5,636 5,636
Total stockholders' equity (deficit)........ $(14,899) $106,118
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(1) Pro forma net loss per share is computed using the weighted average number
of shares of common stock outstanding, adjusted to include the pro forma
effects of the conversion of preferred stock to common stock as if such
conversion had occurred on the original date of issuance along with the
inclusion of 366,851 shares of common stock to be issued to the former
shareholders of Renalogics upon closing of the proposed initial public
offering.
(2) The pro forma as adjusted balance sheet data give effect to the conversion
of all outstanding convertible preferred stock into 10,941,993 shares of
common stock and the issuance of 366,851 shares of common stock issuable to
the former shareholders of Renalogics and a $4.8 million increase in our
deficit accumulated during development stage resulting from a charge to
operations for the value of the shares issued to the former shareholders of
Renalogics. The pro forma as adjusted balance sheet data also reflect the
sale of 5,500,000 shares of common stock at an assumed initial public
offering price of $13.00 per share, after deducting the underwriter
discounts, commissions and estimated offering expenses.
6
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Risk factors
Investing in our common stock involves a high degree of risk. You should
carefully consider the risks described below with all of the other information
included in this prospectus before making an investment decision. If any of the
possible adverse events described below actually occurs, our business, results
of operations or financial condition would likely suffer. In such an event, the
market price of our common stock could decline and you could lose all or part
of your investment.
RISKS RELATED TO OUR BUSINESS
We have a history of operating losses and accumulated deficit, and we may not
achieve or maintain profitability in the future.
Since we were founded in 1994, we have engaged primarily in organizational and
research and development efforts. We have incurred operating losses in all but
two years since our inception, and we may never achieve sustained
profitability. The net loss for the fiscal years ended December 31, 2000 was
$4.9 million compared to net income of $1.1 million for the fiscal year ended
December 31, 1999. The net loss for the year ended December 31, 2001 was $11.1
million. As of December 31, 2001, we had an accumulated deficit of $24.6
million. Our losses have resulted principally from costs incurred in connection
with our research and development activities and from general and
administrative costs associated with our operations.
We have not commercially launched any products to date and do not expect to do
so in the near future. Our ability to generate revenue from product sales or to
achieve profitability is dependent on our ability, alone or with our corporate
collaborators, to successfully and timely design, develop, manufacture and
commercialize our product candidates. Our revenues to date have been generated
principally from license fees and milestone payments from our drug compounds.
We expect that our costs will continue to exceed our revenues on an annual
basis for the foreseeable future. We may never achieve profitability. Even if
we do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis.
Our operating results fluctuate significantly, and any failure to meet
financial expectations may disappoint securities analysts or investors and
result in a decline in our stock price, causing investor losses.
Our operating results have fluctuated in the past and are likely to do so in
the future. These fluctuations could cause our stock price to decline. Some of
the factors that could cause our operating results to fluctuate include:
... expiration or termination of agreements with collaborators, which may not
be renewed or replaced;
... general and industry-specific economic conditions, which may affect our
collaborators' and our research and development expenditures on our
out-licensed drug candidates;
... inability of our collaborators and us to complete non-clinical and clinical
studies in a timely manner that results in a failure or delay in receiving
the required regulatory approvals to commercialize our drug candidates;
... the timing and willingness of our collaborators to invest the resources
necessary to commercialize our drug candidates;
... the timing of receipts of milestone payments from our collaborators; and
... the timing of regulatory approvals, if any.
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7
Risk factors
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If our revenues decline in a quarter, whether due to a delay in recognizing
expected revenues or otherwise, our earnings will decline because many of our
expenses are relatively fixed. In particular, our research and development and
general and administrative expenses are not affected directly by variations in
revenue.
Due to fluctuations in our revenues and operating expenses, we believe that
period-to-period comparisons of our results of operations are not a good
indication of our future performance. It is possible that in some future
quarter or quarters, our operating results will be below the expectations of
securities analysts or investors. In that case, our stock price could fluctuate
significantly or decline.
We are at an early stage of development and we do not have, and may never
develop, any commercial drugs or other products that generate revenues.
We are a biopharmaceutical company at an early stage of development, and we do
not have any commercial products. Our drug candidates will require significant
additional development, clinical trials, regulatory clearances and additional
investment before they can be commercialized. Our product development efforts
may not lead to commercial drugs, either because the drug candidates fail to be
safe and effective in clinical trials or because we have inadequate financial
or other resources to pursue our drug candidates through the clinical trial
process. We do not expect to be able to market any of our existing drug
candidates for a number of years, if at all. If we are unable to develop any
commercial drugs, or if such development is delayed, we will be unable to
generate product revenues.
The regulatory approval process is expensive, time consuming, uncertain and may
prevent us from obtaining required approvals for the commercialization of some
of our drug candidates.
The research, testing, manufacturing and marketing of drug candidates are
subject to extensive regulation by numerous regulatory authorities in the
United States and other countries. In addition, countries other than the United
States have complex and technical regulatory requirements that differ from
country to country. Failure to comply with the regulatory requirements of the
Food and Drug Administration, or FDA, and other applicable foreign and US
regulatory requirements may subject a company to administrative or judicially
imposed sanctions. These include:
... warning letters;
... civil penalties;
... criminal penalties;
... injunctions;
... product seizure or detention;
... product recalls;
... total or partial suspension of production; and
... FDA refusal to approve pending new drug applications, or NDAs, or
supplements to approved NDAs.
Our drug candidates are in the early stages of development and have not
received required regulatory clearance from the FDA or any other foreign or US
regulatory body to be commercially marketed and sold. The regulatory clearance
process typically takes many years and is extremely expensive. Despite the time
and expense exerted, regulatory clearance is never guaranteed.
The number of pre-clinical studies and clinical trials that will be required
for FDA approval varies depending on the drug candidate, the disease or
condition that the drug candidate is in development for and regulations
applicable to any particular drug candidate.
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8
Risk factors
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The FDA can delay, limit or deny approval of a drug for many reasons, including:
... a drug candidate may not be safe or effective;
... FDA officials may interpret data from pre-clinical testing and clinical
trials in different ways than we interpret it;
... the FDA might not approve our manufacturing processes or facilities, or the
processes or facilities of our collaborators; or
... the FDA may change its approval policies or adopt new regulations.
Even if we receive FDA and other regulatory approvals, our drug candidates may
later exhibit adverse effects that limit or prevent their widespread use or
that force us to withdraw products derived from those drug candidates from the
market. If we fail to obtain regulatory clearance for our current or future
drug candidates, we will be unable to market and sell any products and
therefore may never be able to generate product revenues or be profitable.
If we receive regulatory approval, we will also be subject to ongoing FDA
obligations and continued regulatory review, such as continued safety reporting
requirements, and we may also be subject to additional FDA post-marketing
obligations.
Any regulatory approvals that we receive for our drug candidates may also be
subject to limitations on the indicated uses for which the drug candidate may
be marketed or contain requirements for potentially costly post-marketing
follow-up studies. In addition, we or our third-party manufacturers will be
required to adhere to federal regulations setting forth current good
manufacturing practices, known as cGMP. The regulations require that our drug
candidates are manufactured and our records maintained in a prescribed manner
with respect to manufacturing, testing and quality control activities.
Furthermore, we or our third party manufacturers must pass a pre-approval
inspection of manufacturing facilities by the FDA and foreign authorities
before obtaining marketing approval, and will be subject to periodic inspection
by the FDA and corresponding foreign regulatory authorities under reciprocal
agreements with the FDA. Such inspections may result in compliance issues that
could prevent or delay marketing approval, or require the expenditure of money
or other resources to correct.
We are dependent on the successful outcome of the clinical trials for our most
advanced drug candidates, Rotigotine-CDS, MRE-470 and DTI-0009.
Our business prospects will depend on our ability and the ability of our
collaborators to complete patient enrollment in clinical trials, to obtain
satisfactory results, to obtain required regulatory approvals and to
successfully commercialize Rotigotine-CDS, MRE-470 and DTI-0009. Many factors
affect patient enrollment, including the size of the patient population, the
proximity of patients to clinical sites and the eligibility criteria for the
trial. Delays in patient enrollment in the trials may result in increased
costs, program delays, or both, which could slow down our product development
and approval process. If clinical trials for these drug candidates are not
completed or conducted as planned, or if either or both of these drug
candidates do not prove to be safe and effective or do not receive required
regulatory approvals, the commercialization of these drug candidates would be
delayed or prevented and, accordingly, our ability to generate revenue and
achieve profitability would be materially harmed which would likely cause a
sharp drop in our stock price.
Our pre-clinical and initial clinical testing results may not be predictive of
future trial results. If subsequent trial results are negative, we may be
forced to stop developing drug candidates important to our future.
The results of pre-clinical studies and initial clinical trials of our drug
candidates do not necessarily predict the results of later-stage clinical
trials. Drug candidates in later stages of clinical trials may fail to
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9
Risk factors
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show the desired safety and efficacy traits despite having progressed through
initial clinical testing. The data collected from clinical trials of our drug
candidates may not be sufficient to support FDA or other regulatory approval.
Administering any drug candidates we develop to humans may produce undesirable
side effects. These side effects could interrupt, delay or halt clinical trials
of our drug candidates and could result in the FDA or other regulatory
authorities denying approval of our drug candidates for any or all targeted
indications. For example, in our first Phase I clinical trial for DTI-0017, one
of the patients in the trial experienced a seizure. This patient has filed a
complaint against us seeking monetary relief. We are in the process of
evaluating any possible role of DTI-0017 in this adverse event. See "Legal
proceedings." The FDA, other regulatory authorities or we may suspend or
terminate clinical trials at any time. None of our drug candidates may be safe
for human use.
If we fail to maintain our existing collaborative relationships, or if our
collaborators do not devote adequate resources to the development and
commercialization of our licensed drug candidates, we may not be able to
achieve profitability.
We have granted exclusive development, commercialization and marketing rights
to Schwarz Pharma for the development of Rotigotine-CDS, to King for MRE-470
and to Fujisawa Healthcare for the intravenous formulation of DTI-0009 in the
United States and Canada. These collaborators are responsible for most, and in
some cases all, aspects of these programs, including conducting research and
development, clinical trials, the regulatory approval process and
commercialization. Other than attendance at periodic joint steering committee
meetings, we have no ongoing obligations under our collaborative arrangements.
See "Business--Corporate Collaborations" for details on these collaborations.
We have limited control over the amount and timing of resources that our
collaborators dedicate to the development of our licensed drug candidates. Our
ability to generate royalties from our collaborators depends on our
collaborators' abilities to establish the safety and efficacy of our drug
candidates, obtain regulatory approvals and achieve market acceptance of
products developed from our drug candidates. If Schwarz Pharma, King or
Fujisawa Healthcare do not perform under our collaborative agreements, our
potential for revenue from the related drug candidates will be dramatically
reduced. Schwarz Pharma, King and Fujisawa Healthcare may terminate our
collaborative agreements on short notice and at their sole discretion.
Collaborative agreements generally pose the following risks:
... collaborators may not pursue further development and commercialization of
compounds resulting from collaborations or may elect not to continue or
renew research and development programs;
... collaborators may delay clinical trials, underfund a clinical trial
program, stop a clinical trial or abandon a drug candidate, repeat or
conduct new clinical trials or require a new formulation of a drug
candidate for clinical testing;
... collaborators could independently develop, or develop with third parties,
products that could compete with our future products;
... the terms of our agreements with our current or future collaborators may
not be favorable to us;
... a collaborator with marketing and distribution rights to one or more
products may not commit enough resources to the marketing and distribution
of products developed from our drug candidates, limiting our potential
revenues from the commercialization of a product;
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10
Risk factors
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... disputes may arise delaying or terminating the research, development or
commercialization of our drug candidates, or result in significant
litigation or arbitration; and
... collaborations may be terminated and, if terminated, we would experience
increased capital requirements if we elected to pursue further development
of the drug candidate.
In addition, there have been a significant number of recent business
combinations among large pharmaceutical companies that have resulted in a
reduced number of potential future collaborators. If business combinations
involving our collaborators were to occur, the effect could be to diminish,
terminate or cause delays in one or more of our product development programs.
If we do not find additional collaborators for our drug candidates, we may have
to reduce or delay our rate of product development and/or increase our
expenditures.
Our strategy for developing, manufacturing and commercializing our drug
candidates includes entering into various relationships with pharmaceutical
companies to advance our programs and reduce our expenditures on each program.
We may not be able to negotiate additional collaborations on acceptable terms,
if at all. If we are not able to establish additional collaborative
arrangements, we may have to reduce or delay further development of some of our
programs and/or increase our expenditures and undertake the development
activities at our own expense. If we elect to increase our capital expenditures
to fund development programs on our own, we will need to obtain additional
capital, which may not be available on acceptable terms or at all.
If physicians and patients do not accept our products, we may be unable to
generate significant revenue, if any.
Even if our products obtain regulatory approval, our products, if any, may not
gain market acceptance among physicians, patients and the medical community
which would limit our ability to generate revenue and would adversely affect
our results of operations. The degree of market acceptance of any product
depends on a number of factors, including:
... demonstration of clinical efficacy and safety;
... cost effectiveness;
... convenience and ease of administration;
... potential advantages over alternative treatment methods; and
... marketing and distribution support.
Physicians will not recommend our products until clinical data or other factors
demonstrate the safety and efficacy of our products as compared to other
treatments. In practice, competitors may be more effective in marketing their
drugs. Even if the clinical safety and efficacy of products developed from our
drug candidates is established, physicians may elect not to recommend these
products for a variety of factors, including the reimbursement policies of
government and third party payors.
The reimbursement status of newly approved healthcare drugs is uncertain and
failure to obtain adequate reimbursement could limit our ability to market any
products we may develop and decrease our ability to generate revenue.
There is significant uncertainty related to the reimbursement of newly approved
pharmaceutical products. Our ability and the ability of our collaborators to
commercialize products developed from our drug candidates in both domestic and
foreign markets will depend in part on the reimbursements, if any, obtained
from third-party payors such as government health administration authorities,
private health
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Risk factors
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insurers, managed care programs and other organizations. Third-party payors are
increasingly attempting to contain healthcare costs by limiting both coverage
and the level of reimbursement of new pharmaceutical products. Cost control
initiatives could decrease the price that we, or our collaborators, would
receive for products developed from our drug candidates and affect our ability
to commercialize any products we may develop. If third parties fail to provide
reimbursement for any drugs, consumers and doctors may not choose to use
products developed from our drug candidates, and we may not realize an
acceptable return on our investment in product development.
We may be unable to raise additional capital or generate the significant
revenues necessary to expand our operations and invest in new products.
It might be necessary for us to raise additional capital over the next few
years to continue our research and development efforts and to commercialize our
products. We believe that the proceeds from this offering and projected
revenues from collaborations should be sufficient to fund our anticipated
levels of operations for the next 24 months. However, our business or
operations may change in a manner that would consume available resources more
rapidly than anticipated. We may not continue to receive payments under
existing collaborative arrangements and existing or potential future
collaborations may not be adequate to fund our operations. We may need
additional funds sooner than planned to meet operational needs and capital
requirements for product development and commercialization. Additional funds
may not be available when needed or on terms acceptable to us. If adequate
funds are not available, we may have to reduce substantially or eliminate
expenditures for the development and production of certain of our proposed
products or obtain funds through arrangements with our corporate collaborators
that require us to relinquish rights to certain of our technologies or
products. Either of these alternatives could have a material adverse effect on
our business, operating results, financial condition and future growth
prospects.
Our competitors may develop and market drugs that are less expensive, more
effective, or safer, which may diminish or eliminate the commercial success of
any products we may commercialize.
The biopharmaceutical market is highly competitive. We are aware of other
companies that are developing products that may be competitive to ours. We
anticipate that we will face increased competition in the future as new
companies enter the market and advanced technologies emerge. Our competitors
may:
... adapt more quickly to new technologies and scientific advances;
... initiate or withstand substantial price competition more successfully than
we can;
... have greater success in recruiting skilled scientific workers from the
limited pool of available talent;
... more effectively negotiate third-party licensing and collaboration
arrangements; and
... take advantage of acquisition or other opportunities more readily than we
can.
Almost all of the larger biopharmaceutical companies have developed, or are
attempting to develop, products that will compete with products that may be
developed from our drug candidates.
It is possible that our competitors will develop and market products that are
less expensive and more effective than our future products or that will render
our products obsolete. It is also possible that our competitors will
commercialize competing products before any products developed from our drug
candidates are marketed. We expect that the competition from other
biopharmaceutical companies, pharmaceutical companies, universities and public
and private research institutions will increase. Many of our competitors have
substantially greater financial, technical, research and other resources than
we do. We may not have the financial resources, technical expertise or
marketing, distribution or support capabilities to compete successfully. See
"Business--Competition" for additional information.
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Risk factors
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If we are unable to effectively protect our intellectual property, third
parties may use our technology, which could impair our ability to compete in
our markets.
Our continued success will depend significantly on our ability to obtain and
maintain meaningful patent protection for our drug candidates throughout the
world. We rely on patents to protect a significant part of our intellectual
property and to enhance our competitive position. However, our presently
pending and future patent applications may not issue as patents, and any patent
issued to us may be challenged, invalidated, held unenforceable or
circumvented. Furthermore, the claims in patents which have been issued to us,
or which may be issued to us in the future, may not be sufficiently broad to
prevent third parties from producing competing products. In addition, the laws
of various foreign countries in which we compete may not protect our
intellectual property to the same extent as do the laws of the United States.
If we fail to obtain adequate patent protection for our proprietary technology,
our competitors may produce competing products based on our technology, which
would substantially impair our ability to compete.
In addition to patent protection, we also rely on protection of trade secrets,
know-how and confidential and proprietary information. To maintain the
confidentiality of trade secrets and proprietary information, we generally seek
to enter into confidentiality agreements with our employees, consultants and
collaborators upon the commencement of a relationship with us. However, we may
not obtain these agreements in all circumstances. In the event of unauthorized
use or disclosure of our trade secrets or proprietary information, these
agreements, even if obtained, may not provide meaningful protection for our
trade secrets or other confidential information. In addition, adequate remedies
may not exist in the event of unauthorized use or disclosure of this
information. The loss or exposure of our trade secrets and other proprietary
information would impair our competitive advantages and could have a material
adverse effect on our operating results, financial condition and future growth
prospects. Furthermore, others may have developed, or may develop in the
future, substantially similar or superior know-how and technology.
We may be involved in lawsuits to protect or enforce our patents which could be
expensive and time consuming.
In order to protect or enforce our patent rights, we may initiate patent
litigation against third parties or we may be similarly sued by others. We may
also become subject to interference proceedings conducted in the patent and
trademark offices of various countries to determine the priority of inventions.
The defense and prosecution, if necessary, of intellectual property suits,
interference proceedings and related legal and administrative proceedings is
costly and diverts our technical and management personnel from their normal
responsibilities. We may not prevail in any of these suits. An adverse
determination of any litigation or defense proceedings could put our patents at
risk of being invalidated or interpreted narrowly and could put our patent
applications at risk of not being issued.
Furthermore, because of the substantial amount of discovery required in
connection with intellectual property litigation, there is a risk that some of
our confidential information could be compromised by disclosure during this
type of litigation. In addition, during the course of this kind of litigation,
there could be public announcements of the results of hearings, motions or
other interim proceedings or developments. If securities analysts or investors
perceive these results to be negative, it could have a substantial adverse
effect on the trading price of our common stock.
Our success depends on our ability to operate without infringing or
misappropriating the proprietary rights of others.
Our success depends on avoiding the infringement of other parties' patents and
proprietary rights as well as avoiding the breach of any licenses relating to
our technologies and products. Given that there may be
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Risk factors
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patents of which we are unaware, particularly in the United States where patent
applications are confidential, avoiding patent infringement may be difficult.
Various third parties hold patents which may relate to our technology, and we
may be found to infringe these or other patents or proprietary rights of third
parties, either with products we are currently developing or with new products
which we may develop in the future. If a third party holding rights under a
patent successfully asserts an infringement claim with respect to any of our
current or future products or drug candidates, we may be prevented from
manufacturing or marketing our infringing product in the country or countries
covered by the patent we infringe, unless we can obtain a license from the
patent holder. We may not be able to obtain the license on commercially
reasonable terms, if at all, especially if the patent holder is a competitor.
In addition, even if we can obtain the license, it may be non-exclusive, which
will permit others to use the same technology licensed to us. We also may be
required to pay substantial damages to the patent holder in the event of an
infringement. Under some circumstances in the United States, these damages
could be triple the actual damages the patent holder incurs. If we have
supplied infringing products to third parties for marketing or licensed third
parties to manufacture, use or market infringing products, we may be obligated
to indemnify these third parties for any damages they may be required to pay to
the patent holder and for any losses the third parties may sustain themselves
as the result of lost sales or damages paid to the patent holder. Any
successful infringement action brought against us may also adversely affect
marketing of the infringing product in other markets not covered by the
infringement action, as well as our marketing of other products based on
similar technology. Furthermore, we may suffer adverse consequences from a
successful infringement action against us even if the action is subsequently
reversed on appeal, nullified through another action or resolved by settlement
with the patent holder. The damages or other remedies awarded, if any, may be
significant. As a result, any infringement action against us would likely delay
the regulatory approval process, harm our competitive position, be very costly
and require significant time and attention of our key management and technical
personnel.
We depend on our key personnel, the loss of any of whom would impair our
product development and commercialization efforts.
Our performance is substantially dependent on the performance of our senior
management and key scientific and technical personnel. We only carry key person
life insurance on Peter G. Savas, our chief executive officer and president and
Donald A. McAfee, our chief technical officer. The loss of the services of any
member of our senior management, scientific or technical staff may
significantly delay or prevent the achievement of product development and other
business objectives and could have a material adverse effect on our business,
operating results and financial condition. We also rely on consultants and
advisors to assist us in formulating our research and development strategy. All
of our consultants and advisors are either self-employed or employed by other
organizations, and they may have other commitments such as consulting or
advisory contracts with other organizations that may affect their ability to
contribute to us. Our future success will also depend on our ability to
identify, recruit and retain additional qualified scientific, technical and
managerial personnel. There is currently a shortage of skilled executives and
intense competition for such personnel in the areas of our activities, and we
may be unable to continue to attract and retain personnel with the advanced
qualifications necessary for the development of our business. The inability to
attract and retain the necessary scientific, technical and managerial personnel
could limit or delay our product development efforts which would adversely
affect the growth of our business.
We have no manufacturing capacity and depend on third parties to manufacture
our products.
We do not currently operate manufacturing facilities for clinical or commercial
production of our drug candidates under development. We have no experience in
manufacturing, and we currently lack resources and the capability to
manufacture any of our drug candidates on a clinical or commercial scale. As a
result, we are dependent on corporate collaborators, licensees or other third
parties for the
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Risk factors
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manufacturing of clinical and commercial scale quantities of our drug
candidates. These third parties may not be successful in manufacturing our drug
candidates on a commercial scale. In addition, in the event of a natural
disaster, equipment failure, power failure, strike or other difficulty, we may
be unable to replace our third party manufacturers in a timely manner.
We have no marketing or sales staff, and if we are unable to enter into
collaborations with marketing partners or if we are unable to develop our own
sales and marketing capability, we may not be successful in commercializing our
products.
We currently have no sales, marketing or distribution capability. As a result,
we will depend on collaborations with third parties which have established
distribution systems and direct sales forces. To the extent that we enter into
co-promotion or other licensing arrangements, our revenues will depend upon the
efforts of third parties, over which we may have little or no control.
If we are unable to reach and maintain agreement with one or more
pharmaceutical companies or collaborators, we may be required to market our
products directly. We may elect to establish our own specialized sales force
and marketing organization to market our products to physicians. In order to do
this, we would have to develop a marketing and sales force with technical
expertise and with supporting distribution capability. Developing a marketing
and sales force is expensive and time consuming and could delay a product
launch. We may not be able to develop this capacity, which would make us unable
to commercialize our products.
We may be subject to product liability claims and may not be able to obtain
adequate insurance.
Once we have commercially launched our products, we will face exposure to
product liability claims. We intend to secure limited product liability
insurance coverage, but may not be able to obtain such insurance on acceptable
terms with adequate coverage, or at reasonable costs. There is also a risk that
third parties that we have agreed to indemnify could incur liability.
Since we conduct clinical trials on humans, we face the risk that the use of
our drug candidates will result in adverse effects. These risks will exist even
for products developed from our drug candidates that may be cleared for
commercial sale. We cannot predict all of the possible harms or side effects
that may result and, therefore, the amount of insurance coverage we currently
hold may not be adequate to protect us from all liabilities. We may not have
sufficient resources to pay for any liabilities resulting from a claim beyond
the limit of, or excluded from, our insurance coverage.
Our research and development operations involve hazardous materials, which
could subject us to significant liability.
Our research and development activities involve the controlled use of hazardous
materials, including hazardous chemicals and radioactive materials.
Accordingly, we are subject to federal, state and local laws governing the use,
handling and disposal of these materials. We may incur significant costs to
comply with additional environmental and health and safety regulations in the
future. Although we believe that our safety procedures for handling and
disposing of hazardous materials comply with regulatory requirements, we cannot
eliminate the risk of accidental contamination or injury from these materials.
In the event of an accident or environmental discharge, we may be held liable
for any resulting damages, which may exceed our financial resources.
We may encounter difficulties in managing our growth, and these difficulties
could disrupt our operations.
We expect to have significant growth in the number of our employees and the
scope of our operations. Recent growth has placed a significant strain on our
managerial, operational and financial resources. To manage our anticipated
future growth, we must continue to implement and improve our managerial,
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15
Risk factors
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operational and financial systems, to expand our facilities and to continue to
recruit and train additional qualified personnel. Due to our limited resources,
we may not be able to effectively manage the expansion of our operations or
recruit and train additional qualified personnel. Any inability to manage
growth could delay the execution of our business plans or disrupt our
operations.
RISKS RELATED TO THIS OFFERING
If the ownership of our common stock continues to be highly concentrated, it
may prevent you and other stockholders from influencing significant corporate
decisions and may result in conflicts of interest that could cause our stock
price to decline.
Following the completion of this offering, our executive officers, directors
and their affiliates will beneficially own or control approximately 24.1
percent of the outstanding shares of our common stock (after giving effect to
the conversion of all outstanding preferred stock and the exercise of all
outstanding vested and unvested options and warrants). Accordingly, our current
executive officers, directors and their affiliates will have substantial
control over the outcome of corporate actions requiring stockholder approval,
including the election of directors, any merger, consolidation or sale of all
or substantially all of our assets or any other significant corporate
transactions. These stockholders may also delay or prevent a change of control
of us, even if such a change of control would benefit our other stockholders.
The significant concentration of stock ownership may adversely affect the
trading price of our common stock due to investors' perception that conflicts
of interest may exist or arise. See "Management" and "Principal stockholders"
for details on our capital stock ownership.
Management may invest or spend the proceeds of this offering in ways in which
you may not agree and in ways that may not yield a return to our stockholders.
Management will retain broad discretion over the use of proceeds from this
offering. Stockholders may not deem such uses desirable, and our use of the
proceeds may not yield a significant return or any return at all for our
stockholders. Management intends to use a majority of the proceeds from this
offering for research and development, working capital and other general
corporate purposes, and potentially to finance future acquisitions. Because of
the number and variability of factors that determine our use of the proceeds
from this offering, our intended uses for the proceeds of this offering may
vary substantially from our currently planned uses. Pending our use of the
proceeds from this offering, we intend to invest the net proceeds from this
offering in interest-bearing securities of investment grade.
If we engage in any acquisition, we will incur a variety of costs, and we may
never realize the anticipated benefits of the acquisition.
We currently have no commitments or agreements with respect to any material
acquisitions. However, if appropriate opportunities become available, we may
attempt to acquire businesses, technologies, services or products that we
believe are a strategic fit with our business. The process of integrating an
acquired business, technology or product may result in unforeseen operating
difficulties and expenditures and may require significant management attention
that would otherwise be unavailable for ongoing development of our existing
business. In addition, we may not be able to maintain the levels of operating
efficiency that any acquired company achieved or might have achieved
separately. Successful integration of the companies we acquire will depend upon
our ability to, among other things, eliminate redundancies and excess costs. As
a result of difficulties associated with combining operations, we may not be
able to achieve cost savings and other benefits that we might hope to achieve
with acquisitions. Future acquisitions could result in potentially dilutive
issuances of equity securities, the incurrence of debt and contingent
liabilities or have an undesirable impact on our consolidated financial
statements.
In addition, recent changes in the Financial Accounting Standards Board rules
for merger accounting may affect the cost of making acquisitions or of being
acquired. For example, we would likely have to record
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16
Risk factors
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intangible assets that we would amortize to earnings if we merge with another
company. Such amortization would adversely impact our future operating results.
Further, accounting rule changes that reduce the availability of write-offs of
the value of in-process research and development in connection with an
acquisition could result in the capitalization and amortization of these
amounts which would negatively impact results of operations in future periods.
The market price of our common stock may be highly volatile, and you may not be
able to resell your shares at or above the initial public offering price.
There has not been a public market for our common stock. An active trading
market for our common stock may not develop following this offering. You may
not be able sell your shares quickly or at the market price if trading in our
common stock is not active. The initial public offering price for the shares
will be determined by negotiations between us and representatives of the
underwriters and may not be indicative of prices that will prevail in the
trading market. Please see "Underwriting" for more information regarding our
arrangement with the underwriters and the factors considered in setting the
initial public offering price.
The trading price of our common stock is likely to be highly volatile and could
be subject to wide fluctuations in price in response to various factors, many
of which are beyond our control, including:
... actual or anticipated variations in quarterly operating results;
... announcements of technological innovations by us, our collaborators or our
competitors;
... new products or services introduced or announced by us or our competitors;
... changes in financial estimates by securities analysts;
... conditions or trends in the biotechnology and pharmaceutical industries;
... changes in the market valuations of similar companies;
... announcements by us of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
... additions or departures of our key personnel;
... disputes or other developments relating to proprietary rights, including
patents, litigation matters and our ability to obtain patent protection for
our technologies;
... the loss of a significant collaborator;
... developments concerning our collaborations; and
... sales of our common stock.
In addition, the stock market in general, the Nasdaq National Market and the
market for technology companies in particular, have experienced extreme price
and volume fluctuations that have often been unrelated or disproportionate to
the operating performance of those companies. Further, there has been
particular volatility in the market prices of securities of biotechnology and
life sciences companies. These broad market and industry factors may seriously
harm the market price of our common stock, regardless of our operating
performance. In the past, following periods of volatility in the market,
securities class-action litigation has often been instituted against companies.
Such litigation, if instituted against us, could result in substantial costs
and diversion of management's attention and resources.
New investors in our common stock will experience immediate and substantial
dilution.
The offering price of our common stock will be substantially higher than the
net tangible book value per share of our existing capital stock. As a result,
purchasers of our common stock in this offering will incur
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17
Risk factors
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immediate and substantial dilution of $7.63 in pro forma net tangible book
value per share of common stock, based on an assumed public offering price of
$13.00 per share. Those purchasers will experience additional dilution upon the
exercise of outstanding stock options and warrants. See "Dilution" for a more
detailed discussion of the dilution new investors will incur in this offering.
The large number of shares eligible for sale following this offering may
depress the market price of our common stock.
Sales of a substantial number of shares of our common stock in the public
market following this offering could cause the market price to decline. Such
sales also might make it more difficult for us to sell equity securities in the
future at a time and at a price that we deem appropriate. After this offering,
we will have 20,621,938 shares of common stock outstanding. If there are more
shares of our common stock offered for sale than buyers are willing to
purchase, then the market price of our common stock may decline to a market
price at which buyers are willing to purchase the offered shares and sellers
remain willing to sell the shares. The number of shares of our common stock
available for sale in the public market is limited by restrictions under
federal securities laws and under lock-up agreements that our stockholders have
entered into with the underwriters. Except in limited circumstances, those
lock-up agreements restrict our stockholders from selling, pledging or
otherwise disposing of their shares for a period of 180 days after the date of
this prospectus without the prior written consent of UBS Warburg LLC. However,
UBS Warburg LLC may, in its sole discretion, release all or any portion of the
common stock from the restrictions of the lock-up agreements. The following
table indicates approximately when the shares of our common stock that are not
being sold in the offering but which were outstanding as of the date of this
prospectus will be eligible for sale into the public market:
Days after prospectus date Shares eligible for sale Comment
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Upon Effectiveness.... 0 Shares not locked-up and
saleable under Rule 144.
180 days.............. 14,755,087 Lock-up released: shares
saleable under Rules 144 and
701.
Additionally, of the 2,141,657 shares of our common stock that may be issued
upon the exercise of options and warrants outstanding as of the date of this
prospectus, approximately 1,125,380 shares will be vested and eligible for sale
180 days after the date of this prospectus. For a further description of the
eligibility of shares for sale into the public market following the offering,
see "Shares eligible for future sale."
Anti-takeover provisions in our charter documents and Delaware law may make an
acquisition of us more difficult.
Anti-takeover provisions in our charter documents and Delaware law may make an
acquisition of us more difficult. These provisions:
... allow the authorized number of directors to be changed only by resolution
of the board of directors;
... require that stockholder actions must be effected at a duly called
stockholder meeting and prohibit stockholder action by written consent;
... authorize our board of directors to issue blank check preferred stock
without stockholder approval which, if issued, would increase the number of
outstanding shares of our capital stock;
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Risk factors
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... establish advance notice requirements for nominations to the board of
directors or for proposals that can be acted on at stockholder meetings; and
... limit who may call stockholder meetings.
In addition, because we are incorporated in Delaware, we are governed by the
provisions of Section 203 of the Delaware General Corporation Law which may
prohibit large stockholders from consummating a merger with or acquisition of
us. These provisions may prevent a merger or acquisition that would be
attractive to stockholders and could limit the price that investors would be
willing to pay for our common stock in the future.
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19
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Special note regarding forward-looking statements
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. We have attempted to identify forward-looking statements by
terminology including "anticipates," "believes," "can," "continue," "could,"
"estimates," "expects," "intends," "may," "plans," "potential," "predicts,"
"should" or "will" or the negative of these terms or other comparable
terminology. These statements are only predictions and involve known and
unknown risks, uncertainties and other factors, including the risks outlined
under "Risk factors," that may cause our or our industry's actual results,
levels of activity, performance or achievements to be materially different from
any future results, levels or activity, performance or achievements expressed
or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are not under any duty to update any
of the forward-looking statements after the date of this prospectus to conform
these statements to actual results, unless required by law.
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Use of proceeds
Our net proceeds from the sale of 5,500,000 shares of our common stock in this
offering are estimated to be $64.8 million ($74.8 million if the underwriters'
over-allotment option is exercised in full) assuming an initial public offering
price of $13.00 per share and after deducting the underwriting discounts and
commissions and our estimated offering expenses. We intend to use a significant
portion of the proceeds of the offering primarily to fund our research and
development activities, including clinical trials for product candidates for
which we retain product development and commercialization rights, acquisition
of additional potential in-licensing candidates, working capital and other
general corporate purposes. We may also use a portion of the proceeds for the
acquisition of, or investment in, businesses, technologies, services or
products that complement our business. Currently, we have no present
understandings, commitments or agreements to enter into any potential
acquisitions and investments.
We have not yet finalized the amount of net proceeds we will use specifically
for each of the foregoing purposes. Accordingly, our management will have
significant flexibility in applying the net proceeds of this offering. Until
the funds are used as described above, we intend to invest the proceeds of the
offering in interest-bearing, investment grade securities. See "Risk
factors--Management may invest or spend the proceeds of this offering in ways
in which you may not agree and in ways that may not yield a return to our
stockholders."
Dividend policy
The payment of dividends is within the discretion of our board of directors.
Our ability to pay any future dividends will depend on our earnings, operating
and financial condition and projected capital requirements. We have not
declared or paid any cash dividends on our capital stock since inception. We
currently intend to retain future earnings, if any, to finance the expansion of
our business and do not anticipate paying any cash dividends in the foreseeable
future.
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Capitalization
The following table sets forth our capitalization as of December 31, 2001:
... on an actual basis;
... on a pro forma basis reflecting the conversion of all outstanding shares of
convertible preferred stock into common stock upon the closing of this
offering, the issuance of 366,851 shares of common stock issuable upon the
closing of the offering to the former shareholders of Renalogics, and a
$4.8 million increase in our deficit accumulated during development stage
resulting from a charge to operations for the value (assumed to be $13.00
per share) of the shares to be issued to the former shareholders of
Renalogics; and
... on a pro forma as adjusted basis reflecting the pro forma adjustments and
the sale of the 5,500,000 shares of common stock offered by us at an
assumed initial public offering price of $13.00 per share, less the
underwriting discounts and commissions and estimated offering expenses and
the receipt of the net proceeds of the offering.
You should read this information in conjunction with "Management's discussion
and analysis of financial condition and results of operations" and our
financial statements and the notes relating to our financial statements
appearing elsewhere in this prospectus.
As of December 31, 2001
-------------------------------
Pro Pro forma
Actual forma as adjusted
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(In thousands)
Cash and cash equivalents........................... $ 42,821 $ 42,821 $107,745
======== ======== ========
Convertible preferred stock, $0.001 par value
Authorized--7,000,000 shares
Issued and outstanding--6,599,186 shares actual,
and no shares pro forma and pro forma as adjusted 56,216 -- --
-------- -------- --------
Stockholders' equity (deficit):
Common stock, $0.001 par value
Authorized--50,000,000 shares
Issued and outstanding--2,961,478 shares actual,
14,270,322 shares pro forma and 19,770,322
shares pro forma as adjusted..................... 3 14 20
Additional paid-in capital.......................... 15,321 76,295 141,090
Deferred stock compensation......................... (5,636) (5,636) (5,636)
Deficit accumulated during development stage........ (24,587) (29,356) (29,356)
-------- -------- --------
Total stockholders' equity (deficit)............. (14,899) 41,317 106,118
-------- -------- --------
Total capitalization........................... $ 41,317 $ 41,317 $106,118
======== ======== ========
The table above does not include:
... 1,941,046 shares of common stock issuable upon exercise of options
outstanding under our 1995 stock option plan with a weighted average price
of $0.41 per share;
... 831,600 shares of common stock issuable upon exercise of options
outstanding under our 2001 stock option plan with a weighted average price
of $0.67 per share;
... 225,060 shares of common stock issuable upon exercise of warrants with a
weighted average price of $3.64 per share;
... up to 78,554 additional shares of common stock reserved for issuance under
our 1995 stock option plan; and
... up to 323,400 additional shares of common stock reserved for issuance under
our 2001 stock option plan.
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Dilution
If you invest in our common stock, your interest will be diluted immediately to
the extent of the conversion of all shares of our convertible preferred stock
outstanding as of December 31, 2001 upon the closing of this offering, the
issuance of 366,851 shares of common stock to the shareholders of Renalogics
upon the closing of this offering and the difference between the initial public
offering price per share of our common stock and the net tangible book value of
our common stock immediately after completion of this offering. Our net
tangible book value per share is equal to the amount of our total tangible
assets (total assets less intangible assets) less total liabilities, divided by
the number of shares of our common stock outstanding as of December 31, 2001.
Net tangible book value of our common stock as of December 31, 2001 was
approximately $41.3 million, or approximately $13.95 per common share. Assuming
the conversion of all shares of our convertible preferred stock outstanding as
of December 31, 2001 upon the closing of this offering, the issuance of 366,851
shares of common stock to the former shareholders of Renalogics upon the
closing of this offering and the sale of the shares of our common stock offered
by this prospectus at an assumed initial public offering price of $13.00 per
share and after deducting underwriting discounts and the estimated offering
expenses, our pro forma net tangible book value as of December 31, 2001 would
have been $106.1 million, or $5.37 per share of our common stock. This
represents an immediate increase in net tangible book value of $2.47 per share
to existing stockholders and an immediate dilution in net tangible book value
of $7.63 per share to new investors. The following table illustrates this
dilution on a per share basis:
Assumed initial public offering price per share......................... $13.00
Net tangible book value per share as of December 31, 2001.............. $ 13.95
Pro forma decrease in net tangible book value per share attributable to
conversion of convertible preferred stock............................ (10.98)
Pro forma decrease in net tangible book value per share attributable to
the issuance of share to the former Renalogics shareholders.......... (0.07)
Pro forma increase in net tangible book value attributable to new
investors............................................................ 2.47
Pro forma net tangible book value per share after this offering......... $ 5.37
Pro forma dilution per share to new investors........................... $ 7.63
If the underwriters exercise their option to purchase additional shares in this
offering, our adjusted pro forma net tangible book value at December 31, 2001
would have been $116.1 million, or $5.64 per share, representing an immediate
increase in pro forma net tangible book value to our existing stockholders of
$2.74 per share and an immediate dilution to new investors of $7.36 per share.
The following table summarizes, on a pro forma basis as described above as of
December 31, 2001, the total number of shares of common stock purchased from
us, the total consideration paid to us and the average price per share paid by
existing stockholders and by new investors purchasing shares in this offering.
We have assumed an initial public offering price of $13.00 per share, and we
have not deducted estimated underwriting discounts and commissions and
estimated offering expenses in our calculations.
Shares purchased Total consideration Average
------------------ -------------------- price per
Number Percent Amount Percent share
- ----------------------------- ---------- ------- ------------ ------- ---------
Existing stockholders........ 14,270,322 72.2% $ 57,613,438 44.6% $ 4.04
New investors................ 5,500,000 27.8 71,500,000 55.4 13.00
---------- ---- ------------ ----
Total....................... 19,770,322 100% $129,113,438 100%
========== ==== ============ ====
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23
Dilution
- --------------------------------------------------------------------------------
The foregoing discussion and tables assume no exercise of any outstanding stock
options or warrants. The exercise of all options and warrants outstanding as of
December 31, 2001 having an exercise price less than the offering price would
increase the dilutive effect to new investors to $7.99 per share, assuming the
exercise by the underwriters of their overallotment option. See
"Capitalization," "Management--Employee benefit plans" and "Description of
capital stock."
If the underwriters exercise their over-allotment in full, the following will
occur:
... the number of shares of our common stock held by existing stockholders will
decrease to approximately 69.3% of the total number of shares of our common
stock outstanding after this offering; and
... the number of shares of our common stock held by new investors will
increase to 6,325,000 shares, or approximately 30.7% of the total number of
our common stock outstanding after this offering.
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24
- --------------------------------------------------------------------------------
Selected financial data
The following selected financial data should be read in conjunction with
"Management's discussion and analysis of financial condition and results of
operations" and our financial statements and the related notes to those
statements included elsewhere in this prospectus. The statements of operations
data for the years ended December 31, 1999, 2000 and 2001 and the balance sheet
data as of December 31, 2000 and 2001 are derived from our audited financial
statements included elsewhere in this prospectus. The statement of operations
data for the year ended December 31, 1998 and the balance sheet data as of
December 31, 1998 and 1999 are derived from the company's audited financial
statements not included in this prospectus. The statements of operations data
for the year ended December 31, 1997 and the balance sheet data as of December
31, 1997 have been derived from our financial statements not included in this
prospectus. In our opinion, these financial statements include all adjustments,
consisting of only normal recurring adjustments that are necessary for a fair
presentation of our financial position and results of operations for those
periods.
Year ended December 31,
----------------------------------------
Statements of operations data 1997 1998 1999 2000 2001
- ----------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Revenues........................................................ $ 954 $3,173 $6,851 $ 2,967 $ 5,829
Costs and expenses.............................................. 3,399 2,639 5,800 8,160 17,800
------- ------ ------ ------- --------
Operating income (loss)......................................... (2,445) 534 1,051 (5,193) (11,971)
------- ------ ------ ------- --------
Net income (loss)............................................... (2,939) 79 1,073 (4,943) (11,081)
Net income (loss) per common share, basic....................... (1.64) 0.04 0.47 (1.87) (3.97)
Net income (loss) per common share, diluted..................... (1.64) 0.02 0.20 (1.87) (3.97)
Shares used in computing net income (loss) per common share,
basic.......................................................... 1,795 1,807 2,288 2,638 2,790
Shares used in computing net income (loss) per common share,
diluted........................................................ 1,795 4,011 5,369 2,638 2,790
Pro forma net loss per share, basic and diluted (unaudited)..... (0.93)
Shares used in computing pro forma net loss per share, basic and
diluted (unaudited)............................................ 11,921
As of December 31, Pro forma
--------------------------------------------- December 31,
Balance sheet data 1997 1998 1999 2000 2001 2001(1)
- -----------------------------------------------------------------------------------------
(In thousands) (unaudited)
Cash and cash equivalents.... $ 609 $ 3,076 $ 1,640 $ 4,118 $ 42,821 $42,821
Working capital.............. (5,495) (5,374) (563) 1,389 40,828 40,828
Total assets................. 704 4,098 3,074 4,175 43,462 43,462
Convertible preferred stock.. 4,257 4,257 8,325 13,809 56,215 --
Deferred stock compensation.. -- -- -- 965 5,636 5,636
Total stockholders' equity
(deficit)................... (9,692) (9,606) (7,654) (12,365) (14,899) 41,317
(1) The pro forma balance sheet as of December 31, 2001 gives effect to the
conversion of all outstanding convertible preferred stock into 10,941,993
shares of common stock, the issuance of 366,851 shares of stock to the
former shareholders of Renalogics and a $4.8 million increase in our
deficit accumulated during development stage resulting from a charge to
operations for the value (assumed to be $13.00 per share) of the shares to
be issued to the former shareholders of Renalogics.
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25
- --------------------------------------------------------------------------------
Management's discussion and analysis of financial condition and results of
operations
You should read the following discussion of the financial condition and results
of our operations in conjunction with the financial statements and the notes to
those statements included elsewhere in this prospectus. The discussion in this
prospectus contains forward-looking statements that involve risks and
uncertainties, such as statements of our plans, objectives, expectations and
intentions. The cautionary statements made in this prospectus should be read as
applying to all related forward-looking statements wherever they appear in this
prospectus. Our actual results could differ materially from those discussed
here. Factors that could cause or contribute to these differences include those
discussed in "Risk factors," as well as those discussed elsewhere. See "Risk
factors" and "Special note regarding forward-looking statements."
OVERVIEW AND CRITICAL ACCOUNTING POLICIES
We were formed in 1994 to develop small molecule drugs that act selectively on
subtypes of dopamine and adenosine receptors. We began operations by acquiring
the pharmaceutical research programs of Whitby Research, Inc., a wholly owned
subsidiary of Ethyl Corp. In 1999, we acquired Renalogics, Inc., a development
stage company that had funded two early stage research programs at Emory
University.
To date, our revenues have consisted primarily of license fees, milestone
payments and other fees pursuant to product license and development agreements
between us and our corporate collaborators. Staff Accounting Bulletin (SAB) No.
101, issued in December 1999, requires companies to recognize certain up-front
nonrefundable fees and milestone payments over the life of the related contract
alliance when such fees are received in conjunction with alliances that have
multiple elements. We have entered into development agreements for three of our
drug candidates under which we license product rights to certain of our
compounds, for which we earn up-front license fees and on-going milestone
payments as our collaborators reach certain development milestones specified in
the contracts. Payments under these agreements are non-refundable. Each
contract calls for us to participate on an on-going basis in joint management
committees and potentially provide fee-based development assistance to our
collaborators. As a result of this on-going involvement on our part, we
recognize total fixed or determined contract revenues on a straight-line basis
over the development period set forth in the contract adjusted from time to
time for any delays in development or clinical trials of the compound. Most of
our contracts can be canceled by our collaborators at any time, allowing our
collaborators to avoid the payment of future fees. Therefore, we do not
recognize revenues ahead of actual cash received. Any royalty payments to us
provided for in our contracts are recognized in the period in which they are
earned. Deferred revenues consist of payments received in advance of revenues
recognized under these agreements. Revenues have varied and will likely vary in
the future from period to period due principally to the timing of milestone
payments and the progress towards attainment of development milestones by our
collaborators.
Research and development expenses primarily consist of salaries and related
expenses for personnel and consulting services. Other research and development
expenses include fees paid to outside service providers for materials
manufacturing and clinical trial design and management, fees paid to
consultants, the costs of laboratory supplies and materials, amortization of
purchased technology and allocations of other corporate costs. We charge all
research and development expenses to operations as they are incurred. Our
research and development activities are focused on pre-clinical testing and
clinical development of small molecule drugs to treat central nervous system,
cardiovascular and renal system disorders. Our activities include but are not
limited to:
... laboratory testing of a variety of molecules to determine their potential
utility in humans in treating the target disorders;
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26
Management's discussion and analysis of financial condition and results of
operations
- --------------------------------------------------------------------------------
... pre-clinical testing of the molecules to assess their pharmacologic
activity and toxicity potential; and
... a series of clinical testing in healthy volunteers and patients to
determine the safety and efficacy of the drug candidates.
We are not directly compensated for our research and development activities. We
fund the costs of early development of our product candidates and assess on an
on-going basis:
... their medical and commercial potential;
... the medical and clinical risks of continued development; and
... the feasibility and advisability of entering into a collaboration agreement
for continued development and commercialization of our drug candidates.
Clinical development timelines, likelihood of success and total costs can and
do vary widely based in part on the targeted indication, whether therapy is
required to be acute or chronic and the inherent unpredictability of attracting
subjects to participate in the required clinical trials. We anticipate that we
will make on-going determinations as to which research and development projects
to pursue and how much funding to direct to each project on an on-going basis
in response to the scientific and clinical success of each product candidate.
Selling and general and administrative expenses primarily consist of salaries
and related expenses for personnel in business development, administration,
finance, accounting and human resources. Other costs include facility costs and
professional fees for legal and accounting services.
Royalty expense consists of charges related to our in-licensing of the
compounds and related technologies for our product candidates. These charges
are typically incurred under our various agreements for purchased and
in-licensed technology when we receive payments from our product candidates
which incorporate technology covered under such agreements. These charges are
computed as a percentage of the license fees, milestone payments and on-going
royalties, if any, received by us related to our product candidates. The
amounts and term of these obligations vary by product candidate.
Write-off of purchased technology consists of a charge related to the
impairment of the value of technology purchased in connection with our
acquisition of Renalogics. This technology consisted of a license agreement
from Emory University. This agreement was renewed yearly and, at the time of
acquisition, we believed there was value to the underlying technology. During
December 2000, the Company reevaluated the commercial potential of the
licensing agreement with Emory University and concluded that it would not
pursue the further commercialization of this technology. Accordingly, the
Company terminated its licensing agreement with Emory University and wrote off
the remaining $724,242 of unamortized value of the purchased technology due to
its impairment. Due to the impairment of this purchased technology, we will
expense the value of the additional 366,851 shares to be issued to the former
Renalogics shareholders, to be issued immediately after the successful closing
of the proposed initial public offering.
We have granted stock options to employees and non-employees at prices, which
for financial reporting purposes, are deemed below fair market value on the
dates of grant. As a result, we have recorded deferred compensation expense,
which represents, in the case of employees, the difference between the option
exercise price and the deemed fair value of our common stock. In the case of
non-employees, deferred compensation represents the fair market value of the
options granted, computed using the Black-Scholes option-pricing model.
- --------------------------------------------------------------------------------
27
Management's discussion and analysis of financial condition and results of
operations
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Years ended December 31, 2001 and 2000
Revenue
Revenues for the year ended December 31, 2001 increased $2.8 million to $5.8
million from $3.0 million for the year ended December 31, 2000. The increase is
primarily attributable to a milestone payment received from Schwarz Pharma due
to their initiation of the Phase III clinical testing of Rotigotine-CDS.
Research and development expenses
Research and development expenses for the year ended December 31, 2001
increased $0.9 million to $6.0 million from $5.1 million for the year ended
December 31, 2000. The increase is attributable to approximately $1.0 million
in increased spending on clinical testing, $0.9 million of non-clinical testing
costs and $0.9 million of expenses associated with increased staffing and the
addition of a chief medical officer in 2001. The increases were offset by a
reduction of $0.5 million in amortization of capitalized technology costs
associated with the acquisition of Renalogics and approximately $1.5 million of
costs related to license fees paid for acquired technology, which were fully
expensed by December 31, 2000. During the year ended December 31, 2001, we
estimate that we spent approximately 47% of our total research and development
expenses on our DTI-0009 program for atrial fibrillation. We estimate that we
spent approximately 16% on our DTI-0017 program for congestive heart failure
and approximately 17% on our DTI-0026 program for treating kidney disease, a
program we abandoned at the end of 2001 as a result of poor clinical results
for the drug candidate. The remaining 20% of our total research and development
expense was spent on other early stage research efforts. Allocations of
expenses to each development program are based on actual outsourced costs for
the program and an allocation of internal salaries and support costs based on
the estimate of time spent on each program. We expect research and development
expenses to continue to increase in the future as more of our drug candidates
progress into clinical trials.
General and administrative expenses
General and administrative expenses increased approximately $1.9 million to
$3.9 million for the year ended December 31, 2001 from $2.0 million for the
year ended December 31, 2000. This increase is attributable to our investment
in development of the administrative infrastructure necessary to enable us to
expand our operations, support our development efforts and facilitate the
additional reporting and regulatory requirements of a public company. The
increase is primarily composed of $0.7 million of accounting and legal costs
incurred to expand accounting control systems, implement new revenue
recognition rules for prior years and to prepare for a public offering, $0.6
million in increased salary expense associated with the addition of a new chief
executive officer and chief commercial officer, $0.2 million related to
investor relation and marketing efforts and $0.2 million of increased travel
related expenses offset by a reduction in consulting expenses of $0.2 million.
It is expected that general and administrative expenses will continue to trend
upwards as we expand our management staff and make further investment in
information technology resources to support our growth.
Royalty expense
Royalty expense for the year ended December 31, 2001 increased $0.6 million to
$0.6 million for the year ended December 31, 2001. The increase is due
primarily to royalty bearing milestone payments from Schwarz Pharma received in
December 2001.
Stock based compensation
Stock based compensation increased approximately $7.0 million to $7.2 million
for the year ended December 31, 2001 from $0.2 million for the year ended
December 31, 2000. The increase is attributable to $6.1 million of stock
compensation in connection with the grant of stock options to our officers,
directors and other employees, $0.7 million in connection with accelerated
vesting for certain former members of our board of directors, $0.2 million
related to the cashless exercise of options by a former member of management
and $0.2 million related to option grants to non-employees.
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28
Management's discussion and analysis of financial condition and results of
operations
- --------------------------------------------------------------------------------
Net interest income
Net interest income increased approximately $0.7 million to $0.9 million for
the year ended December 31, 2001 from $0.2 million for the year ended December
31, 2000. This increase was attributable to increased cash balances resulting
from the sale of Series D preferred stock in 2001.
Years ended December 31, 2000 and December 31, 1999
Revenues
Revenues for the year ended December 31, 2000 decreased by $3.9 million to $3.0
million from $6.9 million for the year ended December 31, 1999. This decrease
was attributable to a $1.6 million acceleration of previously deferred revenues
recognized in the year ended December 31, 1999 associated with the termination
of an agreement with one of our collaborators during 1999 as well as lower
milestone payments pursuant to our contracts with other collaborators pending
the attainment of additional development milestones by them.
Research and development expenses
Research and development expenses increased approximately $0.5 million to $5.1
million for the year ended December 31, 2000 from $4.6 million for the year
ended December 31, 1999. This increase was attributable to $0.4 million of
increased clinical trial expenses and related travel associated with DTI-0009,
a charge of $1.5 million related to license fees paid for acquired technology
and $0.2 million of amortization of capitalized purchased technology associated
with the acquisition of Renalogics. These increases were offset in part by the
completion in the year ended December 31, 1999 of certain toxicology and
associated pre-clinical testing and manufacturing costs of DTI-0017 and
DTI-0009 resulting in $1.9 million in reduced expenses for the year ended
December 31, 2000. During the year ended December 31, 2000, we estimate that we
spent approximately 42% of our total research and development expense on our
DTI-0026 program for treating kidney disease. We estimate that we spent
approximately 26% on our DTI-0009 program for atrial fibrillation and
approximately 11% on our DTI-0017 program for congestive heart failure. Of the
remaining 21% of our total research and development expense 11% was directed to
other early stage research efforts and 10% was related to amortization of
purchased technology that is not specifically allocated to any development
program. During the year ended December 31, 1999, we estimate that we spent
approximately 48% of our total research and development expense on our DTI-0009
program for atrial fibrillation. We estimate that we spent approximately 24% on
our DTI-0017 program for congestive heart failure, approximately 22% of our
total research and development expense was used on other early stage research
efforts, and approximately 6% of total research and development expense was
related to amortization of purchased technology that are not specifically
allocated to any development program. Allocations of expenses to each
development program is based on actual outsourced costs for the program and an
allocation of internal salaries and support costs based on an estimate of time
spent on each program.
General and administrative expenses
General and administrative expenses for the year ended December 31, 2000
increased $1.2 million to $2.0 million from $0.8 million for the year ended
December 31, 1999. The increase was primarily attributable to increased
personnel costs of $0.5 million related to new employees including a new chief
executive officer, in September 2000, increased travel and associated costs of
$0.1 million as well as increased investor relations and legal costs of $0.2
million and increased professional fees of $0.2 million associated with the
outsourcing of our accounting function.
Royalty expense
Royalty expense for the year ended December 31, 2000 decreased $0.3 million to
$48,000 from $0.4 million for the year ended December 31, 1999. The decrease is
a result of reduction in royalty bearing milestone payments received by us
during the year ended December 31, 2000.
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29
Management's discussion and analysis of financial condition and results of
operations
- --------------------------------------------------------------------------------
Write-off of purchased technology
Write-offs of purchased technology totaled $0.7 million for the year ended
December 31, 2000 and resulted from our determination that the value of
technology purchased in connection with our acquisition of Renalogics was
impaired. We are required to issue an additional 366,851 shares of our common
stock to the former shareholders of Renalogics upon the closing of an
underwritten initial public offering.
Net interest income
Net interest income for the year ended December 31, 2000 increased $0.2 million
to $0.2 million from $0.0 million for the year ended December 31, 1999. The
increase is due to increased cash balances from cash receipts from corporate
collaborators and a reduction in interest expense due to the conversion of
certain notes payable to shareholders to Series B preferred stock in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through private
placements of common stock and preferred stock, as well as payments we received
under licensing agreements and loans. As of December 31, 2001 we had raised
aggregate net proceeds from loans and the sale of our common stock and
preferred stock of $56.3 million. In addition, through December 31, 2001 we had
received $20.3 million from license fees, milestone payments and research
contracts.
Cash and cash equivalents were $42.8 million at December 31, 2001 compared to
$4.1 million at December 31, 2000. Net cash used for operating activities was
$4.6 million and $3.0 million for the years ended December 31, 2001 and 2000,
respectively. The increase from 2000 to 2001 consisted primarily of operating
expenses related to conducting clinical trials and other research, development
and administrative activities and the timing of cash payments related to these
activities.
Net cash used for investing activities was $0.4 million and $0.0 million for
the years ended December 31, 2001 and December 31, 2000, respectively. The
increase from 2000 to 2001 was primarily related to the purchase of certain
computer equipment and analytical instrumentation. Net cash provided by
financing activities was $43.7 million and $5.5 million for the years ended
December 31, 2001 and December 31, 2000, respectively. This increase was
primarily related to the greater net proceeds realized from the sale of our
Series D preferred stock in 2001 as compared to the sale of our Series C
preferred stock in 2000.
We expect to continue to incur substantial operating losses. Our future capital
requirements are difficult to forecast and will depend on many factors,
including:
... cash requirements of any potential acquisitions;
... scientific progress in our research and development programs;
... the size and complexity of these programs;
... the scope and results of preclinical studies and clinical trials;
... our ability to establish and maintain corporate partnerships;
... the time and costs involved in obtaining regulatory approvals;
... the costs involved in filing, prosecuting and enforcing patent claims;
... competing technological and market developments;
... the cost of manufacturing preclinical and clinical material; and
... other factors not within our control.
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30
Management's discussion and analysis of financial condition and results of
operations
- --------------------------------------------------------------------------------
Although we currently have no specifically identified material commitments for
capital expenditures, we anticipate that implementing our strategy will require
substantial increases in our capital expenditures and other capital
commitments. Considering our current spending levels on our existing programs
and a likely future increase in activity on these programs, estimates of future
staff growth and related spending and the estimated capital requirements of
potential in-licensing activity and future acquisitions, we believe that
existing capital resources together with the net proceeds of this offering
should be sufficient to fund our operations for at least the next 24 months.
Until we can generate sufficient cash from our operations to sustain our
business, which we do not expect for the foreseeable future, we expect to
finance future cash needs through private and public financings, including
equity financings. We cannot be certain that additional funding will be
available when needed or on favorable terms. If funding is not available, we
may need to delay or curtail our development and commercialization activities
to a significant extent.
We cannot estimate the completion dates and costs of our current internal
research and development programs due to inherent uncertainties in outcomes of
clinical trials and regulatory approvals of our product candidates. We cannot
be certain that we will be able to successfully complete our research and
development projects or successfully find collaboration or distribution
partners for our product candidates. Our failure to complete our research and
development projects could have a material adverse effect on our financial
position or results of operations.
STOCK COMPENSATION
In connection with the grant of stock options to employees, we recorded
deferred compensation totaling $10.8 million during the year ended December 31,
2001 and $1.1 million for the year ended December 31, 2000, representing the
difference between the exercise price and the deemed fair value of our common
stock for financial reporting purposes on the date those options were granted.
This amount is initially recorded as a component of stockholders' equity and is
being charged against income over the vesting period of the individual options.
We recorded stock compensation expense related to employee options of
$6.1 million for the year ended December 31, 2001 and $0.1 million for the year
ended December 31, 2000. At December 31, 2001, we had a total of $5.6 million
remaining to be amortized over the vesting periods of the stock options.
We expect to record deferred stock compensation expense for options granted
through December 31, 2001, assuming no forfeitures, as follows:
Year Amount
----------------------------------------
2002......................... $3,014,000
2003......................... 1,581,000
2004......................... 790,000
2005......................... 251,000
In addition to the above charges, we recorded additional non-cash compensation
totaling $1.2 million during the year ended December 31, 2001 and $0.1 million
for the year ended December 31, 2000. These charges primarily relate to the
acceleration in September 2001 of vesting of certain options and restricted
stock granted to board members totaling approximately $0.7 million. The
remaining charge related to the charge for options previously granted to
non-employees for which we are recording the charge over the vesting period of
the underlying options.
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31
Management's discussion and analysis of financial condition and results of
operations
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QUANTITATIVE AND QUALITATIVE DISCLOSURE REGARDING MARKET RISK
As of December 31, 2001, we had cash and cash equivalents of $42.8 million
consisting of cash and highly liquid investments. Our exposure to market risk
relates to the increase or decrease in the amount of interest income we can
earn on our investment portfolio and on the increase or decrease in the amount
of any interest expense we must pay with respect to any outstanding debt
instruments. As of December 31, 2001, we had no long-term debt. We do not plan
to invest in derivative financial instruments.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires
that all business combinations initiated after June 30, 2001 be accounted for
using the purchase method of accounting. SFAS No. 142 discusses how intangible
assets that are acquired should be accounted for in financial statements upon
their acquisition and also how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the financial
statements. Beginning on January 1, 2002, with the adoption of SFAS No. 142,
goodwill and certain purchased intangibles existing on June 30, 2001 will no
longer be subject to amortization over their estimated useful lives. Rather,
the goodwill and certain purchased intangibles will be subject to an annual
assessment for impairment based on fair value. The provisions of SFAS No. 142
are required to be adopted starting with fiscal years beginning after December
15, 2001. We do not expect adoption of these statements to have a material
impact on its financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which supersedes SFAS No. 121. SFAS No. 144
further refines the requirements of SFAS No. 121 that companies (1) recognize
an impairment loss only if the carrying amount of a long-lived asset is not
recoverable based on its undiscounted future cash flows and (2) measure an
impairment loss as the difference between the carrying amount and fair value of
the asset. In addition, SFAS No. 144 provides guidance on accounting and
disclosure issues surrounding long-lived assets to be disposed of by sale. We
do not expect the adoption of this statement to have a material impact on its
financial position or results of operations. The provisions of SFAS No. 144 are
required to be adopted starting with fiscal years beginning after December 15,
2001.
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32
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Business
OVERVIEW
We are a biopharmaceutical company engaged in developing small molecule drugs
to treat central nervous system, cardiovascular and renal disorders. We focus
on small molecule drug candidates that act selectively to either block
(antagonists) or increase (agonists) the activity of certain proteins, such as
receptors and enzymes that regulate important physiologic functions. Receptors
for naturally-occurring signal molecules such as adenosine or dopamine exist in
a variety of subtypes that are distributed among tissues. By developing
compounds that selectively target single receptor subtypes, we believe we can
produce the desired therapeutic effect while minimizing side effects often
produced by less selective compounds. Small molecules generally offer the
dosing flexibility required for optimal patient compliance, have a broader
array of dosage forms, lend themselves to easier formulation, have greater
potential for absorption and utilization by the body and are more efficiently
manufactured than large molecule therapies, such as proteins. We have entered
into collaboration agreements with Schwarz Pharma, King and Fujisawa Healthcare
with respect to Rotigotine-CDS, MRE-470 and the intravenous formulation of
DTI-0009, respectively. We have retained development and commercialization
rights to non-intravenous formulations of DTI-0009 and to DTI-0017.
CLINICAL DEVELOPMENT PROGRAMS
We currently have four product candidates being investigated for five potential
indications.
Potential
Product candidate indication Dosage form Clinical stage Marketing rights
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Rotigotine-CDS (dopamine D\\2\\ Parkinson's disease Transdermal patch Phase III Schwarz Pharma
agonist patch)
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Rotigotine-CDS Reduced-Dose Restless Legs Transdermal patch Phase II(1) Schwarz Pharma
(dopamine D\\2\\ agonist patch) Syndrome
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MRE-470 (adenosine A\\2A\\ Cardiac imaging Intravenous Phase II King
agonist)
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DTI-0009 (adenosine A\\1\\ agonist) Atrial fibrillation Intravenous Phase II Fujisawa Healthcare(2)
Oral Phase I(3) Aderis
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DTI-0017 (adenosine A\\1\\ Edema in congestive Intravenous Phase I(4) Aderis
antagonist) heart failure
Oral Phase I(4) Aderis
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(1) Rotigotine-CDS Reduced Dose is currently in a Phase II safety and efficacy
trial solely in Europe.
(2) Fujisawa Healthcare has the exclusive US and Canadian rights to develop and
commercialize the intravenous formulation of DTI-0009.
(3) We have completed the first Phase I clinical trial.
(4) We concluded one Phase I clinical trial which indicated a diuretic effect.
Because of side effects observed in the course of the study, we are
currently reformulating the product candidate and conducting additional
animal testing.
None of our product candidates have been approved for marketing by the FDA or
similar European regulatory agency. Many of our product candidates, especially
those in Phase II and Phase I, are at an early stage of clinical development.
Due to the inherent uncertainties in the drug regulatory process, it is
unlikely that any of our product candidates will be approved in the near
future, if at all.
Rotigotine-CDS. Once-a-day transdermal patch for treatment of Parkinson's
disease
Our most advanced product candidate, Rotigotine-CDS, a dopamine D\\2\\ receptor
agonist, is formulated as a transdermal patch for first line treatment of early
and combination therapy for late stage idiopathic (or of unknown origin)
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Parkinson's disease. Naturally produced dopamine acts, in part, by stimulating
the D\\2\\ receptor which is thought to be the most active receptor for
mediating movement. Rotigotine-CDS is currently in Phase III clinical trials.
We believe that Rotigotine-CDS has significant potential to alleviate the
symptoms and improve the quality of life of patients with Parkinson's disease.
Market opportunity
Parkinson's disease is an age-related, neurodegenerative disorder affecting an
estimated one million patients in the United States today according to the
Parkinson's Disease Foundation, Inc. The Parkinson Study Group reports that the
aging of the population will result in a substantial increase in the number of
at-risk individuals in the coming decades, leading to an increase in the
prevalence of the disease. The National Institute of Neurological Disorders and
Stroke estimates that approximately $2 billion is spent annually on drug
therapy worldwide to treat this disease.
Medical need
Parkinson's disease patients cannot produce sufficient quantities of dopamine
to stimulate the dopamine receptors in the brain. Stimulation of these dopamine
receptors is necessary for people to move normally. Pharmacologic therapies for
Parkinson's disease focus on stimulation of the dopamine D\\2\\ receptor in the
brain. Patients cannot be treated directly with dopamine because it does not
penetrate into the brain. Levodopa, or L-dopa, a common treatment for
Parkinson's disease, must be converted by the brain cells into dopamine to be
effective. Because this conversion takes place in the very nerve cells that are
degenerating as a result of the disease, L-dopa's long-term usefulness is
limited. In addition, patients must take multiple daily doses and long-term use
is often accompanied by worsening movement fluctuations, neuropsychiatric
complications and dyskinesias, or uncontrolled body movements.
An alternate approach is to give the patient a substitute compound for dopamine
that acts by stimulating the D\\2\\ receptors, like dopamine, but does not have
to be converted by the body into dopamine. Significant clinical success has
been achieved using selective dopamine receptor agonists, but this success has
been constrained by the method of drug administration. To date, these products
are usually delivered orally, producing a very uneven pattern of drug release
in the blood stream, causing patients to experience fluctuations in symptoms
far more frequently than desired. The optimum range of therapeutic drug levels
in Parkinson's disease patients is very narrow. Therefore, patients require a
dosage form of the dopamine D\\2\\ agonist that results in a continuous, 24
hour therapeutic blood level of the drug to achieve optimal results. Recent
studies have shown success treating the complications of L-dopa therapy by
giving continuous infusions of dopamine agonists.
Our product candidate
We have developed Rotigotine-CDS as a small molecule dopamine D\\2\\ agonist
that is readily deliverable through the skin. We formulated this molecule into
a transdermal patch that we believe enables delivery of a constant dose of drug
over a 24 hour period, allowing patients to minimize daily symptoms and side
effects. In addition, unlike currently available therapies, we believe that
most patients treated with Rotigotine-CDS will be able to wake up every day
with minimal symptoms. We also believe it is easier for patients to use a
once-a-day transdermal patch therapy rather than an oral medication regimen
requiring dosing multiple times a day.
We completed a double blind, placebo-controlled Phase II clinical trial for
this drug at nine major Parkinson disease centers in North America, which
demonstrated statistically significant efficacy. Based on these data and our
pre-clinical toxicology data, we entered into collaboration with Schwarz Pharma
in July 1998 to complete worldwide development and commercialization of
Rotigotine-CDS. The agreement provides for license fees and milestone payments
and royalty rates based on product sales.
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Using a reformulated version of our original compound, Schwarz Pharma has
completed additional multi-center Phase II trials of the patch in both North
America with early stage patients and in Europe with late stage patients. Based
on the data from these trials, Schwarz Pharma received clearance from both the
FDA and the European regulatory authorities to proceed to Phase III clinical
trials, which commenced in late 2001.
Rotigotine-CDS Reduced Dose. Transdermal patch for treatment of Restless Legs
Syndrome
Rotigotine-CDS has also been formulated as a reduced-dose patch for the
treatment of Restless Legs Syndrome. Restless Legs Syndrome is a common
neurologic movement disorder in which patients suffer an almost irresistible
urge to move their legs because of disagreeable sensations, and is usually
worse at rest. Schwarz Pharma started a pilot, Phase II safety and efficacy
clinical trial for Rotigotine-CDS in late 2001 in Europe. If this initial
European trial has a successful outcome, we have been informed by Schwarz that
it plans to file an investigational new drug application with the FDA and
commence similar Phase II testing in the United States. We believe
Rotigotine-CDS has significant potential to alleviate the symptoms and improve
the quality of life of patients with Restless Legs Syndrome.
Market opportunity
Restless Legs Syndrome can be described as a compelling urge to move the limbs,
usually associated with abnormal sensations and causing chronic sleep
deprivation. The stress often associated with sleep complaints can adversely
affect occupational activities, social activities and family life. The
unpleasant sensations may be described like worms or bugs crawling under the
skin and are often worse at rest. Studies by the American Academy of Family
Physicians have indicated that as much as 15% of the population may experience
symptoms of Restless Legs Syndrome and, although the prevalence increases with
age, 30% to 40% of patients with severe symptoms had their first symptoms
before the age of 20.
Medical need
The Restless Legs Syndrome Foundation reports that there are currently no
medications approved for the treatment of Restless Legs Syndrome in the
United States, although dopaminergic agents are first line therapy for
"off-label" use. L-dopa is effective, but, according to the American Academy of
Family Physicians, as many as 80% of patients may develop worsening of symptoms
from its chronic use. Small, usually uncontrolled trials suggest that a
transdermally administered dopamine D\\2\\ agonist, like Rotigotine-CDS, would
produce a similar therapeutic effect without the side effects associated with
oral dopamine use. The doses of these classes of drugs is usually much lower
than the dose required to treat Parkinson's disease. Other classes of
medications used include opioids, benzodiazepine sedatives, anticonvulsants,
the antihypertensive clonadine, and iron replacement.
MRE-470. Blood vessel dilator for cardiac imaging
MRE-470 is an adenosine A\\2A\\ agonist used as an alternative to exercise
prior to cardiac flow imaging for the diagnosis of coronary artery disease. The
A\\2A\\ receptor subtype controls dilation of arteries, including the coronary
arteries supplying blood to the heart muscle. MRE-470 is formulated to be
administered by bolus injection rather than the continuous infusion required
with adenosine. MRE-470 begins to work quickly and provides sustained coronary
blood vessel dilation for 15 to 20 minutes, permitting the physician adequate
time to complete the diagnostic imaging. MRE-470 is currently in Phase II
clinical trials.
Market opportunity
Cardiac stress tests are performed on people who may have coronary artery
disease because they have experienced certain symptoms, including chest pain,
shortness of breath or irregular heartbeats. Generally, during a cardiac stress
test, the patient's physical condition and heart function is monitored through
electrocardiogram leads placed on the chest. In addition, for many patients,
the physician needs to examine the flow of blood to the heart to improve the
usefulness of the test. These tests, called perfusion imaging cardiac stress
tests, provide an image of the blood flow to the various parts of the
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heart. For the test to yield the best possible images, the patient's coronary
vessels must be fully dilated prior to injection of the imaging agent,
generally through the use of exercise. We estimate that, in 1999, approximately
2.6 million of these tests require a chemical or pharmacologic stress agent
rather than exercise because patients receiving the test cannot tolerate the
required level of exercise as a result of age, disease or infirmity.
Medical need
Currently, the leading blood vessel dilator for cardiac perfusion imaging
studies is adenosine. Because adenosine is eliminated from the blood stream in
approximately ten seconds, the drug must be given with a special syringe pump
as an intravenous infusion over six minutes. Adenosine causes coronary blood
vessel dilation through stimulation of the A\\2A\\ receptor. However, adenosine
can have serious side effects, such as severe slowing of the heart rate, chest
pain, hypotension and wheezing. These side effects can arise, for the most
part, from the actions of adenosine on receptors other than the A\\2A\\ subtype.
Our product candidate
MRE-470 is designed to be a highly selective adenosine A\\2A\\ receptor agonist
which may minimize adenosine side effects of slowing heart rate, chest pain,
hypotension or wheezing. In addition, it can be administered as a bolus
injection that will make it easier to use than adenosine. MRE-470 may also be
useful with the new contrast agents used in flow imaging with echocardiography.
In our pre-clinical studies in live animals, we found evidence that MRE-470 is
useful in imaging coronary blood flow. Based on these data, we entered into a
collaboration agreement with King. Under the terms of the agreement, King has
an exclusive license to market and sell our adenosine A\\2A\\ agonists for use
in cardiac imaging, either directly or through a sub-licensee. In return, the
agreement provides for license fees and milestone payments and royalty rates
based on product sales. In addition, we retain co-development and co-marketing
rights for therapeutic applications of our A\\2A\\ compounds, except
for MRE-470.
King is conducting a series of Phase II clinical trials of MRE-470 examining
dose response to the drug, potential side effects and vasodilatory effects of
the drug in patients.
DTI-0009. Treatment for acute and chronic heart rate control in atrial
fibrillation
DTI-0009 is an adenosine A\\1\\ agonist that acts predominantly by slowing
conduction through the atrioventricular node of the heart to control heart rate
in atrial fibrillation. The A\\1\\ subtype controls the rate and conduction of
electrical stimulation through the heart. We completed our first Phase I
clinical trial for the oral formulation in October 1999. Intravenous DTI-0009
is in Phase II clinical trials for acute rate control in atrial fibrillation.
We believe that DTI-0009, packaged as an acute dosage form and an oral dosage
for chronic use, has the potential to provide immediate and sustained therapy
for patients with atrial fibrillation.
Market opportunity
Atrial fibrillation is the most common of the cardiac arrhythmias, or abnormal
heart rhythms, and currently affects approximately two million patients in the
United States according to the American Heart Association. The incidence is
increasing due to the aging of the population and because patients with
underlying heart disease are surviving longer and developing atrial
fibrillation. When a patient experiences atrial fibrillation, the heart can
beat too rapidly to effectively pump blood throughout the body leading to
palpitation, shortness of breath, chest pain and possibly heart failure. The
American Academy of Family Physicians reports that the incidence of atrial
fibrillation increases with age, with approximately 5% of the population at age
65 and 14% of people over the age of 84 having the arrhythmia.
Medical need
Current treatments to return patients to a normal heart rhythm have variable
initial success but generally poor long term success in maintaining a normal
rhythm, with most patients returning to atrial fibrillation
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within one to two years. In addition, these treatments can cause sudden cardiac
death syndrome. Treatment of chronic atrial fibrillation often requires the use
of drugs to maintain a slow heart rate. DTI-0009 is not designed to convert
patients back to a normal rhythm and, because it has no direct effects on the
pumping chamber heart muscle, should not have many of the side effects of
standard antiarrhythmics.
Therapies commonly used to control heart rate during atrial fibrillation by
slowing conduction through the atrioventricular node, including digoxin, beta
blockers and calcium channel blockers, have significant shortcomings. Digoxin
has a slow onset when given intravenously in the acute setting, provides poor
heart rate control during exercise and has a narrow range between therapeutic
effect and toxicity. Both beta blockers and calcium channel blockers can cause
symptomatic low blood pressure before achieving adequate heart rate control. In
addition, calcium channel blockers can aggravate heart failure which is
becoming the most common underlying heart disease leading to atrial
fibrillation. Beta blockers can aggravate acute heart failure and cause
wheezing.
Our product candidate
DTI-0009 is a potent, small molecule, selective adenosine A\\1\\ agonist that,
by affecting predominantly the atrioventricular node of the heart, has the
potential to control heart rate without lowering blood pressure. It is
formulated to potentially overcome the clinical shortcomings of current
therapies. The molecule is designed to be readily delivered orally and by
intravenous injection.
In our pre-clinical studies, we found evidence that DTI-0009 is effective in
slowing conduction through the atrioventricular node. Based on these data, we
entered into a licensing agreement with Fujisawa Healthcare, the US development
and sales arm of Fujisawa Pharmaceutical Co. of Japan. The agreement provides
Fujisawa Healthcare with exclusive US and Canadian development and marketing
rights for the intravenous formulation of DTI-0009. In return, the agreement
provides for license fees, milestone payments and royalty rates based on
product sales. We retain rights outside the United States and Canada to the
intravenous formulation and worldwide rights to the all other dosage forms of
the drug.
Two multi-center trials to determine dosing and safety of the intravenous
formulation have been completed in the electrophysiology laboratory. The
intravenous formulation of the compound is currently in multi-center Phase II
clinical trials for acute heart rate control in atrial fibrillation.
DTI-0017. Potassium neutral diuretic for edema in congestive heart failure
DTI-0017 is an adenosine A\\1\\ antagonist designed to treat edema associated
with heart failure by blocking the action of internally produced, or
endogenous, adenosine on the A\\1\\ receptor in the kidney. We are developing
DTI-0017 as both an intravenous form for acute treatment and in an oral form
for chronic use. We concluded one Phase I clinical trial for both the
intravenous and oral formulations in May 2001. Because of side effects observed
in the course of the study, we are currently reformulating the product
candidate and conducting additional animal testing. We intend to design a study
which, if successful, will show that adenosine antagonists such as DTI-0017 act
at a different site in the kidney from most diuretics, do not affect potassium
balance, prevent the decreased renal function experienced with some other
agents and prevent the development of resistance to the diuretic effect
occurring with some other agents.
Market opportunity
The American Heart Association reports that approximately 4.7 million people in
the United States currently suffer from congestive heart failure, a condition
where the heart cannot pump enough blood to meet the needs of the body's other
organs. Symptoms of congestive heart failure are related to inadequate blood
flow and sodium and fluid retention. The body interprets the decreased blood
flow as a decrease in blood volume that might occur with dehydration or blood
loss. This causes the body to retain sodium, which can lead to fluid build-up,
or edema. The excess fluid causes congestion in the lungs with shortness of
breath and accumulation of fluid in the extremities and abdominal organs.
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Medical need
Diuretics are typically required to remove excess fluid caused by sodium
retention. There are many currently available diuretic agents for
pharmacological treatment of edema associated with congestive heart failure.
Two classes of these drugs, loop and thiazide diuretics, can cause dangerously
low levels of blood potassium that may result in life-threatening arrhythmias,
especially if used together. Oral potassium replacements are available but are
difficult to take and dosage must be adjusted according to the results of blood
tests. In addition, the potent loop diuretics actually decrease blood flow
through the kidney. This decrease in kidney blood flow limits the ability of
the body to cleanse the blood, which may lead to a resetting of kidney function
that causes resistance to diuretic treatment. Potassium-sparing diuretics can
limit this potassium loss, but if used inappropriately can cause a dangerous
increase in blood potassium levels or hyperkalemia. Potassium-sparing diuretics
must be used very carefully with other drugs used to treat congestive heart
failure, such as angiotensin converting enzyme inhibitors, because of their
additive effect on potassium levels.
Our product candidate
We are independently developing DTI-0017 for potential treatment of both acute
and chronic indications. We have undertaken and concluded the first Phase I
clinical trial for DTI-0017. In this trial, we found that patients had
difficulty tolerating DTI-0017 due to side effects such as vomiting and
irritation at the injection site which we believe were related to the vehicle
used to deliver the drug. One of the patients enrolled in this trial
experienced an unexpected seizure, making it a serious adverse event as defined
by the FDA. A complete review of the patient's records for the trial failed to
yield any apparent causal connection between the drug candidate and the
seizure. We timely filed the required adverse event report with the FDA. The
FDA has not placed the drug on clinical hold. The affected patient was the last
patient planned to be dosed in the highest dose group in the trial. We are in
the process of evaluating any possible role of DTI-0017 in the serious adverse
event, reformulating the intravenous and oral formulations of DTI-0017 and
conducting additional animal testing. See "Business--Legal proceedings" for
more information regarding this serious adverse event.
RESEARCH AND DEVELOPMENT
Our industry collaborators are presently investing in pre-clinical and clinical
development of our dopamine D\\2\\ agonists and adenosine A\\2A\\ agonists for
additional therapeutic targets. Our agreements with these companies provide us
with a combination of milestone and royalty payments in the event the compounds
are successfully developed and launched for new indications. We are currently
developing staffing and task plans for a number of pre-clinical and
early-clinical programs in adenosine-mediated conditions as well as
inflammatory conditions affecting the cardiovascular and renal systems. These
programs are intended to result in product candidates that are covered by our
current patents or form the basis of new patent applications. Our research and
development expenses were approximately $5.1 million and $6.0 million for the
years ended December 31, 2000 and 2001, respectively.
BUSINESS STRATEGY
We intend to develop and commercialize adenosine-based and other therapies for
cardiovascular, central nervous system and renal diseases. To achieve this
objective, we intend to concentrate on the following key strategies.
Focus our internal research and development on predominantly cardiovascular,
central nervous system and renal disease pathways
We believe our receptor-specific adenosine agonists and antagonists have
positioned us to develop superior therapeutic approaches to atrial
fibrillation, congestive heart failure, coronary artery disease diagnosis and
diseases of the central nervous system. We believe that our adenosine receptor
technology
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has additional potential application in inflammatory conditions affecting the
cardiovascular and renal systems, and could enable us to become a leading
company in the market for adenosine-based therapeutics, an area of
pharmaceutical research receiving renewed attention and interest. We believe
that this technology and early work in other inflammation mediators now
underway in our research laboratories hold the potential for the development of
novel drug candidates that can rapidly advance into clinical trials.
Maintain and expand in-house expertise and capabilities in synthetic chemistry,
pharmacology and key elements of clinical development while outsourcing routine
drug development activities
We are developing a scientific and management team tailored to design and
manage pre-clinical and clinical development programs. We will expand our
in-house capabilities in synthetic chemistry, pharmacology, regulatory affairs,
clinical trial management and biostatistics. We intend to outsource certain
specific activities of drug development such as manufacturing, formulation and
packaging, non-clinical toxicology and clinical site management.
Wherever economically feasible, retain development responsibility and marketing
rights to our drug candidates through late stage clinical development and/or
regulatory approval to maximize the value of each of our drug candidates
We believe that undertaking the cost and risks of clinical development of our
drugs will position us to either approach the market directly with our drugs,
if and when approved, or to negotiate out-licensing arrangements that result in
much larger portions of the commercial value of the drugs accruing to us. We
will seek to form development collaborations earlier in the cycle when we
believe that the development costs far outweigh our ability to fund them or
have the potential to jeopardize the success of other on-going programs.
In-license clinical stage drug candidates and acquire companies with
complementary product pipelines and technologies to supplement our internal
research and development efforts
We believe that many new therapies for cardiovascular and renal diseases will
come from efforts now underway in biotechnology. Our strategy is to seek out
and selectively in-license clinical stage molecules and acquire firms to add
complementary technology and development programs to our existing portfolio.
We are at an early state of development and face significant challenges in
achieving our business objectives, including successful completion of clinical
trials, obtaining regulatory approvals, market acceptance of our products and
competition from competitors with greater resources.
SCIENTIFIC BACKGROUND
Receptor and enzyme pharmacology
Naturally-occurring signal molecules interact with special recognition sites
called receptors, proteins located on the surface of the cell that mediate a
variety of physiological effects, or with enzymes that catalyze metabolic
chemical reactions. Receptors for naturally-occurring signal molecules such as
adenosine or dopamine exist in a variety of subtypes that are distributed among
tissues. The receptor subtype distribution allows any individual signal
molecule to mediate different actions in different tissues.
Small molecule analogs of signal molecules that act at individual receptor
subtypes enable the desired therapeutic effect to be produced while minimizing
side effects that often result from less selective compounds. Agonists
stimulate the activity of receptors and enzymes while antagonists inhibit such
activity. These receptor-subtype selective drugs exert a more potent
therapeutic action than are possible with naturally occurring products which do
not distinguish among subtypes of a particular receptor family.
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Adenosine receptors
Adenosine is a multi-purpose signal molecule that regulates a variety of
cardiovascular, renal and other cellular functions to minimize damage during
times of physiological stress. Different adenosine receptor subtypes govern
different effects of adenosine. The challenges faced in the use of adenosine as
a therapeutic agent stem from its nearly equal affinity for all receptor
subtypes and extremely short half-life of approximately ten seconds. There are
at least four adenosine receptor subtypes. In the heart, the A\\1\\ subtype
controls the rate and conduction of electrical stimulation through the heart.
The A\\2A\\ subtype controls dilation of arteries including the coronary
arteries supplying blood to the heart muscle. In the kidney, we believe that
the A\\1\\ receptor helps modulate electrolyte balance, blood flow and
filtration. It is often desirable to achieve a single, specific effect of
adenosine by increasing or blocking activity to one receptor subtype without
affecting the other subtypes and causing potentially harmful side effects.
Dopamine receptors
Dopamine production and release in the brain is necessary to move normally and
smoothly. Naturally produced dopamine acts in part, by stimulating the D\\2\\
receptor, which is thought to be the most active receptor for mediating
movement. If an individual is unable to produce sufficient quantities of
dopamine, certain central nervous system disorders, such as Parkinson's
disease, may result.
CLINICAL APPLICATIONS
Parkinson's disease
Parkinson's disease is an age-related, neurodegenerative disorder with an
average age of onset of 60 years. However, the National Parkinson Foundation
reports that 15% of the cases develop before age 50 and 10% of cases develop
before age 40. According to the Parkinson's Disease Foundation, Inc.,
approximately one million persons in the United States report having the
disease, but the actual incidence may be higher. We believe that aging of the
population will result in a substantial increase in the number of at-risk
individuals in the coming decades, leading to an increase in the prevalence of
the disease.
Parkinson's disease is caused by degenerative changes associated with the loss
of dopamine-producing neurons in an area of the brain known as the substantia
nigra, resulting in the loss of the neurons that produce dopamine. Patients
with Parkinson's disease can still respond to dopamine but are unable to
produce quantities sufficient for normal movement. Thus, current pharmacologic
therapies for the disease focus on replacing the missing dopamine D\\2\\
receptor stimulation.
The cause of these pathologic changes in the majority of Parkinson's disease
cases is of unknown origin. Parkinson's disease may also be caused by recurrent
trauma and genetic defects. However, it is suspected that Parkinson's usually
results from the combination of a genetic predisposition and unidentified
environmental triggers.
The introduction of L-dopa in the late 1960's represented a significant advance
in the treatment of this disease by providing clinical benefit to most
patients. L-dopa is a drug that is converted by the body into dopamine, in both
the brain and periphery, leading to improvement in motor function. However,
L-dopa has a number of shortcomings. L-dopa is converted to dopamine in the
very nerve cells that are degenerating, limiting its long-term usefulness as
these cells die. L-dopa must also be combined with an agent that blocks its
breakdown to dopamine in the periphery to limit side effects and increase the
blood levels of L-dopa that reach the brain. Because it has a short chemical
half-life, the patient must take multiple doses daily. In addition, data
suggest that long-term treatment with L-dopa is often complicated by
neuropsychiatric complications and new uncontrolled body movement problems such
as dyskinesias and motor fluctuations. The National Parkinson Foundation
indicates that as many as half of all Parkinson's disease patients treated with
L-dopa for over five years experience motor fluctuations and dyskinesias. When
patients are experiencing symptoms, they are "off" and when medication relieves
those symptoms, they are "on." Patients can go from being "on"
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to being "off" in a very rapid and unpredictable manner. These fluctuations may
not be related to L-dopa blood levels, making treatment by dose adjustment
difficult. There may also be potential for further brain cell loss by L-dopa
due to oxidative damage resulting from the drug.
An alternate approach is to give the patient a substitute compound for dopamine
that acts like dopamine by stimulating the D\\2\\ receptors but does not have
to be converted by the body into dopamine. In particular, dopamine receptor
agonists selective for these receptors are proven agents for treating
Parkinson's disease.
The range of therapeutic drug levels in Parkinson's disease patients is
relatively narrow. Therefore, patients require a dosage form of the dopamine
D\\2\\ agonist that results in continuous, 24 hour therapeutic blood levels of
the drug. Current D\\2\\ agonists are oral agents, and therefore do not result
in steady blood levels of the drug in the patient. See diagram below. Because
the current medications are not dosed at night, patients wake up "off" in the
morning and are functionally limited until the morning dose of their medication
reaches therapeutic blood levels.
[DIAGRAM SHOWING DRUG LEVELS IN BLOOD]
Restless Legs Syndrome
According to the National Institutes of Health, Restless Legs Syndrome is a
common, under-diagnosed neurologic movement disorder in which patients can
suffer an almost irresistible urge to move the legs because of disagreeable leg
sensations that are usually worse at rest. Studies by the American Academy of
Family Physicians have indicated that as much as 15% of the population may
experience symptoms of Restless Legs Syndrome and, although the prevalence
increases with age, 30% to 40% of patients with severe symptoms had their first
symptoms before the age of 20.
Restless Legs Syndrome is a disease of the central nervous system. It is often
genetically determined, but can be due to other disease states, such as iron
deficiency and kidney failure, and medications, such as antidepressants,
caffeine and dopamine antagonists. Restless Legs Syndrome can be described as
an agitated inability to rest that can have a negative impact on the quality of
life. The waking discomfort, chronic sleep deprivation and stress often
associated with sleep complaints can adversely affect occupational activities,
social activities and family life.
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The symptoms usually involve the legs, but can also involve the arms. The
unpleasant sensations may be described like worms or bugs crawling under the
skin. They are generally worse in the evening and night, less severe in the
morning and improve with activity. The Restless Legs Syndrome Study Group, a
collaboration of academic researchers with interests in the disease, has
defined the following four minimal criteria for diagnosis:
... a compelling urge to move the limbs, usually associated with the abnormal
sensations mentioned above;
... motor restlessness as seen in activities such as floor pacing, tossing and
turning in bed and rubbing the legs;
... symptoms are worse or exclusively present at rest, with variable and
temporary relief by activity; and
... symptoms are worse in the evening and at night.
The Restless Legs Syndrome Foundation reports that there are currently no
medications approved for the treatment of Restless Legs Syndrome in the United
States, although dopamine-like agents, such as L-dopa, are first line therapy
for "off-label" use. L-dopa is effective, but, according to the American
Academy of Family Physicians, as many as 80% of patients may develop worsening
of symptoms from its chronic use. It may cause insomnia or sleeplessness and
its therapeutic effect can be reduced with a high-protein meal. Oral dopamine
agonists have shown high efficacy in small, but often uncontrolled trials. The
doses of both L-dopa and dopamine agonists are usually much lower than the
doses required to treat Parkinson's disease. Other classes of medications used
include opioids, benzodiazepine sedatives, anticonvulsants, the
antihypertensive clonadine and iron replacement treatments.
Cardiovascular disease
The cardiovascular system consists of the heart and blood vessels that together
supply oxygen and nutrients to the cells of the body and remove waste. Arteries
conduct blood to the cells, veins return it to the heart and capillaries are
the small vessels where the actual exchange of oxygen, nutrients and waste
products occur. The kidneys act as filters, regulating blood volume, the
balance of chemicals, such as sodium, potassium and chloride, in the blood and
eliminates toxic waste products. The lungs add oxygen to the circulating blood
while removing carbon dioxide. The key to the body's routine ability to
accomplish these tasks is adequate blood flow. Blood flow, or cardiac output,
is determined by factors such as heart rate and blood pressure, which in turn
are controlled by a variety of signal molecules such as adenosine, and hormones
such as adrenaline and aldosterone. These hormones perform their function by
binding to specific receptor sites of a variety of cell types in the heart,
lungs, blood vessels and kidneys. Any significant disruption of this system
results in cardiovascular disease.
Pharmacologic stress testing
Cardiac stress tests are performed on people who may have heart disease because
they have experienced certain symptoms, including chest pain, shortness of
breath or irregular heartbeats. Generally, during a cardiac stress test, the
patient's physical condition and heart function is monitored through
electrocardiogram leads placed on the chest. For many patients, physicians need
to examine the flow of blood to the heart. These tests, called perfusion
imaging cardiac stress tests, are performed using an imaging agent to provide
an image of the blood flow to the various parts of the heart. For the test to
yield the best possible images, the patient's coronary vessels must be fully
dilated prior to injection of the imaging agent, generally through the use of
exercise. Because many patients cannot perform the level of exercise necessary
for an adequate study, many patients use a chemical or pharmacologic stress
agent in lieu of exercise.We estimate that, in 1999, approximately 2.6 million
coronary blood flow imaging procedures were performed in the United States
using a pharmacologic stress agent.
Currently, the leading blood vessel dilator for cardiac perfusion imaging
studies is adenosine. Because adenosine is eliminated from the blood stream in
approximately ten seconds, adenosine must be given as
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an intravenous infusion over six minutes requiring a special intravenous
syringe pump. Adenosine causes coronary blood vessel dilation through
stimulation of the A\\2A\\ receptor. However, adenosine has serious side
effects, such as severe slowing of the heart rate, hypotension (or low blood
pressure) and wheezing due to stimulation of other adenosine receptor subtypes.
Cardiac arrhythmias-atrial fibrillation
Arrhythmias, also called dysrhythmias, are abnormal heart rhythms caused by
abnormal conduction of electrical impulses in the conduction system of the
heart. Arrhythmias can be fast, slow, regular or irregular. They can cause the
heart to pump less effectively while they occur, depress the intrinsic muscle
function of the heart and cause fainting and even death.
The heart contains four chambers--two atria and two ventricles. The atria are
weakly contracting reservoirs holding blood returning to the heart while the
pumping chambers, the ventricles, contract and eject blood to the body. The
diagram below shows the structure of the human heart and its electrical
conduction system. This electrical system is responsible for controlling the
pumping behavior of the heart.
[DIAGRAM OF HEART]
The normal heart beat starts as an electrical signal in a group of specialized
cells in the right atrium, the sinus node, which acts as the pacemaker of the
heart. This signal spreads throughout the atria and to the atrioventricular, or
AV, node. The atria are electrically isolated from the ventricles, and the AV
node is the only place in the normal heart where the impulse from the atria can
be conducted to the ventricles. The rate of conduction through the AV node
determines the rate at which the ventricles contract. The impulse travels
through the atrioventricular node to specialized fibers to all parts of the
ventricles. This exact route must be followed for the heart to pump properly.
Atrial fibrillation is the most common of the sustained arrhythmias. In atrial
fibrillation, the electrical activity in the atria is chaotic and at an
extremely high rate, approximately 300 to 600 beats per minute, causing the
atrial muscle to quiver rather than contract normally. The AV node is unable to
conduct this extremely fast rate, but can conduct in the range of 120 to 180
beats per minute to the ventricle. Ventricular contraction at this rate is
ineffective because there is inadequate time for the ventricle to fill between
beats, and if it persists, causes a deterioration of ventricular pumping
function. Both of these consequences can be improved by controlling the rate
through slowing conduction through the AV node.
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The American Academy of Family Physicians reports that the incidence of atrial
fibrillation increases with age, with approximately 5% of the population at age
65 and 14% of people over age 84 having the arrhythmia. The incidence is
increasing due to the aging of the population and because patients with
underlying heart disease are surviving longer and developing atrial
fibrillation. In addition, atrial fibrillation is often secondary to conditions
such as congestive heart failure, the incidence of which is also increasing.
Treatment for atrial fibrillation consists of initially slowing the ventricular
response by slowing conduction through the AV node. Although many patients can
be initially converted back to a normal rhythm, the majority of these patients
will have recurrences of atrial fibrillation and ultimately end up in chronic
atrial fibrillation. Therefore, the majority of atrial fibrillation patients
will require long-term rate control by slowing conduction through the AV node.
Current therapies to control heart rate by slowing conduction through the AV
node, including digoxin, beta blockers and calcium channel blockers, have
significant shortcomings. Digoxin has slow onset when given intravenously in
the acute setting, provides poor rate control during exercise, and has a narrow
range between therapeutic effect and toxicity. Both beta blockers and calcium
channel blockers may cause symptomatic low blood pressure before achieving
adequate heart rate control. In addition, calcium channel blockers can
aggravate heart failure, which is becoming the most common underlying heart
disease leading to atrial fibrillation. Beta blockers can also aggravate acute
heart failure and cause wheezing.
It is well known that adenosine plays an important role in limiting the
conduction of rapid atrial rates through the AV node due to its action on the
A\\1\\ receptor. A\\1\\ receptor stimulation of the atrioventricular node has
little effect on heart rate in normal sinus rhythm, but when the AV node is
stressed by rapid atrial rates, the slowing of conduction is significantly
increased. This more dramatic effect at a higher rate is called use or rate
dependence. Use dependence should allow the use of low doses of an A\\1\\
agonist, minimizing the stimulation of other A\\1\\ receptors throughout the
body thereby limiting side effects.
Edema in congestive heart failure
The American Heart Association estimates that approximately 4.7 million people
in the United States currently suffer from congestive heart failure. Congestive
heart failure is a condition in which the heart is unable to pump enough blood
to meet the needs of the body's other organs. It is usually due to decreased
pumping efficiency, but can be due to the inability of the heart to relax
properly between beats.
Symptoms of congestive heart failure are related to inadequate blood flow and
sodium and fluid retention, or edema. Patients develop exercise intolerance,
cold skin, heat intolerance and fatigue from poor blood flow. The body
interprets the decreased blood flow as a decrease in blood volume as might
occur with dehydration or blood loss. This causes the body to retain sodium and
fluid. The excess fluid causes congestion in the lungs with shortness of breath
and accumulation of fluid in the extremities and abdominal organs. Treatment of
congestive heart failure is directed to improving symptoms and survival.
Congestive heart failure usually requires a treatment program of rest, a
sodium-restricted diet, modification of daily activities and drugs such as
angiotensin converting enzyme inhibitors, beta blockers, digitalis, diuretics
and vasodilators. Angiotensin converting enzyme inhibitors are the mainstay for
treatment of congestive heart failure. They improve symptoms and survival. Beta
blockers have also recently been shown to improve symptoms and survival.
Digitalis improves symptoms but has no effect on survival.
Diuretics are typically required to remove excess fluid caused by sodium
retention. The current diuretic agents for pharmacological treatment of edema
associated with congestive heart failure include loop diuretics such as
furosemide and torsemide, aldosterone antagonists like aldactone, thiazide
diuretics
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such as hydrochorthiazide and the potassium-sparing diuretics such as
amiloride. The loop and thiazide diuretics can cause dangerously low levels of
blood potassium that can result in life-threatening arrhythmias, especially if
used together. Oral potassium replacements are available, but are difficult to
take and dosage must be adjusted according to the results of blood tests.
Potassium-sparing diuretics can limit this potassium loss, but if used
inappropriately can cause equally dangerous increase in blood potassium levels.
Potassium-sparing diuretics must be used very carefully in combination with the
angiotensin converting enzyme inhibitors because of the additive effect on
potassium levels. In addition, the potent loop diuretics actually decrease the
kidney's blood flow. This decrease limits the kidney's ability to cleanse the
blood. It may lead to a resetting of kidney function that causes resistance to
diuretic treatment.
As mentioned earlier, adenosine is released in times of physiologic stress and
is elevated in the kidney in heart failure. The kidney senses the low cardiac
output of congestive heart failure and interprets it as low blood volume from
dehydration or blood loss. Adenosine A\\1\\ receptors constrict the blood
vessels leading into the kidney when activated leading to reduced kidney blood
flow, and thus reduced urine output.
CORPORATE COLLABORATIONS
Corporate collaborations are an integral part of our development and growth
strategy. We pursue alliances that allow us to:
... accelerate time to market for our drugs that address large markets that we
could not effectively reach with a sales force of our own;
... leverage our expertise in pre-clinical and clinical development of
cardiovascular and renal drugs;
... provide us with novel molecules for indications of strategic importance to
us; and
... help to validate the technology platform for our drugs.
We have established the following collaborations:
Schwarz Pharma AG--Rotigotine-CDS and Rotigotine-CDS reduced dose
In July 1998, we entered into a license agreement with Schwarz Pharma under
which we granted the exclusive, worldwide license to develop and commercialize
Rotigotine-CDS. The agreement provides for us to receive license fees and
pre-commercial regulatory milestone payments of up to $18.5 million, of which
we have received $9.2 million as of December 31, 2001, along with royalty rates
based on net sales of any products developed and launched by Schwarz Pharma
using our dopamine D\\2\\ agonists during the term of the agreement. As long as
Schwarz Pharma retains its license to our compounds, they are solely
responsible for the costs of developing and marketing the drugs. Schwarz Pharma
retains the right to terminate this agreement upon 30 days' written notice.
Schwarz Pharma is a stockholder of Aderis. See "Principal stockholders."
King--MRE-470
In August 1997, we entered into a development and commercialization agreement
with Medco Research, which was subsequently acquired by King Pharmaceuticals.
Under this agreement, we granted the exclusive, worldwide license to develop
and commercialize our proprietary adenosine A\\2A\\ agonists, including
MRE-470. We have also granted to King a right of first refusal to obtain a
license for any drug that we may develop using our proprietary adenosine
A\\2A\\ agonists. The agreement provides for us to receive pre-commercial
license and milestone payments of up to $8.6 million, of which we have received
$2.6 million as of December 31, 2001, along with a royalty based on the net
sales of any products developed from our adenosine A\\2A\\ agonists during the
term of the agreement. As long as King retains its license to MRE-470, they are
solely responsible for the costs of developing and marketing the drug but
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are under no obligation to do so. We retain co-development and co-promotion
rights in the United States for therapeutic applications of our drug compounds,
other than MRE-470, on a cost-shared basis. King retains the right to terminate
this agreement upon 30 days' written notice.
Fujisawa Healthcare--DTI-0009
In July 1999, we entered into a development and license agreement with Fujisawa
Healthcare under which we granted the exclusive license to develop and
commercialize an intravenous form of DTI-0009 in the United States and Canada.
We retain those rights for DTI-0009 outside the United States and Canada for
the intravenous formulation and worldwide for the oral formulation. The
agreement provides for us to receive license fees and pre-commercial regulatory
milestone payments of up to $13.0 million, of which we have received $4.9
million as of December 31, 2001, along with royalty payments based on net sales
of any products developed and launched by Fujisawa Healthcare using DTI-0009
during the term of the agreement. As long as Fujisawa Healthcare retains its
license to DTI-0009, they are solely responsible for the costs of developing
and marketing the drug. Fujisawa Healthcare retains the right to terminate this
agreement upon 30 days' written notice.
INTELLECTUAL PROPERTY
Patents, trademarks and trade secrets are central to the profitability of
pharmaceutical products, and our policy is to pursue intellectual property
protection aggressively for all our products. We own twelve issued US patents
and have filed four US patent applications relating to compounds active at
adenosine and dopamine receptor subtypes. In addition, we have filed patent
applications in certain foreign jurisdictions (and in appropriate cases have
had foreign patents issued) for these technologies. We have acquired options
and licenses to patents relating to products in pre-clinical research.
Rotigotine-CDS is protected by patents and applications relating to both our
dopamine D\\2\\ receptor agonist, the bulk drug manufacturing process and the
transdermal patch used to deliver the drug. Patents relating to the D\\2\\
agonist and its use in Parkinson's therapy were acquired from Whitby Research
at our formation for cash and a small royalty. All patents relating to the
D\\2\\ agonist and its use in Parkinson's therapy have been issued, and they
have US expiration dates ranging from 2003 to 2016. A patent application to the
bulk drug manufacturing process is pending. Our proprietary transdermal
delivery system is the subject of a patent application co-owned by us and the
contract manufacturer of this system. All patents relating to the Parkinson's
patch are licensed exclusively to Schwarz Pharma worldwide.
We have filed applications for patents relating to compounds being developed in
our adenosine receptor agonist and antagonist programs. These include basic
pharmaceutical composition of matter patents, and in some cases method of use
or method of treatment patents. Issued patents covering our adenosine A\\2A\\
receptor agonists, having expirations between 2009 and 2013, and one patent
application has been licensed to King.
SALES AND MARKETING
We currently have no sales and marketing employees, and no immediate plans to
hire any. We will make final decisions about sales and marketing at a later
date, but expect to depend in large part on collaboration with third parties
that have established distribution systems and direct sales forces.
MANUFACTURING
We do not currently have manufacturing capabilities, nor do we intend to
develop manufacturing capabilities for any products in the near future. Under
existing agreements, our corporate collaborators have assumed manufacturing
responsibility for our most advanced product candidates. If and when
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approved for marketing by the FDA, our dopamine D\\2\\ agonist patch for
Parkinson's disease will be manufactured by Schwarz Pharma. King will be
responsible for manufacturing our adenosine A\\2A\\ agonist for cardiac
imaging. Fujisawa Healthcare will be responsible for manufacturing our
adenosine A\\1\\ agonist for atrial fibrillation in intravenous formulations.
For pre-clinical and initial clinical studies with products earlier in our
development pipeline, we will use contract manufacturers to prepare current
good manufacturing practices, or cGMP, drug substances. We support our contract
manufacturers in the development of synthesis strategies, analytical assays,
and quality control procedures.
COMPETITION
The pharmaceutical and biotechnology industries are intensely competitive, and
technological progress can be rapid. Although we believe that our receptor
subtype specific drug candidates constitute new therapeutic classes of
molecules, we anticipate that each of the areas in which we are conducting
research and development may become the focus of intense competition. Almost
all of the larger biopharmaceutical companies have developed, or are attempting
to develop, products that will compete with products that may be developed from
our drug candidates.
Most of our competitors are larger than we are and have greater financial
resources, technical expertise or marketing, distribution or support
capabilities. We expect that we will face increased competition in the future
as new companies enter the market and advanced technologies become available.
Any of our competitors could broaden the scope of their drug products through
acquisition, collaboration or internal development to compete with us. Our
competitors may also develop new, more effective or affordable approaches or
technologies that compete with our drug candidates or render them obsolete.
Parkinson's disease
We believe that Schwarz Pharma and we were the first companies to conduct
extensive Phase II clinical trials with a once-per-day transdermal patch for
the treatment of Parkinson's disease. To date only multi-dose oral or
injectable agents have been approved as anti-Parkinson's therapy. While the
active agent, Rotigotine, is a new dopamine agonist and the patch is a novel
formulation, a number of effective dopamine agonists are already marketed in
oral dosage forms. One or more of the oral dopamine agonists are being
developed in once-per-day extended release dosage forms for oral delivery. It
is also possible that one or more of the current approved dopamine agonists
could have sufficient potency and skin permeability to be suitable for
formulation into a patch, but we are not aware of published reports of programs
currently in this area. There is also considerable effort and investment being
made by biotechnology firms in cell transplantation approaches to treatment of
this disease.
Cardiovascular disease
There has been a significant increase in competition in recent years in the
market for adenosine-based products. King, CV Therapeutics, Biogen, Fujisawa
Healthcare and Adenosine Therapeutics are all engaged in development programs
that could compete with one or more of our adenosine-based programs.
Restless Legs Syndrome
There are currently no medications indicated for the treatment of Restless Legs
Syndrome in the United States although there is significant off-label use of
drugs approved for other indications. We know of no plans by other companies to
pursue that indication and we believe there are no other transdermal
formulations in development for this indication.
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GOVERNMENT REGULATION
Government authorities in the United States and other countries extensively
regulate the research, development, testing, manufacture, promotion, marketing
and distribution of drug products. Drugs are subject to rigorous regulation by
the FDA in the United States and similar regulatory bodies in other countries.
The steps ordinarily required before a new drug may be marketed in the United
States are similar to steps required in most other countries and include:
... pre-clinical laboratory tests, pre-clinical studies in animals and
formulation studies and the submission to the FDA of an investigational new
drug application, or IND, for a new drug or antibiotic. The IND must become
effective before clinical trials may begin;
... adequate and well-controlled human clinical trials to establish the safety
and efficacy of the drug for each indication;
... the submission of a new drug application to the FDA; and
... FDA review and approval of the new drug application before any commercial
sale or shipment of the drug.
Pre-clinical tests include laboratory evaluation of product chemistry and
stability, as well as animal studies to evaluate toxicity. The results of
pre-clinical testing are submitted to the FDA as part of an IND application.
The FDA requires a 30-day waiting period after the filing of each IND
application before beginning clinical tests in humans. At any time during this
30-day period or at any time thereafter, the FDA may halt proposed or ongoing
clinical trials until the FDA authorizes trials under specified terms. The IND
application process may become extremely costly and substantially delay
development of our products. Moreover, positive results of pre-clinical tests
will not necessarily indicate positive results in clinical trials.
Clinical trials to support new drug applications are typically conducted in
three sequential phases that may overlap. These phases generally include the
following:
... Phase I: The drug is introduced into humans and is tested for safety, dose
tolerance and metabolism.
... Phase II: The drug is introduced into a limited patient population to:
. assess the efficacy of the drug in specific, targeted indications;
. assess dosage tolerance and optimal dosage; and
. identify possible adverse effects and safety risks.
... Phase III trials, or pivotal studies: If a compound is found to be
potentially effective and to have an acceptable safety profile in Phase II
evaluations, the clinical trial will be expanded to further demonstrate
clinical efficacy, optimal dosage and safety within an expanded patient
population at geographically dispersed clinical study sites.
The FDA, and the Institutional Review Board at each institution at which a
clinical trial is being performed, may suspend a clinical trial at any time for
various reasons, including a belief that the subjects are being exposed to an
unacceptable health risk.
The results of product development, pre-clinical animal studies and human
studies are submitted to the FDA as part of a new drug application, or NDA. The
NDA also must contain extensive manufacturing information. Once the submission
has been accepted for filing, the FDA has 180 days to review the application
and respond to the applicant. The review process is often significantly
extended by FDA
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requests for additional information or clarification. The FDA may refer the NDA
to an advisory committee for review, evaluation and recommendation as to
whether the application should be approved, but the FDA is not bound by the
recommendation of an advisory committee. Once approved, the FDA may withdraw
the product approval if compliance with pre- and post-market regulatory
standards is not maintained or if problems occur after the product reaches the
marketplace. In addition, the FDA may require post-marketing studies, referred
to as Phase IV studies, to monitor the effect of approved products, and may
limit further marketing of the product based on the results of these
post-market studies. The FDA has broad post-market regulatory and enforcement
powers, including the ability to levy fines and civil penalties, suspend or
delay issuance of approvals, seize or recall products, and withdraw approvals.
Satisfaction of FDA pre-market approval requirements for new drugs typically
takes several years and the actual time required may vary substantially based
upon the type, complexity and novelty of the product or disease. Government
regulation may delay or prevent marketing of potential products for a
considerable period of time and impose costly procedures upon our activities.
Success in early stage clinical trials does not assure success in later stage
clinical trials. Data obtained from clinical activities is not always
conclusive and may be susceptible to varying interpretations that could delay,
limit or prevent regulatory approval. Even if a product receives regulatory
approval, later discovery of previously unknown problems with a product may
result in restrictions on the product or even complete withdrawal of the
product from the market.
If regulatory approval of any of our products is granted, it will be limited to
certain disease states or conditions. The manufacturers of approved products
and their manufacturing facilities will be subject to continual review and
periodic inspections by the FDA and other authorities where applicable, and
must comply with FDA's cGMP regulations. Failure to comply with the statutory
and regulatory requirements subjects the manufacturer to possible legal or
regulatory action, such as suspension of manufacturing, seizure of product or
voluntary recall of a product. Adverse experiences with the product must be
reported to the FDA and could result in the imposition of market restriction
through labeling changes or in product removal. Product approvals may be
withdrawn if compliance with regulatory requirements is not maintained or if
problems concerning safety or efficacy of the product occur following approval.
Because we intend to contract with third parties for manufacturing of these
products, our ability to control third party compliance with FDA requirements
will be limited.
With respect to post-market product advertising and promotion, the FDA imposes
a number of complex regulations on entities that advertise and promote
pharmaceuticals, which include, among others, standards and regulations for
direct-to-consumer advertising, off-label promotion, industry-sponsored
scientific and educational activities and promotional activities involving the
internet. The FDA has very broad enforcement authority under the Federal Food
Drug and Cosmetic Act, and failure to abide by these regulations can result in
penalties including the issuance of a warning letter directing us to correct
deviations from FDA standards, a requirement that future advertising and
promotional materials be pre-cleared by the FDA, and state and federal civil
and criminal investigations and prosecutions.
We are also subject to various laws and regulations regarding laboratory
practices, the experimental use of animals and the use and disposal of
hazardous or potentially hazardous substances in connection with our research.
In each of these areas, as above, the FDA and other regulatory authorities have
broad regulatory and enforcement powers, including the ability to levy fines
and civil penalties, suspend or delay issuance of approvals, seize or recall
products, and withdraw approvals, any one or more of which could have a
material adverse effect upon us.
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Outside the United States our ability to market our products will also depend
on receiving marketing authorizations from the appropriate regulatory
authorities. The foreign regulatory approval process includes all of the risks
associated with FDA approval described above. The requirements governing the
conduct of clinical trials and marketing authorization vary widely from country
to country.
LEGAL PROCEEDINGS
We may from time to time become a party to legal proceedings arising in the
ordinary course of our business. Except as disclosed below, we are not
currently a party to any material pending litigation or other material legal
proceedings.
On January 18, 2002, we were served with a complaint filed by Mr. Joseph Ladd
against us. The complaint was filed with the US District Court in the Eastern
District of Louisiana. The complaint alleges that while the plaintiff was a
participant in a clinical trial of DTI-0017, he was injured as a result of his
participation in the trial. The complaint alleges that DTI-0017 caused his
injuries. The plaintiff is seeking monetary damages in the amount of $1,500,000.
On February 12, 2002, Ardais Corporation filed a complaint against us in the
United States District Court for the District of Massachusetts. The complaint
alleges unfair competition and trademark dilution under federal and
Massachusetts state law. Specifically, Ardais Corporation claims that our use
of the trademark ADERIS PHARMACEUTICALS dilutes the strength of their allegedly
famous trademark ARDAIS and constitutes unfair competition under federal and
state statutes. The plaintiff is seeking unspecified monetary relief and an
injunction to prevent us from using the ADERIS name. On March 27, 2002, we
filed an answer to the complaint denying its essential allegations.
We intend to defend ourselves vigorously against these claims. Nevertheless,
due to the uncertain nature of litigation, and because these cases are at an
early stage, we cannot be sure of the extent to which we may be found liable,
if at all, or if we will be enjoined from using the name ADERIS in the future.
EMPLOYEES
As of December 31, 2001, we had 21 full-time employees, including six with
doctoral degrees. Fourteen of our employees are engaged in research and
development, and all management and professional employees have had substantial
prior experience with pharmaceutical, biotechnology or medical products
companies. We believe our relations with our employees are good.
PROPERTY AND FACILITIES
We are currently leasing approximately 7,000 square feet of laboratory and
office space in Richmond, Virginia, which we occupy under a three-year lease,
expiring in November 2003. We are also currently leasing approximately 2,400
square feet of office space in Hopkinton, Massachusetts, which we occupy under
two leases ending in November 2002 and 2003. These leases are renewable at our
option for an additional three years upon written notice at least 120 days
prior to the expiration date of the lease. These facilities are adequate for
our current requirements.
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Scientific advisory board
We have established a group of scientists to advise us on scientific, technical
and commercialization issues. These advisors comprise leading scientists in the
areas of pharmacology, chemistry and biology. These advisors are:
Member Affiliation
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James W. Black, F.R.C.P., F.R.S............................. Professor of Analytical Pharmacology at
Nobel Laureate King's College Hospital Medical School,
London, England.
Paul Greengard, Ph.D........................................ Victor Astor Professor at Rockefeller
Nobel Laureate University in New York City.
Joseph R. Bianchine, M.D., Ph.D., F.A.C.P., F.A.C.C.P....... Senior Scientific Advisor, Schwarz Pharma
AG.
Ray A. Olsson, M.D.......................................... Professor of Cardiovascular Research of the
College of Medicine, University of South
Florida.
Juha P. Kokko, M.D., Ph.D................................... Associate Dean for Clinical Research,
Emory University.
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EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information as of December 31, 2001,
about our executive officers and members of our board of directors, as well as
certain other key employees.
Name Age Position
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Peter G. Savas.............................. 53 Chairman of the Board, Chief Executive
Officer and President
Donald A. McAfee, Ph.D...................... 60 Chief Technical Officer
Kenneth L. Rice, Jr......................... 47 Vice President, Chief Commercial Officer and
Secretary
William S. Wheeler, M.D., FACC.............. 53 Vice President and Chief Medical Officer
James V. Peck, Pharm.D...................... 51 Vice President of Research Operations
Noel J. Cusack, Ph.D........................ 61 Vice President and Chief Scientific Officer
Gevork I. Minaskanian, Ph.D................. 54 Vice President of Synthetic Chemistry
Stan M. Benson(1)........................... 50 Director
Gary E. Frashier(1)(2)...................... 65 Director
James I. Garvey(1).......................... 54 Director
Robert G. McNeil, Ph.D...................... 58 Director
Wayne I. Roe(2)............................. 51 Director
Michael J. Ross, Ph.D.(2)................... 52 Director
- --------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Peter G. Savas, Chairman of the Board, Chief Executive Officer and
President. Mr. Savas joined us in 2000 as Chairman of the Board of Directors,
Chief Executive Officer and President. Before joining us, Mr. Savas served as
Chief Executive Officer, Chairman and President of Unisyn, Inc. from 1992 to
2000. Before joining Unisyn, Mr. Savas was engaged as a business
development/turnaround consultant. In 1984, Mr. Savas founded Xydex
Corporation, a company that in-licensed and commercialized separations
technology that had been developed overseas. Prior to founding Xydex, Mr. Savas
held various positions at Millipore Corporation and Bristol Laboratories. Mr.
Savas holds a Bachelor of Science degree from Syracuse University.
Donald A. McAfee, Ph.D., Chief Technical Officer. A co-founder of Aderis, Dr.
McAfee has been a scientist and manager in academia and industry for more than
35 years. Before organizing Aderis in 1994, Dr. McAfee served for eight years
as Vice President, Research at Whitby Research, Inc., managing the drug
discovery programs. Prior to entering the pharmaceutical industry, Dr. McAfee
served as Chairman of the Division of Neurosciences at the Beckman Research
Institute (City of Hope) and held faculty appointments at the Yale University
School of Medicine and the University of Miami School of Medicine. He has
authored more than 100 articles and book chapters in neuroscience and
pharmacology. He is currently an adjunct professor at the University of
California, Irvine and at the Medical College of Virginia, and is a frequent
lecturer to the industry in drug discovery for the Pharmaceutical Education
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and Research Institute. Dr. McAfee received his Ph.D. in Physiology from the
University of Oregon School of Medicine.
Kenneth L. Rice, Jr., Vice President, Chief Commercial Officer and
Secretary. Mr. Rice joined us in April 2001. Prior to joining us, Mr. Rice was
Vice President, Chief Financial Officer, Secretary, Treasurer and General
Counsel of MacroChem Corporation, a drug delivery company from 1999 to 2001.
Before joining MacroChem, Mr. Rice was Vice President, Finance and
Administration, Chief Financial Officer and Secretary at Pentose
Pharmaceuticals, Inc. from 1998 to 1999. Mr. Rice held similar financial and
operating positions at Unisyn Technologies, Inc. from 1993 to 1998 and Zymark
Corporation. Mr. Rice spent his early career at Millipore Corporation where he
attained the position of Corporate Tax Director. Mr. Rice holds an L.L.M. in
Taxation from Boston University Law School, a J.D. from Suffolk Law School and
an M.B.A. and B.S.B.A. from Babson College.
William S. Wheeler, M.D., FACC, Vice President and Chief Medical Officer. Dr.
Wheeler, who joined us in April 2001, is board certified in internal medicine
and cardiovascular diseases and is a fellow of the American College of
Cardiology. Prior to joining us, Dr. Wheeler served as Vice President of
Cardiovascular/Critical Care at Quintiles Inc., a contract research
organization that performs clinical trials for the pharmaceutical industry,
from 1999 to 2001. Prior to joining Quintiles, Dr. Wheeler managed a private
practice in Interventional Cardiology while serving as Chief of Cardiology and
member of the board of directors at Cardinal Healthcare, a multi-specialty
internal medicine practice, from 1996 to 1999. Previously, Dr. Wheeler served
as Associate Medical Director in the Cardiovascular Section at Burroughs
Wellcome Co. where he conducted global trials in acute coronary syndrome and
heart failure. Before entering the pharmaceutical industry, Dr. Wheeler held
numerous positions at East Carolina University School of Medicine. Dr. Wheeler
received his cardiology training at Cedars-Sinai Medical Center in Los Angeles,
California. Dr. Wheeler completed his Internal Medicine Residency at Los
Angeles County/University of Southern California Medical Center (LAC/USC). He
earned his M.D. from the University of California, Los Angeles and his B.S. in
Zoology from California State College, Long Beach, California.
James V. Peck, Pharm.D., Vice President of Operations. A co-founder of Aderis,
Dr. Peck has served as Vice President, Operations, since our inception. From
1972 until he co-founded us, he served as Director of Chemistry at Whitby
Research, Inc. (formerly Nelson Research and Development). Dr. Peck earned his
Pharm.D. from the University of Southern California. He is a licensed
pharmacist in both California and Virginia, and is an inventor on more than
three dozen patents and patent applications.
Noel J. Cusack, Ph.D., Vice President and Chief Scientific Officer. A
co-founder of Aderis, Dr. Cusack has served as Vice President, and Chief
Scientific Officer since our inception. From 1988 until he co-founded us, he
served as Director of Pharmacology at Whitby Research, Inc. Previously, he held
academic appointments at Cambridge University and King's College, London. He is
the author of numerous articles on the chemistry and pharmacology of adenine
derivatives. Dr. Cusack is currently an adjunct professor at the University of
California at Irvine, and a frequent lecturer in pharmacology for the
Pharmaceutical Education and Research Institute. Dr. Cusack received his Ph.D.
from the University of Bradford, U.K.
Gevork Minaskanian, Ph.D., Vice President of Synthetic Chemistry. A co-founder
of Aderis, Dr. Minaskanian leads our chemistry program. From 1981 until he
co-founded us, he served as Scientist and Principal Research Scientist at
Whitby Research, Inc. (formerly Nelson Research and Development), and is the
inventor of more than three dozen patents and publications. Dr. Minaskanian is
also an adjunct professor of Chemistry at Virginia Commonwealth University. He
received his Ph.D. from Texas Tech University.
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Stan M. Benson. Mr. Benson was elected a director in September 2001 by our
board of directors. Mr. Benson currently serves as a director of Aradigm
Corporation, a pharmaceutical delivery company. Mr. Benson served as Senior
Vice President, Sales and Marketing of Amgen Inc., a biotechnology company,
from June 1995 to March 2001. Prior to joining Amgen, Mr. Benson worked at
Pfizer, a pharmaceutical company, for 19 years in various senior management
positions. Mr. Benson received a B.A. in mathematics and computer science from
New York University and an M.S. in mathematics also from New York University.
Gary E. Frashier. Mr. Frashier was elected a director in August 2001 by our
board of directors. Mr. Frashier is currently President and Principal of
Management Associates, a healthcare and management consulting group. From 1990
to 2000, Mr. Frashier served as Chairman of the board of directors, Chief
Executive Officer and President of OSI Pharmaceuticals. Mr. Frashier has over
30 years executive management experience in pharmaceutical, biotechnology and
scientific instrument companies including Waters Associates, Millipore
Corporation and Genex Corporation. Mr. Frashier holds a B.S. in chemical
Engineering from Texas Technological University, where he was honored as a
Distinguished Engineer and an M.S. in Management from M.I.T., where he was
named a Sloan Fellow. Mr. Frashier currently serves on the boards of Maxim
Pharmaceuticals, Inc. and eXegenics, Inc. and several private biopharmaceutical
companies.
James Garvey. Mr. Garvey was elected a director in September 2001 by our board
of directors. Mr. Garvey currently serves as the Chief Executive Officer and
Managing Partner of Schroder Ventures Life Sciences, a private venture capital
firm, and has served in this capacity since May 1995. Prior to joining Schroder
Ventures, Mr. Garvey was Director of the Venture Capital Division of Allstate
Corp. He has served on several public and private healthcare boards in the
United States and Europe. Mr. Garvey received a BSE degree from Northern
Illinois University in 1969.
Robert G. McNeil, Ph.D. Dr. McNeil has been a director since our inception.
Dr. McNeil is the General Partner and Founding Member of Sanderling, a
biomedical fund. Dr. McNeil holds a Ph.D. in molecular biology, biochemistry
and genetics from the University of California, Irvine.
Wayne I. Roe. Mr. Roe was elected a director in August 2001 by our board of
directors. Mr. Roe currently serves as a director of Aradigm Corporation and
Ista Pharmaceuticals, Inc. and several private companies in the life sciences
field. From October 1999 until November 2000, Mr. Roe was Senior Vice President
of United Therapeutics Corporation, a pharmaceutical manufacturer. From March
1996 until March 1999, he was Chairman of Covance Health Economics and Outcomes
Services, Inc., a contract research and developmental services company to the
medical technology marketplace. From June 1988 to March 1996, Mr. Roe was the
President of Health Technology Associates, a pharmaceutical industry consulting
firm. Mr. Roe received a B.A. from Union College, an M.A. from the State
University of New York at Albany and an M.A. from the University of Maryland.
Michael J. Ross, Ph.D. Dr. Ross was elected a director in September 2001 by
our board of directors. Dr. Ross currently serves as a managing partner of
Didyma LLC, a management consulting firm specializing in management of startup
companies. Dr. Ross was the founding Chief Executive Officer of Axys
Pharmaceuticals, Inc. (formerly Arris Pharmaceuticals), a biopharmaceutical
company, and MetaXen LLC, a company which was recently sold to Exelixis
Pharmaceuticals Inc. Prior to that, Dr. Ross worked at Genentech for 13 years
where he served as Vice President of Development and Vice President of
Medicinal and Biomolecular Chemistry. Dr. Ross has served on a number of boards
of directors and been involved in a number of biotech/pharmaceutical
partnerships. Dr. Ross received his A.B. from Dartmouth College, his Ph.D. from
The California Institute of Technology and completed his post-doctoral studies
at Harvard University.
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BOARD COMPOSITION
Our bylaws require our board of directors to consist of one or more members. We
currently have seven authorized directors. At each annual meeting of
stockholders, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the next
annual meeting following election or special meeting held in lieu thereof and
until their successors are duly elected and qualified. Executive officers are
elected by and serve at the direction of our board of directors.
BOARD COMMITTEES
Audit committee
The audit committee consists of Messrs. Frashier and Roe and Dr. Ross, all of
whom are outside directors. The audit committee recommends engagement of our
independent auditors, approves the services performed by such auditors and
reviews and evaluates our accounting policies and its systems of internal
accounting controls.
Compensation committee
The compensation committee consists of Messrs. Frashier, Benson and Garvey, all
of whom are outside directors. The compensation committee administers our 1995
stock option plan and 2001 incentive award plan and is authorized by the board
of directors to make recommendations with respect to matters of compensation,
including the compensation of our executive officers.
COMPENSATION COMMITTEE INTERLOCKS
The members of the compensation committee of our board of directors are
currently Messrs. Frashier, Garvey and Benson. No member of our board of
directors or of our compensation committee serves as a member of the board of
directors or compensation committee of an entity that has one or more executive
officers serving as members of our board of directors or compensation committee.
DIRECTOR COMPENSATION
We reimburse our non-employee directors for expenses incurred in connection
with attending board and committee meetings but do not compensate them for
their services as board or committee members. Our board has the discretion to
grant options to non-employee directors.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
Our amended and restated certificate of incorporation includes a provision that
eliminates the personal liability of our directors for monetary damages to the
fullest extent permitted by law. Our bylaws provide that we will indemnify our
directors and may indemnify our other directors, officers or employees to the
fullest extent permitted by Delaware law. Under current Delaware law, a
director's liability to us or our stockholders may not be limited:
... to any breach of the director's duty of loyalty to us or our stockholders;
... for acts or omissions not in good faith or involving intentional misconduct;
... for knowing violations of law;
... for any transaction from which the director derived an improper personal
benefit;
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Management
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... for improper transactions between the director and us; and
... for improper distributions to stockholders and loans to directors and
officers.
We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, indemnify our directors and executive officers
for certain expenses, including attorneys' fees, judgments, fines and
settlement amounts incurred by any such person in any action or proceeding,
including any action by us arising out of such person's services as our
director or executive officer, any of our subsidiaries or any other company or
enterprise to which the person provides services at our request. We believe
that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers. Currently, there is no
pending litigation or proceeding involving any of our directors, executive
officers or employees for which indemnification is sought, nor are we aware of
any threatened litigation that may result in claims for indemnification.
We currently have directors' and officers' liability insurance.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or paid
to our chief executive officer and our other most highly compensated officers
whose annual salary and bonus exceeded $100,000 for services rendered in all
capacities to us during the year ended December 31, 2001.
Summary compensation table
Long-term
compensation
2001 compensation awards
----------------- ------------
Shares
underlying
Name and principal position Salary Bonus options
- -----------------------------------------------------------------------------------------
Peter G. Savas............................................ $364,503 $187,964 330,000
Chief Executive Officer and President(1)
Donald A. McAfee, Ph.D.................................... 270,000 35,381 --
Chief Technical Officer
William S. Wheeler, M.D................................... 172,436 -- 206,250
Vice President and Chief Medical Officer(2)
Noel J. Cusack, Ph.D...................................... 162,500 12,433 --
Vice President and Chief Scientific Officer
James V. Peck, Pharm.D.................................... 175,000 4,144 --
Vice President-Research Operations
Kenneth L. Rice, Jr....................................... 141,166 -- 206,250
Vice President, Chief Commercial Officer and Secretary(3)
- --------
(1) Included in salary compensation is $14,503 paid in the form of insurance
premiums.
(2) Dr. Wheeler joined us in April 2001.
(3) Mr. Rice joined us in April 2001.
In accordance with the rules of the commission, the compensation described in
this table does not include medical, group life insurance or other benefits
received by the named executive officers that are available generally to all of
our salaried employees and certain perquisites and other personal benefits
received by the named executive officers, which do not exceed the lesser of
$50,000 or 10% of any such officer's salary and bonus disclosed in this table.
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Management
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Option grants in last fiscal year
The following table sets forth information regarding options granted to each of
the officers listed in the Summary compensation table during the year ended
December 31, 2001.
Individual grants in 2001 Potential realizable
---------------------------------------------- value
at assumed
Number of Percent of annual rates of stock
securities total options price appreciation for
underlying granted to Exercise option term
options employees price Expiration ----------------------
Name granted in fiscal year per share date 5% 10%
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Peter G. Savas.............. 330,000 39.7% $0.67 2011 $6,767,958 $10,907,155
Chief Executive Officer and
President
Donald A. McAfee, Ph.D...... -- -- -- -- -- --
Chief Technical Officer
William S. Wheeler, M.D..... 206,250 24.8 0.67 2011 4,229,974 6,816,972
Vice President and Chief
Medical Officer
Noel J. Cusack, Ph.D........ -- -- -- -- -- --
Vice President and Chief
Scientific Officer
James V. Peck, Pharm.D...... -- -- -- -- -- --
Vice President-Research
Operations
Kenneth L. Rice, Jr......... 206,250 24.8 0.67 2011 4,229,974 6,816,972
Vice President, Chief
Commercial Officer and
Secretary
The information regarding stock options granted to named executive officers as
a percentage of total options granted to employees in the fiscal year, as
disclosed in the table, is based upon options to purchase an aggregate of
831,600 shares of common stock that were granted to all employees as a group,
including the named executive officers, in the fiscal year ended December 31,
2001.
There was no public trading market for our common stock as of December 31,
2001. Accordingly, the exercise price per share of each option granted was
equal to the fair market value of the common stock as determined by the board
of directors on the date of the grant.
Potential realizable values are computed by (1) multiplying the number of
shares of common stock subject to a given option by an assumed initial offering
price of $13.00 per share; (2) assuming that the aggregate stock value derived
from that calculation compounds at an annual 5% or 10% rate shown in the table
for the entire ten-year term of the option; and (3) subtracting from that
result the aggregate option exercise price. The 5% or 10% assumed annual rates
of the stock price appreciation are mandated by the rules of the commission and
do not represent our estimate or projection of future common stock prices.
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Management
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FISCAL YEAR-END OPTION VALUES
The following table sets forth, as to the named officers, certain information
concerning the number and value of unexercised options held by each of the
named executive officers at December 31, 2001.
The information regarding the value of unexercised in-the-money options is
based on a value of $13.00 per share, the initial public offering price, minus
the per share exercise price, multiplied by the number of shares underlying the
option.
Number of securities Value of unexercised
underlying unexercised options in-the-money options at
Shares at December 31, 2001 December 31, 2001
acquired on Value ------------------------------ -------------------------
Name exercise realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------
Peter G. Savas -- -- 154,890 670,756 $1,957,244 $8,487,428
Chief Executive Officer
and President
Donald A. McAfee, Ph.D. -- -- 180,991 29,384 2,295,070 371,305
Chief Technical Officer
William S. Wheeler, M.D. -- -- -- 206,250 -- 2,543,750
Vice President and
Chief Medical
Officer
Noel J. Cusack, Ph.D. -- -- 130,307 15,718 1,652,208 198,617
Vice President and
Chief Scientific
Officer
James V. Peck, Pharm.D. -- -- 130,307 15,718 1,652,208 198,617
Vice President-Research
Operations
Kenneth L. Rice, Jr. -- -- -- 206,250 -- 2,543,750
Vice President, Chief
Commercial Officer
and Secretary
EMPLOYMENT AGREEMENTS
Each of Messrs. Rice and Savas and Dr. Wheeler entered into an employment
agreement dated as of January 2, 2002. Each of the agreements extend through
January 1, 2004 and will automatically be extended for successive one year
periods thereafter unless a notice to terminate the agreement is delivered by
either party upon not less than 30 days prior to the end of such period.
Under each agreement, the executive receives a stated annual base salary, which
is reviewed annually by our compensation committee, and is eligible to
participate in our discretionary bonus program. Each agreement provides for our
board of directors to determine, on an annual basis, the amount of each
executive's bonus, if any.
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Management
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Each of these employment agreements provides that upon termination of
employment, either by us without cause or by the executive for good reason:
... each executive will be entitled to an amount equal to (a) monthly base
salary multiplied by the greater of (i) the remaining number of months
under the employment agreement and (ii) 12 and (b) the average annual bonus
received over the last 24 months;
... each executive will have the right to continue to participate in our
health, life and long term disability benefits plans for the greater of (a)
the amount of time remaining under the agreement or (b) one year after the
date of termination; and
... any unvested stock options held by the executive will become immediately
exercisable and any restricted stock.
Each employment agreement also provides that for a period of one year after the
termination of the executive's employment for any reason, the executive will
not engage in activities similar to those engaged in during the two years
immediately preceding their termination or render similar services to any
direct competitor of ours without our prior written consent.
EMPLOYEE BENEFIT PLANS
1995 Stock Option Plan
Purpose
Our board of directors adopted the 1995 Stock Option Plan on March 29, 1995 and
our stockholders approved it on March 29, 1995. The stock option plan provides
for grants of incentive stock options, as defined in Section 422 of the
Internal Revenue Code of 1986, to our employees, as well as non-qualified stock
options to our employees, directors and consultants. The stock option plan is
intended to facilitate the retention of current employees, consultants or
directors as well as to secure and retain the services of new employees,
consultants and directors and to provide incentives for such persons to exert
maximum efforts for the success of the company.
Administration
The stock option plan is administered by the board of directors unless the
board of directors delegates administration to a compensation committee which
shall be comprised of two or more members, appointed by the board of directors,
each a "disinterested person" as defined by Rule 16b-3(c)(2)(i) under the
Securities Exchange Act of 1934. The board of directors, or the compensation
committee if so empowered, has the power to interpret the stock option plan and
to adopt such rules for the administration, interpretation and application of
the stock option plan as are consistent with the stock option plan.
Securities reserved
The aggregate number of shares of our common stock issuable under the stock
option plan is 2,475,000.
Grant of awards
Certain employees, consultants and directors are eligible to be granted awards
under the stock option plan. The board of directors, or the compensation
committee if so empowered, determines (1) which employees, consultants, and
directors are to be granted awards; (2) the number of shares subject to option
grants; (3) whether the options are to be incentive stock options or
non-qualified stock options (except that only our employees may be granted
incentive stock options); (4) terms and conditions of such options, consistent
with the stock option plan; and (5) the type of award that is granted. The
board of directors, or the compensation committee if so empowered, has the
discretion, subject to the limitations of the stock option plan and applicable
laws, to grant incentive stock options and non-
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qualified stock options. A director shall not be eligible to be granted awards
under the stock option plan unless the board of directors has (1) delegated its
discretionary authority over the stock option plan to the compensation
committee; or (2) otherwise complied with the requirements of Rule 16b-3 under
the Securities Exchange Act of 1934.
Limitation on incentive stock option treatment.
Even if an option agreement designates an option as an incentive stock option,
no option will qualify as an incentive stock option if the aggregate fair
market value of stock (determined as of the date of grant) with respect to all
of a holder's incentive stock options is exercisable for the first time during
any calendar year under the stock option plan or under any other of our plans,
as applicable, exceeds $100,000. Any option failing to qualify as an incentive
stock option will be deemed to be a non-qualified stock option.
Exercise price
The board of directors, or the compensation committee if so empowered, shall
set the per share exercise price, subject to the following rules: (1) in the
case of incentive stock options, the exercise price shall not be less than 100%
of the fair market value of shares of our common stock on the grant date for
all options granted; (2) in the case of non-qualified stock options, the
exercise price shall not be less than 85% of the fair market value of shares of
our common stock on the grant date for all options granted; and (3) for the
persons owning (within the meaning of 424(d) of the Internal Revenue Code of
1986) more than 10% of the total combined voting power of all classes of our
capital stock or of any of our subsidiaries, the exercise price shall be not
less than 110% of the fair market value of the shares of our common stock on
the grant date. The fair market value of a share of our common stock as of a
given date will be determined in good faith by the board of directors.
Expiration of awards
The term of an award is set by the board of directors, or the compensation
committee if so empowered, subject to the following conditions: (1) that no
award term shall be longer than ten years from the date of grant; and (2) the
award term for a person owning more than 10% of the total combined voting power
of all classes of our capital stock shall not exceed five years from the date
of grant. Upon termination of an outstanding option holder's status as our
employee or consultant, the holder may exercise his or her options within the
period of time specified in the option grant, to the extent that the options
were vested at the time of termination. If no time period was specified in the
notice of grant, the option shall remain exercisable for three months following
the holder's termination of status as an employee or consultant, or until the
date of expiration of the option as set forth in the option agreement,
whichever is earlier. Options granted under the plan must be exercised within
twelve months if the holder's employment ends due to disability, and within
eighteen months of the holder's death, or until the date of expiration of the
option as set forth in the option agreement, whichever is earlier.
Adjustments of awards
If the board of directors, or the compensation committee if so empowered,
determines that there is a corporate event, defined as a dividend,
recapitalization, reclassification, stock split, merger, consolidation,
split-up, spin-off, combination, consolidation, dissolution or other similar
corporate transaction that affects our common stock which causes dilution or
enlargement of benefits under the stock option plan, then the board of
directors, or the compensation committee if so empowered, may appropriately
adjust (1) the aggregate number of shares of our common stock subject to the
stock option plan; (2) the number of shares of our common stock subject to the
outstanding awards; and (3) the price per share of our common stock upon
exercise of outstanding awards to counter the dilution or enlargement of
benefits.
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Change of control
Upon the occurrence of a merger or the sale of substantially all of our assets,
each outstanding award shall be assumed or substituted for an equivalent option
by the successor corporation or shall continue in full force and effect. If the
successor corporation refuses to assume or substitute the awards, each holder
of an award shall be entitled to immediately exercise the award for all shares
of our common stock under the award, including unvested shares.
Amendment and termination
The board of directors, or the compensation committee if so empowered, may
amend, modify, suspend or terminate the stock option plan at any time, except
the board of directors, or the compensation committee if so empowered, must
obtain approval of our stockholders within twelve months before or after such
action to (1) increase the number of shares of our common stock that may be
issued under the stock option plan; or (2) to modify the requirements as to
eligibility for participation in the stock option plan.
Certain restrictions on resale
The board of directors, or the compensation committee if so empowered, may
require any person granted an award to give written assurances stating that
such person has no intention of selling or otherwise distributing the shares of
our common stock they acquire upon exercise of their options under the stock
option plan except that they may offer or sell the shares if they make such
offers and sales (1) pursuant to an effective registration statement under the
Securities Act of 1933; or (2) a determination is made by our counsel that such
requirements need not be meet pursuant to an appropriate exemption from the
registration requirements of the Securities Act of 1933.
2001 Incentive Award Plan
Purpose
Our board of directors adopted the 2001 Incentive Award Plan on November 14,
2001 and our stockholders approved it on November 14, 2001.
Administration
The incentive award plan is administered by the compensation committee, which
shall be comprised of two or more directors, appointed by the board of
directors, each a "non-employee director" as defined by Rule 16b-3 under the
Securities Exchange Act of 1934 and an "outside director" under Section 162(m)
of the Internal Revenue Code of 1986. The compensation committee has the power
to interpret the incentive award plan and to adopt such rules for the
administration, interpretation and application of the incentive award plan as
are consistent with the incentive award plan, to interpret, amend or revoke any
such rules and to amend any award agreement provided that the rights or
obligations of the holder of the award that is the subject of any award
agreement is not affected adversely.
Securities reserved
The aggregate number of shares of our common stock issuable under the incentive
award plan is 1,155,000.
Grant of awards
Certain employees, consultants, and directors are eligible to be granted awards
under the incentive award plan. The compensation committee determines (1) which
employees, consultants, and directors are to be granted awards; (2) the number
of shares subject to option grants; (3) whether the options are to be incentive
stock options or non-qualified stock options (except that only our employees
may be granted incentive stock options); (4) terms and conditions of such
options, consistent with the incentive award
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Management
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plan and (5) the type of award that is granted. The compensation committee has
the discretion, subject to the limitations of the incentive award plan and
applicable laws, to grant incentive stock options, non-qualified stock options,
restricted stock awards, performance awards, dividend equivalents, deferred
stock, stock payments, and stock appreciation rights.
Limitation on incentive stock option treatment
Even if an option agreement designates an option as an incentive stock option,
no option will qualify as an incentive stock option if the aggregate fair
market value of stock (determined as of the date of grant) with respect to all
of a holder's incentive stock options is exercisable for the first time during
any calendar year under the incentive award plan or under any other of our
plans, as applicable, exceeds $100,000. Any option failing to qualify as an
incentive stock option will be deemed to be a non-qualified stock option.
Exercise price
The compensation committee shall set the per share exercise price, subject to
the following rules: (1) in the case of incentive stock options, the exercise
price shall not be less than 100% of the fair market value of shares of our
common stock on the grant date for all options granted; and (2) for the persons
owning (within the meaning of 424(d) of the Internal Revenue Code of 1986) more
than 10% of the total combined voting power of all classes of our capital stock
or of any of our subsidiaries, the exercise price shall be not less than 110%
of the fair market value of the shares of our common stock on the grant date.
The fair market value of a share of our common stock as of a given date will
be, after the date of this offering, the average of the mean between the
closing representative bid and asked prices for a share of our common stock on
the trading day previous to such date, as reported by Nasdaq or such successor
quotation system, on such date (or the next preceding trading day, if our
common stock is not traded on that date).
Expiration of awards
The term of an award is set by the compensation committee, subject to the
following conditions: (1) that no award term shall be longer than ten years
from the date of grant; and (2) the award term for a person owning more than
10% of the total combined voting power of all classes of our capital stock
shall not exceed five years from the date of grant. The compensation committee
also establishes the time period following termination of employment, death or
disability during which vested options may be exercised, subject to the
requirements of Section 422 of the Internal Revenue Code of 1986 with respect
to incentive stock options.
Adjustments of awards
If the compensation committee determines that there is a corporate event,
defined as a dividend, recapitalization, reclassification, stock split, merger,
consolidation, split-up, spin-off, combination, consolidation, dissolution or
other similar corporate transaction that affects our common stock which causes
dilution or enlargement of benefits under the incentive award plan, then the
compensation committee may appropriately adjust (1) the aggregate number of
shares of our common stock subject to the incentive award plan; (2) the number
of shares of our common stock subject to the outstanding awards; and (3) the
price per share of our common stock upon exercise of outstanding awards to
counter the dilution or enlargement of benefits.
Change of control
Upon the occurrence of a merger or sale of substantially all of our assets,
each outstanding award shall be assumed or substituted for an equivalent option
by the successor corporation, or a parent or subsidiary of the successor
corporation. If the successor corporation refuses to assume or substitute the
awards, each holder of an award shall be entitled to immediately exercise the
award for all shares of our common stock under the award, including unvested
shares.
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Amendment and termination
The compensation committee may amend, modify, suspend or terminate the
incentive award plan at any time, except the compensation committee must obtain
approval of our stockholders within 12 months before or after such action to
increase the number of shares of our common stock that may be issued under the
incentive award plan.
Certain restrictions on resale
Employees, officers and directors who are our "affiliates" as defined by the
rules and regulations under the Securities Act of 1933, may offer or sell the
shares of our common stock they acquire upon exercise of their options under
the incentive award plan only if they make such offers and sales (1) pursuant
to an effective registration statement under the Securities Act of 1933;
(2) pursuant to an appropriate exemption from the registration requirements of
the Securities Act of 1933; or (3) within the limitations and subject to the
conditions set forth in Rule 144 under the Securities Act of 1933.
401(K) Plan
Effective January 2002, we adopted an employee savings and retirement plan,
that is intended to qualify under Section 401(k) of the Internal Revenue Code,
covering all of our employees. Pursuant to the 401(k) plan, employees may elect
to reduce their current compensation by up to the statutorily prescribed annual
limit and have the amount of the reduction contributed to the 401(k) plan. We
may make matching or additional contributions to the 401(k) plan in amounts to
be determined annually by our board of directors.
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Related party transactions
PREFERRED STOCK SALES
From February 2000 through August 2001, we issued the following securities to
various investors in private placement transactions:
... in February 2000 and May 2000, we issued and sold an aggregate of 538,776
shares of our Series C convertible preferred stock at a price per share of
$10.21; and
... in February 2001, March 2001 and August 2001, we issued and sold an
aggregate of 4,076,834 shares of our Series D convertible preferred stock
at a price per share of $11.00.
Investors in these transactions included the following directors, holders of
more than 5% of our outstanding stock and their affiliates and collaborator.
Our executive officers and stockholders associated with our officers, did not
purchase shares in these transactions. Upon the closing of this offering, the
following shares of preferred stock will convert into common stock at the rate
of 1.65 shares of common stock for each share of Series A and Series B
preferred stock and at a rate of
approximately 1.66 shares of common stock for each share of Series C and Series
D preferred stock.
Shares of Shares of Shares of Shares of
Shares of Series A Series B Series C Series D
common preferred preferred preferred preferred
Purchaser stock stock stock stock stock
- ---------------------------------------------------- --------- --------- --------- --------- ---------
Five percent stockholders
Entities affiliated with the Sanderling Group(1).. 740,338 333,334 409,900 -- 409,091
Entities affiliated with the Alliance Group(2).... 290,535 198,020 553,289 -- --
Entities affiliated with New York Life(3)......... 104,881 132,013 283,167 -- 158,655
Entities affiliated with Schroder(4).............. -- -- -- -- 454,546
International Biotechnology Trust PLC............. -- -- -- -- 454,545
China Development Industrial Bank................. -- -- -- -- 454,545
Schwarz Pharma AG(5).............................. -- -- -- 489,804 200,000
- --------
(1) Sanderling Venture Partners III, L.P. owns 372,646 shares of common stock,
177,355 shares of Series A preferred stock, 240,802 shares of Series B
preferred stock and 4,718 shares of Series D preferred stock; Sanderling
III Biomedical, L.P. owns 64,321 shares of common stock, 30,618 shares of
Series A preferred stock, 41,568 shares of Series B preferred stock and
813 shares of Series D preferred stock; Sanderling III Limited Partnership
owns 193,369 shares of common stock, 92,028 shares of Series A preferred
stock, 124,952 shares of Series B preferred stock and 2,444 shares of
Series D preferred stock; Sanderling Ventures Management owns 1,116 shares
of Series D preferred stock; Sanderling IV Biomedical Co-Investment Fund,
L.P. owns 145,455 shares of Series D preferred stock; Sanderling Ventures
Management FBO Fred A. Middleton owns 55,002 shares of common stock, 16,667
shares of Series A preferred stock and 1,289 shares of Series B preferred
stock; Sanderling Management Company, LLC Retirement Trust FBO Robert G.
McNeil owns 55,000 shares of common stock, 16,666 shares of Series A
preferred stock and 1,289 shares of Series B preferred stock; Sanderling
Venture Partners IV Co-Investment Fund, L.P. owns 72,727 shares of Series D
preferred stock; Sanderling Venture Partners V Co-Investment Fund, L.P.,
owns 181,818 shares of Series D preferred stock. Dr. McNeil is a General
Partner at Sanderling and has been a director of Aderis since 1994.
(2) Alliance Technology Ventures, L.P. owns 268,982 shares of common stock,
183,330 shares of Series A preferred stock, 489,275 shares of Series B
preferred stock; ATV/MFJ Parallel Fund, L.P. owns 21,553 shares of common
stock, 8,203 shares of Series A preferred stock and 38,896 shares of Series
B preferred stock; ATV/GP Parallel Fund, L.P. owns 6,487 shares of Series A
preferred stock and 25,118 shares of Series B preferred stock.
(3) Mac & Co. FBO New York Life Bio Venture Partners LLC owns 158,655 shares of
Series D preferred stock; New York Life Insurance Company owns 104,881
shares of common stock, 132,013 shares of Series A preferred stock and
283,167 shares of Series B preferred stock.
(4) Schroder Ventures International Life Sciences Fund II LP1 owns 266,323
shares of Series D preferred stock; Schroder Ventures International Life
Sciences Fund II LP2 owns 113,425 shares of Series D preferred stock;
Schroder Ventures International Life Sciences Fund II LP3 owns 30,227
shares of Series D preferred stock; Schroder Ventures International Life
Sciences Fund II Strategic Partners L.P. owns 4,109 shares of Series D
preferred stock; Sitco Nominees Limited VC-01903 as Nominee of Schroder
Ventures International Life Sciences Fund II Group Co-Investment Scheme
owns 7,659 shares of Series D preferred stock and SV (Nominees) Limited as
Nominee of Schroder Ventures Investments Limited owns 32,803 shares of
Series D preferred stock. Mr. Garvey is the Chief Executive Officer and
Managing Partner of Schroder Ventures Life Sciences and has been a director
of Aderis since September 2001. Mr. Ross is a General Partner of Schroder
Ventures Life Sciences and has been a director of Aderis since September
2001.
(5) Schwarz Pharma AG is our collaborator on Rotigotine-CDS.
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64
Related party transactions
- --------------------------------------------------------------------------------
In connection with the above-described transactions and sales of our Series A
preferred stock and Series B preferred stock, we entered into an agreement with
the investors providing for registration rights with respect to the shares of
common stock issuable upon conversion of the preferred stock. For more
information, please see "Description of capital stock--Registration Rights."
We believe that the terms of all the above-described transactions were no less
favorable than we could have obtained from unaffiliated third parties.
Stock option grants to our directors and executive officers are described in
this prospectus under the heading "Management--Director Compensation" and
"Management--Executive Compensation." In addition, we have severance
obligations to certain of our executive officers, which are discussed under
"Management--Severance and Other Agreements."
INDEMNIFICATION AGREEMENTS
We have entered into indemnification agreements with our officers and directors
containing provisions that may require us, among other things, to indemnify
them against certain liabilities that may arise by reason of their status or
service as officers or directors. See "Management--Limitations of Liability and
Indemnification Matters" for more information regarding indemnification of our
officers and directors.
- --------------------------------------------------------------------------------
65
- --------------------------------------------------------------------------------
Principal stockholders
The following table sets forth certain information with respect to the
beneficial ownership of our common stock on a fully-diluted basis as of March
31, 2002 and as adjusted to reflect the sale of our common stock offered by
this prospectus by:
... each of the individuals listed in the "Summary compensation table" above;
... each of our directors;
... each person, or group of affiliated persons, who is known by us to own
beneficially more than 5% of our common stock; and
... all of our directors and officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock under options held by that person that are currently
exercisable or exercisable within 60 days of March 31, 2002 are considered
outstanding. These shares, however, are not considered outstanding when
computing the percentage ownership of each other person.
Except as indicated in the footnotes to this table and pursuant to state
community property laws, each stockholder named in the table has sole voting
and investment power for the shares shown as beneficially owned by them.
Percentage of ownership is based on 14,740,820 shares of common stock
outstanding on March 31, 2002 and 20,607,671 shares of common stock outstanding
after completion of this offering, including the 366,851 shares to be issued to
the former Renalogic shareholders. This table assumes no exercise of the
underwriters' over-allotment option. Unless otherwise indicated in the
footnotes, the address of each of the individuals named below is: c/o Aderis
Pharmaceuticals, Inc., 85 Main Street, Hopkinton, Massachusetts 01748.
Percent Percent
beneficially beneficially
Number of owned owned
shares before this after this
Name of beneficial owner owned offering offering
- ----------------------------------------------------------------------------------------
Five percent stockholders
Entities affiliated with the Sanderling Group(1).. 2,646,406 18.0 12.8
2730 Sand Hill Road, Suite 200
Menlo Park, CA 94025
Entities affiliated with the Alliance Group(2).... 1,530,197 10.4 7.4
8995 Westside Parkway
Alphretta, GA 30004
Schwarz Pharma AG(3).............................. 1,146,144 7.8 5.6
Alfred-Nobel-Strasse 10
40789 Monheim, Germany
Entities affiliated with New York Life(4)......... 1,053,543 7.1 5.1
888 7th Avenue, 29th Floor
New York, NY 10106
Entities affiliated with Schroder(5).............. 755,253 5.1 3.7
22 Church Street
Hamilton, Bermuda HM11
China Development Industrial Bank(6).............. 755,250 5.1 3.7
125 Nanking East Road
Section 5 Taipei 105
Taiwan ROC 105
International Biotechnology Trust PLC(7).......... 755,250 5.1 3.7
71 Kinsway
London, United Kingdom, WC2B 6ST
- --------------------------------------------------------------------------------
66
Principal stockholders
- --------------------------------------------------------------------------------
Percent Percent
beneficially beneficially
Number owned owned
of shares before this after this
Name of beneficial owner owned offering offering
----------------------------------------------------------------------
Directors and executive officers
Robert McNeil, Ph.D.(8)......... 2,726,776 18.4 13.2
Donald A. McAfee, Ph.D.(9)...... 535,649 3.6 2.6
James V. Peck(10)............... 391,635 2.7 1.9
Noel J. Cusack(10).............. 391,635 2.7 1.9
Gevork Minaskanian, Ph. D.(11).. 383,558 2.6 1.9
Peter G. Savas(12).............. 251,200 1.7 1.2
Stan M. Benson(13).............. 66,000 * *
Gary Frashier(13)............... 66,000 * *
Wayne I. Roe(13)................ 66,000 * *
James Garvey(13)................ 66,000 * *
Michael Ross, Ph.D.(13)......... 66,000 * *
Kenneth L. Rice, Jr.(14)........ 44,687 * *
William S. Wheeler, M.D.(14).... 44,687 * *
Executive officers and directors
as a group(15).................. 5,099,827 33.3 24.1
- --------
* Less than 1% of the outstanding shares of common stock.
(1) Includes 184,780 shares held by Sanderling III Biomedical, 241,681 shares
held by Sanderling IV Biomedical Co-Investment Fund, L.P., 555,448 shares
held by Sanderling III Limited Partnership, 84,626 shares held by
Sanderling Management Company, LLC Retirement Trust FBO Robert G. McNeil,
1,070,446 shares held by Sanderling Venture Partners III, 120,840 shares
held by Sanderling Venture Partners IV Co-Investment Fund, L.P., 302,100
shares held by Sanderling Venture Partners V Co-Investment Fund, L.P.,
1,855 shares held by Sanderling Ventures Management, and 84,630 shares
held by Sanderling Ventures Management FBO Fred A. Middleton. Sanderling
Ventures is the managing general partner of the Sanderling entities.
Robert G. McNeil and Fred A. Middleton are general partners of Sanderling
Ventures and share voting and dispositive power over the shares held by
Sanderling and its related entities, except as to Sanderling Venture
Partners V Co-Investment Fund, L.P. Voting and dispositive power over the
shares held by Sanderling Venture Partners V Co-Investment Fund, L.P. is
shared by Robert G. McNeil, Fred A. Middleton and Timothy C. Mills.
(2) Includes 1,378,781 shares held by Alliance Technology Ventures, L.P.,
52,149 shares held by ATV/GP Parallel Fund, L.P., and 99,267 shares held
by ATV/MFJ Parallel Fund, L.P. Michael A. Henos and Steven R. Flemings are
general partners of these funds and share voting and dispositive power
over these shares.
(3) Voting and dispositive power for these shares is shared by the board of
directors of Schwarz Pharma AG, consisting of Patrick Schwarz-Schutte,
Klaus Langer, Klaus Veitinger, Jurgen Baumann, Iris Low-Friedrich and
Detlef Thielgen.
(4) Includes 789,929 shares held by New York Life Insurance Company and
263,614 shares held by Mac & Co. FBO New York Life Bio Venture Partners
LLC. The beneficial owner of these shares is Perseus Soros
BioPharmaceutical Fund. The investment committee of Perseus Soros
BioPharmaceutical Fund consists of Dennis Purcell, Christopher Earl,
Ph.D., Steven A. Elms, Andrew Schiff, M.D. and Keith Tarleton, all of whom
share voting and dispositive power over these shares.
(5) Includes 442,509 shares held by Schroder Ventures International Life
Sciences Fund II LP1, 188,462 shares held by Schroder Ventures
International Life Sciences Fund II LP2, 50,224 shares held by Schroder
Ventures International Life Sciences Fund II LP3, 6,828 shares held by
Schroder Ventures International Life Sciences Fund II Strategic Partners
L.P., 12,726 shares held by Sitco Nominees Limited VC-01903 as Nominee of
Schroder Ventures International Life Sciences Fund II Group Co-Investment
Scheme and 54,504 shares held by SV (Nominees) Limited as Nominee of
Schroder Ventures Investments Limited. Schroder Venture Managers Limited
is the fund manager for the Schroder entities. The investment committee of
Schroder Venture Managers Limited consists of Nichola Lawson, Gary Carr,
Deborah Speight and Peter Everson, all of whom share voting and
dispositive power over these shares.
(6) Voting and dispositive power for these shares is shared by the board of
directors and managing directors of China Development Industrial Bank. The
board of directors consists of Liu Tai-Ying, Ph.D., Weng-Hsiung Sun,
Carolyn Yeh Shih, Kou-I Yeh, Ming H. Chen, Ching-Jen Chen, Shin-I Lin,
C.S. Chou, Ben Chen, Ching-Jing Sheen, William T. Lin, I. C. Liu,
Cheng-Chau Kuo, Harvey Tang and Yi-Yi Tai. The managing directors consists
of Chin Lin, Frank Chen, Min-Hsun Chen, Yung-San Lee, Ph.D., Sheng-Yann
Lii and Benny T. Hu.
(7) Voting and dispositive power for these shares is shared by the investment
committee and the board of directors of International Biotechnology Trust
PLC. The investment committee consists of Thomas Daniel and Kate Bingham.
The board of directors consists of Andrew Barker, Alan Clifton, Peter
Collacott, Alex Hammond-Chambers and Ian Macgregor.
(8) Includes 99,000 shares of common stock and 66,000 shares issuable upon
exercise of options which are currently exercisable. Also includes
2,561,776 shares held by Sanderling and its related entities. Does not
include 84,630 shares held by Sanderling Ventures Management FBO Fred A.
Middleton over which Fred A. Middleton has sole voting and dispositive
control. Dr. McNeil is a general partner of Sanderling. In such capacity,
Dr. McNeil may be deemed to have an indirect pecuniary interest in an
indeterminate portion of the shares beneficially owned by Sanderling and
its related entities. Dr. McNeil disclaims beneficial ownership of the
shares held by Sanderling within the meaning of Rule 13d-3 of the
Securities Exchange Act of 1934.
- --------------------------------------------------------------------------------
67
Principal stockholders
- --------------------------------------------------------------------------------
(9) Includes 529,118 shares of common stock. Also includes 6,531 shares of
common stock issuable upon exercise of options. Does not include options
to purchase 21,226 shares of common stock which are not exercisable within
60 days of this table.
(10) Includes 387,176 shares of common stock. Also includes 4,459 shares of
common stock issuable upon exercise of options. Does not include options
to purchase 10,140 shares of common stock which are not exercisable within
60 days of this table.
(11) Includes 380,125 shares of common stock. Also includes 3,433 shares of
common stock issuable upon exercise of options. Does not include options
to purchase 5,842 shares of common stock which are not exercisable within
60 days of this table.
(12) Includes 165,215 shares of common stock. Also includes 85,985 shares
issuable upon exercise of options. Does not include options to purchase
574,446 shares of common stock which are not exercisable within 60 days of
this table.
(13) Includes 66,000 shares issuable upon exercise of options.
(14) Includes 44,687 shares issuable upon exercise of options. Does not include
options to purchase 161,563 shares of common stock which are not
exercisable within 60 days of this table.
(15) Includes 590,241 shares issuable upon exercise of options. Does not
include options to purchase 944,920 shares of common stock which are not
exercisable within 60 days of this table. Please also see footnote 8, as
applicable.
68
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Description of capital stock
The following description of the material terms of our capital stock is
qualified by reference to our amended and restated certificate of
incorporation, the amended and restated investors' rights agreement, the
amended and restated stockholders rights agreement and applicable law. The
descriptions of our common stock and preferred stock reflect changes to our
capital structure that will occur upon the closing of this offering.
GENERAL
Upon completion of this offering, our authorized capital stock will consist of
50,000,000 shares of common stock, par value $0.001 per share, 20,621,938 of
which will be issued and outstanding and 5,000,000 shares of preferred stock,
par value $0.001 per share, none of which will be outstanding.
COMMON STOCK
As of December 31, 2001, there were 2,961,478 shares of common stock
outstanding held of record by 20 stockholders.
The holders of common stock are entitled to one vote per share on all matters
to be voted upon by stockholders and are not entitled to cumulate their votes
in election of directors. All shares of common stock rank equally as to voting
and all other matters. Subject to the prior rights of holders of preferred
stock, the holders of common stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the board of
directors out of funds legally available for payment. Such dividends may be
paid in cash, property, or shares of common stock. The shares of our common
stock have no preemptive or conversion rights, no redemption or sinking fund
provisions and are not liable for further call or assessment. The outstanding
shares of our common stock are, and all shares of common stock to be
outstanding upon completion of this offering will be, validly issued fully paid
and non-assessable.
PREFERRED STOCK
Upon the closing of this offering, the board of directors will be authorized,
without further stockholder approval, to issue from time to time up to an
aggregate of 5,000,000 shares of preferred stock in one or more series and to
fix or alter the designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each such series thereof,
including the dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption including sinking fund provisions, redemption price
or prices, liquidation preferences and the number of shares constituting any
series or designations of such series. The issuance of preferred stock could
have the effect of delaying, deferring or preventing a change in control of
Aderis. We have no present plans to issue any shares of preferred stock.
WARRANTS
As of December 31, 2001, we had outstanding a warrant to purchase 225,060
shares of common stock at an exercise price of $3.64 per share, which expires
on March 30, 2006. This warrant contains provisions for the adjustment of the
exercise price and the aggregate number of shares issuable upon the exercise of
the warrant in the event of stock dividends, stock splits, reorganizations,
reclassifications and consolidations.
REGISTRATION RIGHTS
Upon the completion of this offering, assuming exercise of all outstanding
warrants, the holders of 11,167,053 shares of common stock or their transferees
will be entitled to rights to register these shares
- --------------------------------------------------------------------------------
69
Description of capital stock
- --------------------------------------------------------------------------------
under the Securities Act of 1933. If we propose to register any of our
securities under the Securities Act, either for our own account or for the
account of other security holders, the holders of these shares will be entitled
to notice of the registration and will be entitled to include, at our expense,
their shares of common stock. In addition, the holders of these shares may
require us, at our expense and on not more than two occasions at any time
beginning approximately six months from the date of the closing of this
offering, to file a registration statement under the Securities Act covering
their shares of common stock, and we will be required to use our best efforts
to have the registration statement declared effective. Further, the holders may
require us at our expense to register their shares on Form S-3 when this form
becomes available. These rights shall terminate on the earlier of five years
after the effective date of this offering, or when a holder is able to sell all
its shares pursuant to Rule 144 under the Securities Act in any 90-day period.
Attached to these registration rights are conditions and limitations, including
the right of the underwriters to limit the number of shares included in the
registration statement.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND CHARTER
PROVISIONS
In general, Section 203 of the Delaware General Corporation Law prohibits a
publicly held Delaware corporation from engaging in any business combination
with any interested stockholder for a period of three years following the date
that the stockholder became an interested stockholder unless:
... prior to the date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
... upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by persons who are
directors and also officers, and employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held under the plan will be tendered in a tender or exchange offer;
or
... on or subsequent to the date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines "business combination" to include:
... any merger or consolidation involving the corporation and the interested
stockholder;
... any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
... in general, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder;
or
... the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% of more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
Our certificate of incorporation and bylaws include a number of provisions that
may have the effect of deterring hostile takeovers or delaying or preventing
changes in control of our certificate of incorporation
- --------------------------------------------------------------------------------
70
Description of capital stock
- --------------------------------------------------------------------------------
provides that all stockholder actions upon completion of this offering must be
effected at a duly called meeting of holders and not by a consent in writing.
Second, our bylaws provide that special meetings of the holders may be called
only by the chairman of the board of directors, the chief executive officer, or
our board of directors pursuant to a resolution adopted by a majority of the
total number of authorized directors. Third, our certificate of incorporation
provides that our board of directors can issue up to 5,000,000 shares of
preferred stock, as described under "--Preferred Stock" above. Finally, our
bylaws establish procedures, including advance notice procedures with regard to
the nomination of candidates for election as directors and stockholder
proposals. These provisions of our certificate of incorporation and bylaws
could discourage potential acquisition proposals and could delay or prevent a
change in our control or management.
NATIONAL MARKET LISTING
We have applied for listing of our common stock on the Nasdaq Stock Market's
National Market under the symbol "ADPX."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer and Trust Company.
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71
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Shares eligible for future sale
We will have 20,621,938 shares of our common stock outstanding after the
completion of this offering (21,446,938 shares if the underwriters'
overallotment is exercised in full). Of those shares, the 5,500,000 shares of
common stock sold in the offering (6,325,000 shares if the underwriters'
overallotment option is exercised in full) will be freely transferable without
restriction, unless purchased by persons deemed to be our "affiliates" as that
term is defined in Rule 144 under the Securities Act. Any shares purchased by
an affiliate may not be resold except pursuant to an effective registration
statement or an applicable exemption from registration, including an exemption
under Rule 144. The remaining 15,121,938 shares of common stock to be
outstanding immediately following the completion of this offering are
"restricted," which means they were originally sold in offerings that were not
registered under the Securities Act. These restricted shares may only be sold
through registration under the Securities Act or under an available exemption
from registration, such as provided through Rule 144 promulgated under the
Securities Act. As of the effective date of this offering, all of our officers,
directors and certain other security holders have entered into lock-up
agreements pursuant to which they have agreed, subject to limited exceptions,
not to offer or sell any shares of common stock or securities convertible into
or exchangeable or exercisable for shares of common stock for a period of 180
days from the date of this prospectus without the prior written consent of UBS
Warburg LLC. See "Underwriting." After the 180-day lock-up period, these shares
may be sold in accordance with Rule 144.
After the offering, the holders of shares of our common stock (including
225,060 shares issuable upon exercise of outstanding warrants) will be entitled
to registration rights. For more information on these registration rights, see
"Description of capital stock--Registration rights."
In general, under Rule 144, as currently in effect, a person (or persons whose
shares are aggregated), including an affiliate, who has beneficially owned
shares of our common stock for one year or more, may sell in the open market
within any three-month period a number of shares that does not exceed the
greater of:
... one percent of the then outstanding shares of our common stock
(approximately 206,219 shares immediately after the offering); or
... the average weekly trading volume in the common stock on the Nasdaq
National Market during the four calendar weeks preceding the sale.
Sales under Rule 144 are also subject to certain limitations on the manner of
sale, notice requirements and the availability or our current public
information. A person (or persons whose shares are aggregated) who is deemed
not to have been our affiliate at any time during the 90 days preceding a sale
by him and who has beneficially owned his shares for at least two years, may
sell the shares in the public market under Rule 144(k) without regard to the
volume limitations, manner of sale provisions, notice requirements or the
availability of current public information we refer to above.
Any of our employees, officers, directors or consultants who purchased his or
her shares before the date of completion of this offering or who holds options
as of that date pursuant to a written compensatory plan or contract is entitled
to rely on the resale provisions of Rule 701, which permits non-affiliates to
sell their Rule 701 shares without having to comply with the
public-information, holding-period, volume-limitation or notice provisions of
Rule 144 and permits affiliates to sell their Rule 701 shares without having to
comply with Rule 144's holding-period restrictions, in each case commencing 90
days after completion of this offering.
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72
Shares eligible for future sale
- --------------------------------------------------------------------------------
Holders of all of our outstanding common stock have entered into the
contractual "lock up" agreements described in "Underwriting." As a result of
these contractual restrictions, notwithstanding possible earlier eligibility
for sale under the provisions of Rules 144, 144(k) and 701, additional shares
will be available beginning 181 days after the date of this prospectus, subject
in some cases to certain volume limitations.
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73
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Underwriting
We and the underwriters named below have entered into an underwriting agreement
concerning the shares we are offering. Subject to conditions, each underwriter
has severally agreed to purchase the number of shares indicated in the
following table. UBS Warburg LLC, CIBC World Markets Corp, RBC Dain Rauscher
Inc. and Gerard Klauer Mattison & Co., Inc. are the representatives of the
underwriters.
Underwriters Number of shares
- --------------------------------------------------------
UBS Warburg LLC........................
CIBC World Markets Corp................
RBC Dain Rauscher Inc..................
Gerard Klauer Mattison & Co., Inc......
---------
Total............................... 5,500,000
=========
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have a 30-day option to buy from us up to an
additional 825,000 shares at the initial public offering price less the
underwriting discounts and commissions to cover these sales. If any shares are
purchased under this option, the underwriters will severally purchase shares in
approximately the same proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase up
to an additional 825,000 shares.
No exercise Full exercise
- ---------------------------------------------
Per share.......... $ $
Total........... $ $
We estimate that the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, will be approximately $ .
Shares sold by the underwriters to the public will initially be offered at the
initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any of
these securities dealers may resell any shares purchased from the underwriters
to other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
public offering price, the representatives may change the offering price and
the other selling terms.
The underwriters have informed us that they do not expect discretionary sales
to exceed 5% of the shares of common stock to be offered.
We, our directors, officers and our stockholders holding approximately 98%
shares of our common stock in the aggregate have agreed with the underwriters
not to offer, sell, contract to sell, hedge or otherwise dispose of, directly
or indirectly, or file with the SEC a registration statement under the
Securities Act of 1933 relating to, any of our common stock or securities
convertible into or exchangeable for shares of our common stock during the
period from the date of this prospectus continuing through the date 180 days
after the date of this prospectus, without the prior written consent of UBS
Warburg LLC.
We and the underwriters have made available a copy of the preliminary
prospectus, in electronic format, to qualified investors through a
password-protected online service. In addition, UBS Warburg LLC has made
available a copy of the preliminary prospectus, in electronic format, to its
qualified institutional customers at a password-protected portion of its web
site. These facilities will not be used to receive indications of interest or
consummate online sales.
- --------------------------------------------------------------------------------
74
Underwriting
- --------------------------------------------------------------------------------
The underwriters have reserved for sale, at the initial public offering price,
up to 275,000 shares of our common stock being offered, for sale to our
customers and business partners. At the discretion of our management, other
parties, including our employees, may participate in the reserved share
program. The number of shares available for sale to the general public in the
offering will be reduced to the extent these persons purchase reserved shares.
Any reserved shares not so purchased will be offered by the underwriters to the
general public on the same terms as the other shares.
Prior to this offering, there has been no public market for our common stock.
The initial public offering price will be determined by negotiation by us and
the representatives of the underwriters. The principal factors to be considered
in determining the initial public offering price include:
... the information set forth in this prospectus and otherwise available to the
representatives;
... the history and the prospects for the industry in which we compete;
... the ability of our management;
... our prospects for future earnings, the present state of our development,
and our current financial position;
... the general condition of the securities markets at the time of this
offering; and
... the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
In connection with the offering, the underwriters may purchase and sell shares
of common stock in the open market. These transactions may include stabilizing
transactions. Stabilizing transactions consist of bids or purchases made for
the purpose of preventing or retarding a decline in the market price of the
common stock while the offering is in progress. These transactions may also
include short sales and purchases to cover positions created by short sales.
Short sales involve the sale by the underwriters of a greater number of shares
than they are required to purchase in the offering. Short sales may be either
"covered short sales" or "naked short sales." Covered short sales are sales
made in an amount not greater than the underwriters' over-allotment option to
purchase additional shares in the offering. The underwriters may close out any
covered short position by either exercising their over-allotment option or
purchasing shares in the open market. In determining the source of shares to
close out the covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. Naked short sales are sales in excess of the
over-allotment option. The underwriters must close out any naked short position
by purchasing shares in the open market. A naked short position is more likely
to be created if the underwriters are concerned that there may be downward
pressure on the price of the shares in the open market after pricing that could
adversely affect investors who purchase in the offering.
The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of that underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
We have agreed to indemnify the several underwriters against some liabilities,
including liabilities under the Securities Act of 1933 and to contribute to
payments that the underwriters may be required to make in respect thereof.
- --------------------------------------------------------------------------------
75
- --------------------------------------------------------------------------------
Legal matters
The validity of the shares of common stock offered hereby will be passed upon
for us by Latham & Watkins, Costa Mesa, California. Dewey Ballantine LLP, New
York, New York is counsel for the underwriters in connection with this offering.
Experts
The financial statements of Aderis Pharmaceuticals, Inc. as of December 31,
2001 and 2000 and for each of the three years in the period ended December 31,
2001 and financial statements of Renalogics, Inc. as of June 21, 1999 and
December 31, 1999 and for the year ended December 31, 1998, for the period from
January 1, 1999 to June 21, 1999 and for the period from inception (September
10, 1996) to June 24, 1999 included in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
Change in independent auditors
In November 2000, we dismissed Ernst & Young LLP as our independent auditors
and retained Arthur Andersen LLP. Our board of directors approved the decision
to change independent auditors. We had no disagreements with Ernst & Young LLP
on any matter of accounting principles or practices, financial statements
disclosure, or auditing scope of procedures during our two most recent fiscal
years and interim period prior to our change in independent auditors, which, if
not resolved to the satisfaction of Ernst & Young LLP, would have caused them
to make reference to the matter in their report.
Where you can find more information
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 (including the exhibits, schedules and amendments
thereto) under the Securities Act with respect to the shares of common stock to
be sold in this offering. This prospectus does not contain all the information
set forth in the registration statement. For further information regarding us
and our shares of common stock to be sold in this offering, please refer to the
registration statement.
You may read and copy all or any portion of the registration statement or any
other information that we file at the Securities and Exchange Commission's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You
can request copies of these documents, upon payment of a duplicating fee, by
writing to the Securities and Exchange Commission. Please call the Securities
and Exchange Commission at 1-800-SEC-0330 for further information on the
operation of the public reference rooms. Our Securities and Exchange Commission
filings, including the Registration Statement, are also available to you on the
Securities and Exchange Commission's website (http://www.sec.gov).
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934, as amended, and,
in accordance therewith, will file periodic reports, proxy statements and other
information with the Securities and Exchange Commission.
- --------------------------------------------------------------------------------
76
- --------------------------------------------------------------------------------
About this prospectus
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of our common stock only in jurisdictions where offers and sales
are permitted. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of shares of our common stock.
- --------------------------------------------------------------------------------
77
- --------------------------------------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
Page
ADERIS PHARMACEUTICALS, INC. ----
Report of Independent Public Accountants.................................................... F-1
Consolidated Balance Sheets as of December 31, 2000 and 2001 and Pro Forma as of
December 31, 2001 (unaudited)............................................................. F-2
Consolidated Statements of Operations for the Years Ended December 31, 1999, 2000 and
2001 and for the Period from Inception (April 22, 1994) to December 31, 2001.............. F-3
Consolidated Statement of Convertible Preferred Stock and Stockholders' Equity (Deficit) for
the Period from Inception (April 22, 1994) to December 31, 2001........................... F-4-F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 2000 and
2001 and for the Period from Inception (April 22, 1994) to December 31, 2001.............. F-6
Notes to Consolidated Financial Statements.................................................. F-7-F-26
RENALOGICS, INC.
Report of Independent Public Accountants.................................................... F-27
Balance Sheets as of December 31, 1998 and June 21, 1999.................................... F-28
Statements of Operations for the Year Ended December 31, 1998, Period from January 1,
1999 to June 21, 1999 and Period from Inception (September 10, 1996) to June 21, 1999..... F-29
Statement of Redeemable Convertible Preferred Stock and Stockholders' Deficit for the Period
from Inception (September 10, 1996) to June 21, 1999...................................... F-30
Statement of Cash Flows for the Year Ended December 31, 1998, Period from January 1,
1999 to June 21, 1999, and Period from Inception (September 10, 1996) to
June 21, 1999............................................................................. F-31
Notes to Financial Statements............................................................... F-32-F-36
- --------------------------------------------------------------------------------
ADERIS PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information for September 30, 2000 and 2001 is unaudited)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Aderis Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of Aderis
Pharmaceuticals, Inc. (a Delaware Corporation) (formerly Discovery
Therapeutics, Inc.) as of December 31, 2000 and 2001 and the related
consolidated statements of operations, convertible preferred stock and
stockholders' equity (deficit) and cash flows for each of the years in the
three-year period ended December 31, 2001 and for the period from inception
(April 22, 1994) through December 31, 2001. These financial statements are the
responsibility of Aderis Pharmaceuticals, Inc.'s management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aderis
Pharmaceuticals, Inc. as of December 31, 2000 and 2001 and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 2001 and for the period from inception (April 22, 1994) to
December 31, 2001 in conformity with accounting principles generally accepted
in the United States.
/S/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 25, 2002
- --------------------------------------------------------------------------------
F-1
ADERIS PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information for September 30, 2000 and 2001 is unaudited)
CONSOLIDATED BALANCE SHEETS
December 31, Pro Forma
-------------------------- December 31,
2000 2001 2001
- -------------------------------------------------------------------------------------------------------------------
Assets (unaudited)
Current Assets:
Cash and cash equivalents............................................. $ 4,118,162 $ 42,820,944 $ 42,820,944
Prepaid expenses and other current assets............................. 2,273 152,497 152,497
------------ ------------ ------------
Total current assets............................................... 4,120,435 42,973,441 42,973,441
Property and Equipment, net.............................................. 36,638 365,058 365,058
Other Assets............................................................. 17,960 123,500 123,500
------------ ------------ ------------
$ 4,175,033 $ 43,461,999 $ 43,461,999
============ ============ ============
Liabilities And Stockholders' Equity (Deficit)
Current Liabilities:.....................................................
Accounts payable...................................................... $ 29,973 $ 169,774 $ 169,774
Accrued expenses and other current liabilities........................ 872,599 1,975,674 1,975,674
Deferred revenues..................................................... 1,829,093 -- --
------------ ------------ ------------
Total current liabilities.......................................... 2,731,665 2,145,448 2,145,448
------------ ------------ ------------
Commitments and Contingencies (Note 4)
Convertible Preferred Stock, $0.001 par value:
Undesignated convertible preferred stock--
Authorized--203,647 shares
Issued and outstanding--none......................................... -- -- --
Series A convertible preferred stock--
Authorized--666,667 shares
Issued and outstanding--666,667 shares at December 31, 2000 and
2001 and no shares pro forma........................................ 480,303 480,303 --
Series B convertible preferred stock--
Authorized--1,500,000 shares
Issued and outstanding--1,316,909 shares at December 31, 2000 and
2001 and no shares pro forma........................................ 7,844,443 7,844,443 --
Series C convertible preferred stock--
Authorized--538,776 shares
Issued and outstanding--538,776 shares at December 31, 2000 and
2001, and no shares pro forma....................................... 5,484,110 5,484,110 --
Series D convertible preferred stock--
Authorized--4,090,910 shares
Issued and outstanding--no shares and 4,076,834 shares at December
31, 2000 and 2001, respectively, no shares pro forma................ -- 42,406,576 --
Stockholders' Equity (Deficit):
Common stock, $0.001 par value--
Authorized--50,000,000 shares
Issued and outstanding--2,661,178 shares, 2,961,478 shares and
14,270,322 shares at December 31, 2000 and 2001, and pro forma,
respectively......................................................... 2,661 2,961 14,270
Additional paid-in capital............................................... 2,103,114 15,321,587 76,294,773
Deferred compensation.................................................... (964,978) (5,636,169) (5,636,169)
Deficit accumulated during the development stage......................... (13,506,285) (24,587,260) (29,356,323)
------------ ------------ ------------
Total stockholders' equity (deficit)............................... (12,365,488) (14,898,881) 41,316,551
------------ ------------ ------------
$ 4,175,033 $ 43,461,999 $ 43,461,999
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
F-2
ADERIS PHARMACEUTICALS, INC.
(A development stage company)
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
For the
period from
inception
For the year ended (April 22,
December 31, 1994) to
------------------------------------- December 31,
1999 2000 2001 2001
- ----------------------------------------------------------------------------------------------------------
Revenues:
License fees and collaboration revenues(a)
(Note 10)....................................... $6,850,560 $ 2,967,071 $ 5,829,093 $ 20,117,603
Grant revenues................................... -- -- -- 150,000
---------- ----------- ------------ ------------
Total revenues................................ 6,850,560 2,967,071 5,829,093 20,267,603
---------- ----------- ------------ ------------
Costs and Expenses:
Research and development(a)(b)(Note 10).......... 4,605,177 5,116,510 6,006,576 24,900,993
General and administrative(b).................... 814,575 2,040,592 3,926,586 9,556,203
Stock-based compensation(b)...................... 16,460 230,603 7,248,881 7,511,665
Royalty expense.................................. 363,392 48,372 617,907 2,015,400
Write-offs of purchased technology............... -- 724,242 -- 724,242
In-Process research and development write-offs... -- -- -- 309,503
---------- ----------- ------------ ------------
Total operating expenses...................... 5,799,604 8,160,319 17,799,950 45,018,006
---------- ----------- ------------ ------------
Income (loss) from operations................. 1,050,956 (5,193,248) (11,970,857) (24,750,403)
---------- ----------- ------------ ------------
Other Income (Expense):
Interest income.................................. 79,673 246,877 889,882 1,334,993
Other income..................................... 16,476 3,848 -- 49,254
Interest expense................................. (74,577) -- -- (790,882)
---------- ----------- ------------ ------------
Total other income............................ 21,572 250,725 889,882 593,365
Income (loss) before income taxes............. 1,072,528 (4,942,523) (11,080,975) (24,157,038)
Provision for Income Taxes........................... -- -- -- 430,222
---------- ----------- ------------ ------------
Net income (loss)............................. $1,072,528 $(4,942,523) $(11,080,975) $(24,587,260)
========== =========== ============ ============
Net income (loss) per share (Note 2(k))--
Basic............................................ $ 0.47 $ (1.87) $ (3.97)
========== =========== ============
Diluted.......................................... $ 0.20 $ (1.87) $ (3.97)
========== =========== ============
Pro forma basic and diluted...................... $ (0.93)
============
Weighted average shares outstanding--
Basic............................................ 2,287,800 2,637,726 2,790,255
========== =========== ============
Diluted.......................................... 5,369,358 2,637,726 2,790,255
========== =========== ============
Pro forma basic and diluted...................... 11,920,936
============
(a)The following summarizes revenues and expenses
from related parties:
License fees and collaboration revenues.......... $3,133,935 $ 673,019 $ 4,000,000 $ 9,243,342
Research and development expenses................ $ -- $ 1,500,000 $ -- $ 1,500,000
(b)The following summarizes the departmental
allocation of the stock-based compensation charge:
Research and development......................... $ 16,460 $ 32,297 $ 777,153 $ 841,631
General and administrative....................... -- 198,306 6,471,728 6,670,034
---------- ----------- ------------ ------------
Total stock-based compensation................ $ 16,460 $ 230,603 $ 7,248,881 $ 7,511,665
========== =========== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
F-3
ADERIS PHARMACEUTICALS, INC.
(A development stage company)
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
Preferred Stock
-------------------------------------------------------------------
Series A Series B Series C Series D
Convertible Convertible Convertible Convertible Common Stock
---------------- ------------------ --------------- --------------- ----------------
Number Number Number Number
of Carrying of Carrying of Carrying of Carrying Number
shares value shares value shares value shares value of shares Value
------- -------- ------- ---------- ------ -------- ------ -------- --------- ------
Issuance of common stock (April 22,
1994).................................... -- $ -- -- $ -- -- $ -- -- $ -- 1,663,758 $1,664
Issuance of Series A convertible preferred
stock, net of issuance costs of $19,967.. 666,667 480,303 -- -- -- -- -- -- -- --
Net loss.................................. -- -- -- -- -- -- -- -- -- --
------- -------- ------- ---------- ------ -------- ------ ----- --------- ------
Balance, December 31, 1994................ 666,667 480,303 -- -- -- -- -- -- 1,663,758 1,664
Issuance of Series B convertible preferred
stock, net of issuance costs of $57,012.. -- -- 430,583 2,526,486 -- -- -- -- -- --
Issuance of Series B convertible preferred
stock upon conversion of debt............ -- -- 191,651 1,149,907 -- -- -- -- -- --
Issuance of Series B convertible preferred
stock as payment for services............ -- -- 16,667 100,002 -- -- -- -- -- --
Issuance of common stock.................. -- -- -- -- -- -- -- -- 132,000 132
Net loss.................................. -- -- -- -- -- -- -- -- -- --
------- -------- ------- ---------- ------ -------- ------ ----- --------- ------
Balance, December 31, 1995................ 666,667 480,303 638,901 3,776,395 -- -- -- -- 1,795,758 1,796
Net loss.................................. -- -- -- -- -- -- -- -- -- --
------- -------- ------- ---------- ------ -------- ------ ----- --------- ------
Balance, December 31, 1996................ 666,667 480,303 638,901 3,776,395 -- -- -- -- 1,795,758 1,796
Stock-based compensation expense related
to options granted to nonemployees....... -- -- -- -- -- -- -- -- -- --
Net loss.................................. -- -- -- -- -- -- -- -- -- --
------- -------- ------- ---------- ------ -------- ------ ----- --------- ------
Balance, December 31, 1997................ 666,667 480,303 638,901 3,776,395 -- -- -- -- 1,795,758 1,796
Stock-based compensation expense related
to options granted to nonemployees....... -- -- -- -- -- -- -- -- -- --
Exercise of stock options................. -- -- -- -- -- -- -- -- 24,750 24
Net income................................ -- -- -- -- -- -- -- -- -- --
------- -------- ------- ---------- ------ -------- ------ ----- --------- ------
Balance, December 31, 1998................ 666,667 480,303 638,901 3,776,395 -- -- -- -- 1,820,508 1,820
Issuance of Series B convertible preferred
stock and common stock in connection
with acquisition of Renalogics, Inc...... -- -- 178,008 1,068,048 -- -- -- -- 256,570 257
Issuance of Series B convertible preferred
stock and common stock upon
conversion of debt....................... -- -- 500,000 3,000,000 -- -- -- -- 453,750 454
Stock-based compensation expense related
to options granted to nonemployees....... -- -- -- -- -- -- -- -- -- --
Exercise of stock options................. -- -- -- -- -- -- -- -- 122,100 122
Net income................................ -- -- -- -- -- -- -- -- -- --
------- -------- ------- ---------- ------ -------- ------ ----- --------- ------
Deficit
accumulated Total
Additional during the stockholders'
paid-in Deferred development equity
capital compensation stage (deficit)
---------- ------------ ----------- -------------
Issuance of common stock (April 22,
1994).................................... $ 8,419 $ -- $ -- $ 10,083
Issuance of Series A convertible preferred
stock, net of issuance costs of $19,967.. -- -- -- --
Net loss.................................. -- -- (1,447,600) (1,447,600)
-------- ------------ ----------- -----------
Balance, December 31, 1994................ 8,419 -- (1,447,600) (1,437,517)
Issuance of Series B convertible preferred
stock, net of issuance costs of $57,012.. -- -- -- --
Issuance of Series B convertible preferred
stock upon conversion of debt............ -- -- -- --
Issuance of Series B convertible preferred
stock as payment for services............ -- -- -- --
Issuance of common stock.................. 3,868 -- -- 4,000
Net loss.................................. -- -- (1,937,071) (1,937,071)
-------- ------------ ----------- -----------
Balance, December 31, 1995................ 12,287 -- (3,384,671) (3,370,588)
Net loss.................................. -- -- (3,391,859) (3,391,859)
-------- ------------ ----------- -----------
Balance, December 31, 1996................ 12,287 -- (6,776,530) (6,762,447)
Stock-based compensation expense related
to options granted to nonemployees....... 9,821 -- -- 9,821
Net loss.................................. -- -- (2,939,024) (2,939,024)
-------- ------------ ----------- -----------
Balance, December 31, 1997................ 22,108 -- (9,715,554) (9,691,650)
Stock-based compensation expense related
to options granted to nonemployees....... 5,900 -- -- 5,900
Exercise of stock options................. 726 -- -- 750
Net income................................ -- -- 79,264 79,264
-------- ------------ ----------- -----------
Balance, December 31, 1998................ 28,734 -- (9,636,290) (9,605,736)
Issuance of Series B convertible preferred
stock and common stock in connection
with acquisition of Renalogics, Inc...... 93,041 -- -- 93,298
Issuance of Series B convertible preferred
stock and common stock upon
conversion of debt....................... 739,878 -- -- 740,332
Stock-based compensation expense related
to options granted to nonemployees....... 16,460 -- -- 16,460
Exercise of stock options................. 29,178 -- -- 29,300
Net income................................ -- -- 1,072,528 1,072,528
-------- ------------ ----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
F-4
ADERIS PHARMACEUTICALS, INC.
(A development stage company)
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
Preferred Stock
---------------------------------------------------------------------------------------------
Series A
Convertible Series B Convertible Series C Convertible Series D Convertible
------------------- ----------------------- --------------------- ------------------------
Number Number
of Carrying Number of Carrying of Carrying Number of Carrying
shares value shares value shares value shares value
-------- --------- ---------- ----------- -------- ----------- ---------- ------------
Balance, December 31, 1999...... 666,667 $ 480,303 1,316,909 $ 7,844,443 -- $ -- -- $ --
Issuance of Series C convertible
preferred stock, net of
issuance costs of $16,793...... -- -- -- -- 538,776 5,484,110 -- --
Stock-based compensation
expense related to options
granted to nonemployees........ -- -- -- -- -- -- -- --
Deferred compensation on
stock options.................. -- -- -- -- -- -- -- --
Amortization of deferred
compensation................... -- -- -- -- -- -- -- --
Stock-based compensation
expense related to
acceleration of employee
stock options.................. -- -- -- -- -- -- -- --
Exercise of stock options....... -- -- -- -- -- -- -- --
Net loss........................ -- -- -- -- -- -- -- --
-------- --------- ---------- ----------- -------- ----------- ---------- ------------
Balance, December 31, 2000...... 666,667 480,303 1,316,909 7,844,443 538,776 5,484,110 -- --
Issuance of Series D convertible
preferred stock, net of
issuance costs of $2,438,598... -- -- -- -- -- -- 4,076,834 42,406,576
Stock-based compensation
expense related to options
granted to nonemployees........ -- -- -- -- -- -- -- --
Deferred compensation on
stock options.................. -- -- -- -- -- -- -- --
Amortization of deferred
compensation................... -- -- -- -- -- -- -- --
Acceleration of vesting of stock
options........................ -- -- -- -- -- -- -- --
Stock-based compensation
expense related to cashless
exercise....................... -- -- -- -- -- -- -- --
Exercise of stock options....... -- -- -- -- -- -- -- --
Net loss........................ -- -- -- -- -- -- -- --
-------- --------- ---------- ----------- -------- ----------- ---------- ------------
Balance, December 31, 2001...... 666,667 480,303 1,316,909 7,844,443 538,776 5,484,110 4,076,834 42,406,576
Conversion of convertible
preferred stock to common
stock (unaudited).............. (666,667) (480,303) (1,316,909) (7,844,443) (538,776) (5,484,110) (4,076,834) (42,406,576)
Issuance of contingent shares to
former Renalogics, Inc.
stockholders (unaudited)....... -- -- -- -- -- -- -- --
-------- --------- ---------- ----------- -------- ----------- ---------- ------------
Balance, Pro Forma December
31, 2001 (unaudited)........... -- $ -- -- $ -- -- $ -- -- $ --
======== ========= ========== =========== ======== =========== ========== ============
Common Stock Deficit
------------------ accumulated Total
Additional during the stockholders'
Number of paid-in Deferred development equity
shares Value capital compensation stage (deficit)
---------- ------- ----------- ------------ ------------ -------------
Balance, December 31, 1999...... 2,652,928 $ 2,653 $ 907,291 $ -- $ (8,563,762) $ (7,653,818)
Issuance of Series C convertible
preferred stock, net of
issuance costs of $16,793...... -- -- -- -- -- --
Stock-based compensation
expense related to options
granted to nonemployees........ -- -- 23,154 -- 23,154
Deferred compensation on
stock options.................. -- -- 1,109,313 (1,109,313) -- --
Amortization of deferred
compensation................... -- -- -- 144,335 -- 144,335
Stock-based compensation
expense related to
acceleration of employee
stock options.................. -- -- 63,114 -- -- 63,114
Exercise of stock options....... 8,250 8 242 -- -- 250
Net loss........................ -- -- -- -- (4,942,523) (4,942,523)
---------- ------- ----------- ------------ ------------ ------------
Balance, December 31, 2000...... 2,661,178 2,661 2,103,114 (964,978) (13,506,285) (12,365,488)
Issuance of Series D convertible
preferred stock, net of
issuance costs of $2,438,598... -- -- 1,238,701 -- -- 1,238,701
Stock-based compensation
expense related to options
granted to nonemployees........ -- -- 230,082 -- -- 230,082
Deferred compensation on
stock options.................. -- -- 10,757,341 (10,757,341) -- --
Amortization of deferred
compensation................... -- -- -- 6,086,150 -- 6,086,150
Acceleration of vesting of stock
options........................ -- -- 743,536 -- -- 743,536
Stock-based compensation
expense related to cashless
exercise....................... 135,300 135 188,978 -- -- 189,113
Exercise of stock options....... 165,000 165 59,835 -- -- 60,000
Net loss........................ -- -- -- -- (11,080,975) (11,080,975)
---------- ------- ----------- ------------ ------------ ------------
Balance, December 31, 2001...... 2,961,478 2,961 15,321,587 (5,636,169) (24,587,260) (14,898,881)
Conversion of convertible
preferred stock to common
stock (unaudited).............. 10,941,993 10,942 56,204,490 -- -- 56,215,432
Issuance of contingent shares to
former Renalogics, Inc.
stockholders (unaudited)....... 366,851 367 4,768,696 -- (4,769,063) --
---------- ------- ----------- ------------ ------------ ------------
Balance, Pro Forma December
31, 2001 (unaudited)........... 14,270,322 $14,270 $76,294,773 $ (5,636,169) $(29,356,323) $ 41,316,551
========== ======= =========== ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
F-5
ADERIS PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information for September 30, 2000 and 2001 is unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31,
--------------------------------------
1999 2000 2001
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income (loss).......................................................... $ 1,072,528 $(4,942,523) $(11,080,975)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities--
Noncash interest on convertible notes.................................... 74,577 -- --
Write-off of purchased technology........................................ -- 724,242 --
Depreciation and amortization............................................ 282,483 501,958 60,978
Stock-based compensation expense related to options to employees
and nonemployees........................................................ 16,460 230,603 7,248,881
Issuance of Series B convertible preferred stock to vendor for services
performed............................................................... -- -- --
Changes in operating assets and liabilities--
Accounts receivable..................................................... 889,667 83,333 --
Prepaids and other current assets....................................... (39,507) 61,267 (150,224)
Income tax refund receivable............................................ (52,500) 52,500 --
Other assets............................................................ -- (17,960) (105,540)
Accounts payable........................................................ (7,927) (279,213) 139,801
Accrued expenses and other current liabilities.......................... (153,857) 749,596 1,103,075
Deferred revenues....................................................... (3,216,193) (141,596) (1,829,093)
----------- ----------- ------------
Net cash used in operating activities................................. (1,134,269) (2,977,793) (4,613,097)
----------- ----------- ------------
Cash Flows from Investing Activities
Purchases of property and equipment........................................ (19,124) (28,740) (389,398)
Purchase of Whitby Research, net of cash acquired.......................... -- -- --
Purchase of Renalogics, Inc., net of cash acquired......................... (311,416) -- --
----------- ----------- ------------
Net cash used in investing activities................................. (330,540) (28,740) (389,398)
----------- ----------- ------------
Cash Flows from Financing Activities
Net proceeds from issuance of Series A convertible preferred stock......... -- -- --
Net proceeds from issuance of Series B convertible preferred stock......... -- -- --
Net proceeds from issuance of Series C convertible preferred stock......... -- 5,484,110 --
Net proceeds from issuance of Series D convertible preferred stock......... -- -- 43,645,277
Proceeds from notes payable to stockholders................................ -- -- --
Proceeds from issuance of common stock..................................... -- -- --
Proceeds from exercise of common stock options............................. 29,300 250 60,000
----------- ----------- ------------
Net cash provided by financing activities............................. 29,300 5,484,360 43,705,277
----------- ----------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents........................ (1,435,509) 2,477,827 38,702,782
Cash and Cash Equivalents, beginning of period.............................. 3,075,844 1,640,335 4,118,162
----------- ----------- ------------
Cash and Cash Equivalents, end of period.................................... $ 1,640,335 $ 4,118,162 $ 42,820,944
=========== =========== ============
Supplemental Cash Flow Information
Cash paid for income taxes................................................. $ -- $ -- $ --
=========== =========== ============
Supplemental Disclosure of Noncash Investing and
Financing Activities
Issuance of Series B convertible preferred stock and common stock upon
conversion of notes payable............................................... $ 3,740,332 $ -- $ --
=========== =========== ============
Net Cash Paid for the Acquisitions
Fair value of assets....................................................... $ 1,487,610 $ -- $ --
Fair value of common stock issued.......................................... (1,161,346) -- --
----------- ----------- ------------
Cash paid.................................................................. 326,264 -- --
Less--cash acquired........................................................ (14,848) -- --
----------- ----------- ------------
Net cash paid for the acquisitions....................................... $ 311,416 $ -- $ --
=========== =========== ============
For the
period from
inception
(April 22,
1994) to
December 31,
2001
- ------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income (loss).......................................................... $(24,587,260)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities--
Noncash interest on convertible notes.................................... 790,239
Write-off of purchased technology........................................ 1,033,746
Depreciation and amortization............................................ 1,051,511
Stock-based compensation expense related to options to employees
and nonemployees........................................................ 7,511,665
Issuance of Series B convertible preferred stock to vendor for services
performed............................................................... 100,002
Changes in operating assets and liabilities--
Accounts receivable..................................................... --
Prepaids and other current assets....................................... (152,497)
Income tax refund receivable............................................ --
Other assets............................................................ (123,500)
Accounts payable........................................................ 169,775
Accrued expenses and other current liabilities.......................... 1,975,674
Deferred revenues....................................................... --
------------
Net cash used in operating activities................................. (12,230,645)
------------
Cash Flows from Investing Activities
Purchases of property and equipment........................................ (477,554)
Purchase of Whitby Research, net of cash acquired.......................... (500,000)
Purchase of Renalogics, Inc., net of cash acquired......................... (311,416)
------------
Net cash used in investing activities................................. (1,288,970)
------------
Cash Flows from Financing Activities
Net proceeds from issuance of Series A convertible preferred stock......... 480,303
Net proceeds from issuance of Series B convertible preferred stock......... 2,526,486
Net proceeds from issuance of Series C convertible preferred stock......... 5,484,110
Net proceeds from issuance of Series D convertible preferred stock......... 43,645,277
Proceeds from notes payable to stockholders................................ 4,100,000
Proceeds from issuance of common stock..................................... 14,083
Proceeds from exercise of common stock options............................. 90,300
------------
Net cash provided by financing activities............................. 56,340,559
------------
Net Increase (Decrease) in Cash and Cash Equivalents........................ 42,820,944
Cash and Cash Equivalents, beginning of period.............................. --
------------
Cash and Cash Equivalents, end of period.................................... $ 42,820,944
============
Supplemental Cash Flow Information
Cash paid for income taxes................................................. $ 354,222
============
Supplemental Disclosure of Noncash Investing and
Financing Activities
Issuance of Series B convertible preferred stock and common stock upon
conversion of notes payable............................................... $ 4,890,239
============
Net Cash Paid for the Acquisitions
Fair value of assets....................................................... $ 1,987,610
Fair value of common stock issued.......................................... (1,161,346)
------------
Cash paid.................................................................. 826,264
Less--cash acquired........................................................ (14,848)
------------
Net cash paid for the acquisitions....................................... $ 811,416
============
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
F-6
ADERIS PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information for September 30, 2000 and 2001 is unaudited)
(1) OPERATIONS
Discovery Therapeutics, Inc. (Discovery) was incorporated in Delaware on April
22, 1994 to acquire, on April 25, 1994, a research business from Whitby, Inc.,
a pharmaceutical company. On January 4, 2002, Discovery changed its name to
Aderis Pharmaceuticals, Inc. (the Company). The Company expanded its business
through the acquisition in June 1999 of Renalogics, Inc. (Renalogics), a
company engaged in the development and commercialization of products for
treatment of glumorolonephritis and other diseases (see Note 11). The Company's
primary activity is to engage in the discovery and development of its portfolio
compounds and the subsequent commercialization of products utilizing these
compounds. These compounds represent therapeutics for disease states where
there is a significant medical need, including Parkinson's disease, cardiac
disease, and other disorders. To date, the Company's principal activities have
involved obtaining capital, performing research and development activities and
entering into collaboration agreements. As such, the Company is classified as a
development stage company, as the Company has not commercialized any of its
drug candidates and, accordingly, has not generated revenues from such
activities.
The Company is subject to a number of risks associated with companies in the
biotechnology industry and in the development stage. Principal among these are
the risks associated with the Company's dependence on collaborative
arrangements, development by the Company or its competitors of new
technological innovations, dependence on key personnel, protection of
proprietary technology, compliance with the U.S. Food and Drug Administration
and other governmental regulations and approval requirements, as well as the
ability to grow the Company's business and obtain adequate financing to fund
this growth.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of consolidation
The accompanying consolidated financial statements include the Company and
its wholly-owned subsidiary, Renalogics. Intercompany balances are
eliminated in consolidation.
(b) Unaudited pro forma presentation
The unaudited pro forma consolidated balance sheet and statement of
stockholders' equity as of December 31, 2001 and the pro forma net loss per
share for the year ended December 31, 2001 reflect the automatic conversion
of all outstanding shares of Series A, B, C and D convertible preferred
stock into 10,941,993 shares of common stock upon the closing of the
Company's proposed initial public offering, as well as the issuance of
171,046 shares of common stock and the issuance and of 118,670 shares of
Series B convertible preferred stock which will convert into 195,805 shares
of common stock to the former Renalogics shareholders upon the closing of
the Company's proposed initial public offering and the charge of $4.8
million related to this issuance (See Note 11).
(c) Use of estimates
The preparation of the Company's consolidated financial statements in
conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect the
reported amounts and disclosure of certain assets and liabilities at the
balance sheet date. Such estimates include the recording of revenue and
expenses, the carrying value of property and equipment and intangible assets
and the value of certain liabilities. Actual results may differ from such
estimates.
- --------------------------------------------------------------------------------
F-7
ADERIS PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information for September 30, 2000 and 2001 is unaudited)
(d) Revenue recognition
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition," was issued
in December 1999. SAB No. 101 requires companies to recognize certain
up-front nonrefundable fees and milestone payments over the life of the
related alliances when such fees are received in conjunction with alliances
that have multiple elements. The Company has adopted SAB No. 101 for all
periods presented.
The Company has entered into agreements with pharmaceutical companies under
which it licenses product rights to certain compounds, earns milestone
payments (based on the pharmaceutical company achieving certain milestones
in the development of the compound), consulting fees and research and
development cost reimbursements. Under these arrangements, the Company has
fulfilled all of its contractual development obligations as of December 31,
2001 and any additional development work requested to be performed by the
pharmaceutical company will be charged for at a rate at which the Company
would separately charge for these development services. The Company is also
involved on committees with these pharmaceutical companies monitoring the
development of these compounds. As a result of this, the Company is
recognizing the total expected fees under these contracts, exclusive of
royalties (as the receipt of royalties do not occur until the successful
development and sale of a product which is a separate discrete earnings
event), as revenue on a straight-line basis over the estimated development
period of the compound to the extent such amount is not greater than cash
received. The pharmaceutical company has the right to cancel these
agreements at any time and all payments received are nonrefundable;
therefore, no revenue is recognized ahead of cash received. Deferred revenue
consists of payments received in advance of revenue-recognized under these
agreements.
In connection with one of the Company's agreements, the Company received
research and development reimbursements of approximately $1,108,000 and
$559,000 for the years ended December 31, 1999 and 2000, respectively. These
amounts have been included in the total contract value and are being
recognized as discussed above.
Revenue is recognized under government grants as the services are provided
and payment is assured under the terms of the grant.
(e) Cash and cash equivalents
Cash equivalents consist of short-term, highly liquid investments with
maturities of 90 days or less when acquired. Cash equivalents, which
consisted primarily of a money market account, are stated at cost, which
approximates market value.
(f) Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related
assets.
The estimated useful lives of property and equipment are as follows:
Estimated
Asset Life
- -------------------------------------------------
Computer equipment..................... 3-5 years
Furniture and fixtures................. 5 years
Laboratory equipment................... 5 years
Vehicles............................... 5 years
- --------------------------------------------------------------------------------
F-8
ADERIS PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information for September 30, 2000 and 2001 is unaudited)
(g) Long-lived assets
The Company periodically evaluates the potential impairment of its
long-lived assets whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. At the occurrence of
a certain event or change in circumstances, the Company evaluates the
potential impairment of an asset based on future undiscounted cash flows. In
the event that impairment exists, the Company will measure the amount of
such impairment based on the fair value of the related asset, calculated
based on the present value of estimated future cash flows using a discount
rate commensurate with the risks involved. Factors that management considers
in performing this assessment include current operating results, trends and
prospects and, in addition, demand, competition and other economic factors.
As of December 31, 2000, the Company determined that the value of its
purchased technology was impaired under Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (see Note 11).
Intangible assets consisted of the following:
Estimated
useful December 31, December 31,
life 2000 2001
- ---------------------------------------------------------------------------------
Purchased technology from Renalogics
acquisition............................... 3 years $1,472,762 $ --
Less--Accumulated amortization.............. (748,520) --
Less--Write-off of purchased technology..... (724,242) --
---------- --------
$ -- $ --
========== ========
Amortization expense related to intangible assets for the years ended
December 31, 1999, 2000 and 2001, and for the period from inception
(April 22, 1994) to December 31, 2001 was approximately $258,000, $491,000,
$0 and $749,000, respectively, and is included in the accompanying
consolidated statements of operations as research and development expenses.
(h) Fair value of financial instruments
The estimated fair value of cash, cash equivalents and accounts payable
approximates carrying value due to the short-term nature of these
instruments.
(i) Research and development expenses
Research and development costs are charged to operations as incurred.
(j) Stock-based compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
measurement of the fair value of stock options or warrants granted to
employees to be included in the statement of operations or, alternatively,
disclosed in the notes to consolidated financial statements. The Company
accounts for stock-based compensation for employees under Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations and provides additional footnote
disclosure as required under SFAS No. 123. The Company records the
- --------------------------------------------------------------------------------
F-9
ADERIS PHARMACEUTICALS, INC.
(A development stage company)
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
fair market value of stock options and warrants granted to nonemployees in
exchange for services in accordance with Emerging Issues Task Force (EITF)
Issue No. 96-18, "Accounting for Equity Instruments that are Issued to Other
than Employees," in the consolidated statement of operations.
(k) Basic and diluted income (loss) per common share
The Company applies SFAS No. 128, "Earnings per Share," which establishes
standards for computing and presenting earnings per share. Basic net income
(loss) per share excludes potential dilution and is computed by dividing net
income (loss) by the weighted average number of unrestricted common shares
outstanding for the period. Diluted net income per share is computed by
dividing net income by the diluted weighted average number of common and
common-equivalent shares outstanding during the period. Common stock
equivalents include options to purchase common stock and convertible
preferred stock. The weighted average number of common-equivalent shares has
been determined in accordance with the treasury stock method for options and
warrants and by using the if converted method from the date of issuance for
convertible preferred stock. In accordance with SAB No. 98, the Company has
determined that there were no nominal issuances of the Company's stock prior
to the Company's initial public offering. Pro forma net loss per share has
been computed as described above and also gives effect to the conversion of
convertible preferred stock that will automatically convert upon the
completion of the Company's proposed initial public offering (using the
if-converted method) from the original date of issuance. Upon consummation
of the proposed initial public offering, all of the convertible preferred
stock outstanding as December 31, 2001 will be converted into an aggregate
of 10,943,861 shares of common stock. In addition, the Company will also
issue 366,851 shares of common stock to the previous shareholders of
Renalogics (see Note 11). These shares have been included in the calculation
of pro forma earnings per share.
Calculation of historical and pro forma basic and diluted net income (loss)
per shares are as follows:
Year ended December 31,
-------------------------------------
1999 2000 2001
------------------------------------------------------------------------------
Basic:
Net income (loss)..................... $1,072,528 $(4,942,523) $(11,080,975)
========== =========== ============
Weighted average common shares
outstanding......................... 2,337,085 2,660,672 2,800,629
Weighted average restricted common
shares outstanding.................. (49,285) (22,946) (10,374)
---------- ----------- ------------
Basic weighted average shares
outstanding......................... 2,287,800 2,637,726 2,790,255
========== =========== ============
Basic income (loss) per share....... $ 0.47 $ (1.87) $ (3.97)
========== =========== ============
Diluted:
Net income (loss)..................... $1,072,528 $(4,942,523) $(11,080,975)
========== =========== ============
Basic weighted average common shares
outstanding......................... 2,287,800 2,637,726 2,790,255
Restricted shares - common stock...... 49,285 -- --
Assumed conversion of preferred stock. 2,935,589 -- --
Effect of assumed exercise of dilutive
stock options....................... 96,683 -- --
========== =========== ============
Diluted weighted average shares
outstanding......................... 5,369,357 2,637,726 2,790,255
========== =========== ============
Diluted income (loss) per share....... $ 0.20 $ (1.87) $ (3.97)
========== =========== ============
- --------------------------------------------------------------------------------
F-10
ADERIS PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information for September 30, 2000 and 2001 is unaudited)
December 31,
2001
- ---------------------------------------------------------------------------------------------
Pro forma:
Net loss...................................................................... $(11,080,975)
============
Basic and diluted weighted average common shares outstanding.................. 2,790,255
Issuance of contingent shares to former Renalogics' stockholders.............. 366,851
Weighted average adjustment to reflect the conversion of preferred stock...... 8,763,830
------------
Pro forma basic and diluted weighted average shares outstanding............. 11,920,936
============
Pro forma basic and diluted loss per share.................................. $ (0.93)
============
For the years ended December 31, 1999, 2000 and 2001 the following options
and warrants were excluded from the computation of diluted net income (loss)
per share, as their effect would be anti-dilutive: 0, 1,813,995, and
2,997,705 respectively. In addition, 0, 4,161,881, and 10,941,993 shares of
convertible preferred stock as converted have been excluded from the
calculation of diluted net income (loss) per share for the years ended
December 31, 1999, 2000 and 2001 respectively, as their effect would be
anti-dilutive.
(l) Concentration of credit risk
SFAS No. 105, "Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of
Credit Risk," requires disclosure of any significant off-balance-sheet and
credit risk concentrations. As of December 31, 2000 and 2001, the Company
has no significant off-balance-sheet or concentrations of credit risk. The
Company's financial instruments that subject the Company to credit risk at
December 31, 2000 and 2001 consist of cash and cash equivalents. The Company
maintains the majority of its cash balances with highly rated financial
institutions. The Company recorded revenues of greater than 10% of total
revenues from the following customers for the years ended December 31, 1999,
2000 and 2001 and for the period from inception (April 22, 1994) to December
31, 2001:
Percentage of revenues
-------------------------------
Period from
inception
Year ended (April 22,
December 31, 1994) to
---------------- December 31,
Customer 1999 2000 2001 2001
-----------------------------------------------------------------------
A...................................... 13% 72% 31% 24%
B...................................... 18% * * 13%
C...................................... 45% 23% 69% 46%
D...................................... 24% * * 17%
* Revenues derived from this customer were less than 10% of the Company's
total revenue for the applicable period.
- --------------------------------------------------------------------------------
F-11
ADERIS PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information for September 30, 2000 and 2001 is unaudited)
(m) Comprehensive income (loss)
SFAS No. 130, "Reporting Comprehensive Income," requires disclosure of all
components of comprehensive income (loss) on an annual and interim basis.
Comprehensive income (loss) is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances involving nonowner sources. The Company does not have any
items of comprehensive income (loss) other than its reported net income
(loss).
(n) Disclosures about segments of an enterprise
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for reporting information regarding
operating segments and establishes standards for related disclosure about
products and services and geographic areas. Operating segments are
identified as components of an enterprise about which separate discrete
financial information is available for evaluation by the chief operating
decision maker, or decision making group, in making decisions regarding
resource allocation and assessing performance. To date, the Company has
viewed its operations and manages its business as one operating segment.
As of December 31, 2001, all of the Company's assets are located in the
United States.
Revenue was derived in the following manner (based on location of customer):
For the years ended
December 31,
-------------------
1999 2000 2001
--------------------------------------------
United States........... 31% 77% 31%
Germany................. 45% 23% 69%
Japan................... 24% -- --
(o) Accrued expenses
Accrued expenses consist of the following:
December 31,
-------------------
2000 2001
--------------------------------------------
Development costs....... $278,071 $ 580,046
Payroll related......... 175,669 518,033
Professional fees....... 277,905 163,200
Other/Travel related.... 140,954 114,395
Royalties............... -- 600,000
-------- ----------
$872,599 $1,975,674
======== ==========
(p) Accounting for derivative instruments
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 137
and No. 138, which establishes a new model for accounting for derivatives
and hedging activities. It requires an entity to recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure these instruments at fair value. The adoption of SFAS No. 133 did
not have a material impact on the Company's financial statements.
- --------------------------------------------------------------------------------
F-12
ADERIS PHARMACEUTICAL, INC.
(A Development Stage Company)
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information for September 30, 2000 and 2001 is unaudited)
In September 2000, the EITF issued Issue No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock," which requires free-standing contracts that are
settled in a company's own stock, including common stock options and
warrants to third parties, to be designated as an equity instrument, asset
or a liability. Under the provisions of EITF Issue No. 00-19, a contract
designated as an asset or a liability must be carried at fair value, with
any changes in fair value recorded in the results of operations. A contract
designated as an equity instrument must be included within equity and no
fair value adjustments are required. As of December 31, 2001, the Company
has recorded all warrants and options to third parties as a component of
equity based on the requirements of EITF Issue No. 00-19.
(q) Recently issued accounting pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 requires that all business combinations
initiated after June 30, 2001 be accounted for using the purchase method of
accounting. SFAS No. 142 discusses how intangible assets that are acquired
should be accounted for in financial statements upon their acquisition and
also how goodwill and other intangible assets should be accounted for after
they have been initially recognized in the financial statements. Beginning
on January 1, 2002, with the adoption of SFAS No. 142, goodwill and certain
purchased intangibles existing on June 30, 2001 will no longer be subject to
amortization over their estimated useful lives. Rather, the goodwill and
certain purchased intangibles will be subject to an annual assessment for
impairment based on fair value. The provisions of SFAS No. 142 are required
to be adopted starting with fiscal years beginning after December 15, 2001.
The Company does not expect adoption of these statements to have a material
impact on its financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", which supersedes SFAS No. 121. SFAS No.
144 further refines the requirements of SFAS No. 121 that companies (i)
recognize an impairment loss only if the carrying amount of a long-lived
asset is not recoverable based on its undiscounted future cash flows and
(ii) measure an impairment loss as the difference between the carrying
amount and fair value of the asset. In addition, SFAS No. 144 provides
guidance on accounting and disclosure issues surrounding long-lived assets
to be disposed of by sale. The Company does not expect the adoption of this
statement to have a material impact on its financial position or results of
operations. The provisions of SFAS No. 144 are required to be adopted
starting with fiscal years beginning after December 15, 2001.
- --------------------------------------------------------------------------------
F-13
ADERIS PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information for September 30, 2000 and 2001 is unaudited)
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
-----------------
2000 2001
--------------------------------------------------------------
Computer equipment.......................... $ 73,490 $168,897
Furniture and fixtures...................... 36,389 135,279
Laboratory equipment........................ 168,773 346,374
Vehicles.................................... -- 17,500
-------- --------
278,652 668,050
Less--Accumulated depreciation.............. 242,014 302,992
-------- --------
Total.................................... $ 36,638 $365,058
======== ========
Depreciation expense related to property and equipment for the years ended
December 31, 1999, 2000 and 2001, and for the period from inception (April 22,
1994) to December 31, 2001 was approximately $25,000, $11,000, $61,000 and
$302,000, respectively.
(4) COMMITMENTS AND CONTINGENCIES
(a) Lease commitments
The Company leases its facilities and office equipment under operating
leases that expire through July 31, 2006. During the years ended December
31, 1999, 2000 and 2001, rent expense totaled approximately $50,000, $62,000
and $122,000 respectively. Rent expense for the period from inception (April
22, 1994) to December 31, 2001 was approximately $385,000.
Future minimum payments under the operating lease agreements at December 31,
2001 are as follows:
Year ending December 31,
-----------------------------------------------------
2002........................................ 163,000
2003........................................ 147,000
2004........................................ 50,000
2005........................................ 10,000
2006........................................ 5,000
--------
$375,000
========
(b) Royalties
The Company has a number of agreements with various research firms and
universities in which the Company has potential obligations to pay royalties
upon the achievement of specific milestones, as defined. During the years
ended December 31, 1999, 2000 and 2001 and for the period from inception
(April 22, 1994) to December 31, 2001, the Company incurred $120,000,
$20,000, $20,000 and $307,000, respectively, of royalties under these
agreements, which are included in the accompanying consolidated statements
of operations as royalty expense. In connection with one
- --------------------------------------------------------------------------------
F-14
ADERIS PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information for September 30, 2000 and 2001 is unaudited)
agreement with a university, the Company is obligated to pay a minimum
annual royalty of $20,000. The Company's obligation to pay this royalty
shall continue until it is terminated by either party in accordance with
provisions, as defined.
(c) Contingencies
From time to time, the Company may have certain contingent liabilities that
arise in the ordinary course of its business activities. The Company accrues
contingent liabilities when it is probable that future expenditures will be
made and such expenditures can be reasonably estimated. Except as discussed
below, the Company is not currently a party to any material pending
litigation or other material legal proceeding.
On January 18, 2002, the Company was served with a complaint which alleges
that the plaintiff was injured while he was a participant in a clinical
trial. The plaintiff is seeking monetary damages in the amount of $1,500,000.
On February 12, 2002, the Company was served with a complaint which alleges
that our use of the trademark ADERIS infringes their trademark, constitutes
unfair competition and is likely to dilute what they perceive to be the
distinctive quality of their trademark. The plaintiff is seeking unspecified
monetary relief in addition to an injunction which may prevent us from using
the trademark ADERIS. The Company does not believe the complaint has merit
and plans to vigorously defend themselves against this claim.
(5) NOTES PAYABLE TO STOCKHOLDERS
During 1996, the Company issued convertible promissory notes to investors
totaling $3,000,000. In March 1999, the notes payable to stockholders totaling
$3,000,000 were converted into 500,000 shares of Series B convertible preferred
stock at the fair market value of $6.00 per share, as determined by the
Company's Board of Directors and consistent with the price of previous
issuances of Series B convertible preferred stock. At the conversion date, the
accrued interest on the notes payable to stockholders totaled $740,332, of
which $165,000 was converted into 453,750 shares of common stock at the fair
market value of $0.60 per share, as determined by the Company's Board of
Directors, and $575,332 of the accrued interest was forgiven. In accordance
with EITF Issue No. 85-17, "Accrued Interest Upon Conversion of Convertible
Debt", the forgiveness of interest was treated as an additional capital
contribution and recorded to additional paid-in capital upon conversion.
(6) CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(a) Convertible preferred stock
The Company has 7,000,000 authorized shares of convertible preferred stock,
$0.001 par value, of which 666,667 shares have been designated as Series A
convertible preferred stock (Series A Preferred Stock), 1,500,000 shares
have been designated as Series B convertible preferred stock (Series B
Preferred Stock), 538,776 shares have been designated as Series C
convertible preferred stock (Series C Preferred Stock), and 4,090,910 shares
have been designated as Series D convertible preferred stock (Series D
Preferred Stock).
In February, March and August 2001, the Company issued an aggregate of
4,076,834 shares of Series D Preferred Stock at $11.00 per share, resulting
in gross proceeds to the Company of approximately $44.8 million.
- --------------------------------------------------------------------------------
F-15
ADERIS PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information for September 30, 2000 and 2001 is unaudited)
In connection with the Series D Preferred Stock financing, the Company paid
a placement agent approximately $1.1 million and issued to it a warrant to
purchase 225,060 shares of common stock at $3.64 per share. The value of the
warrant using the Black-Scholes option pricing model was approximately
$1,239,000. Both amounts are included in the Series D issuance costs. The
warrant expires five years from the issuance date.
In April 1994, the Company issued 666,667 shares of Series A Preferred Stock
at $0.75 per share, resulting in net proceeds to the Company of $480,303. In
March and November 1995, the Company issued an aggregate 430,583 shares of
Series B Preferred Stock at $6.00 per share, resulting in net proceeds to
the Company of $2,526,486. In addition, in March 1995, the Company issued
191,651 shares of Series B Preferred Stock at $6.00 upon the conversion of
$1,100,000 of principal and $49,907 of accrued interest of convertible notes
payable. In November 1995, the Company issued 16,667 shares of Series B
Preferred Stock to a consultant as payment for past services rendered. The
Company has recorded the fair value of the shares issued of $100,002 as
research and development expense in 1995. In March 1999, the Company issued
500,000 shares of Series B Preferred Stock upon conversion of $3,000,000 of
principal of convertible notes payable (see Note 5) at a price of $6 per
share. In June 1999, the Company issued 178,008 shares of Series B Preferred
Stock in connection with the acquisition of Renalogics (see Note 11). In
February and May 2000, the Company issued an aggregate 538,776 shares of
Series C Preferred Stock at $10.21 per share, resulting in net proceeds to
the Company of $5,484,110.
The rights, preferences and privileges of the Series A, Series B, Series C
and Series D Preferred Stock are detailed below:
Dividends
The Company is not required to pay dividends to any preferred stockholders.
However, in the event of a dividend to common stockholders, Series A
Preferred stockholders are entitled to receive dividends at a rate of $0.06
per annum (8% of purchase price) prior to any dividend payments to common
stockholders. Series B Preferred stockholders are entitled to receive
dividends at a rate of $0.48 per annum (8% of purchase price) prior to any
dividend payments to common stockholders. Series C Preferred stockholders
are entitled to receive dividends at a rate of $0.82 per annum (8% of
purchase price) prior to any dividend payments to common stockholders.
Series D Preferred stockholders are entitled to receive dividends at a rate
of $0.88 per annum (8% of purchase price) prior to any dividend payments to
common stockholders. These dividends are not cumulative.
Liquidation
In the event of any voluntary or involuntary liquidation, dissolution or
winding-up, including the sale of all or substantially all of the assets of
the Company, as defined, the holders of Series A, Series B and Series D
Preferred Stock then outstanding shall be entitled to be paid an amount
equal to $0.75, $6.00 and $11.00 per share, respectively plus any declared
but unpaid dividends. After payment in full to the holders of Series A,
Series B and Series D Preferred Stock, then Series C Preferred Stock will be
entitled to be paid an amount equal to $10.21 per share plus any declared
but unpaid dividends. As the potential liquidation event upon a change in
control of the Company could be deemed outside the control of the Company,
the convertible preferred stock has been presented outside of stockholder's
equity (deficit) in the accompanying financial statements. Since redemption
is uncertain because it is based on a liquidation event, the Company has
presented the
- --------------------------------------------------------------------------------
F-16
ADERIS PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information for September 30, 2000 and 2001 is unaudited)
preferred stock at issuance value. The following summarizes the liquidation
values of Series A, Series B, Series C and Series D Preferred Stock as of
December 31, 2000 and 2001:
December 31,
----------------------
2000 2001
-------------------------------------------------------------------
Series A Preferred Stock.................... $ 500,000 $ 500,000
Series B Preferred Stock.................... 7,901,454 7,901,454
Series C Preferred Stock.................... 5,500,903 5,500,903
Series D Preferred Stock.................... -- 44,845,174
After the liquidation preference payments to all Preferred stockholders, the
remaining assets of the Company shall be distributed ratably among the
holders of common stock and Series A, Series B, and Series D Preferred Stock
based on the number of shares of common stock that the Series A, Series B
and Series D Preferred Stock is then convertible into.
If upon any such liquidation, dissolution, or winding-up of the Company, the
remaining assets of the Company available for distribution to its
stockholders are insufficient to pay the holders of shares of Preferred
Stock the full amount which they are entitled to, the holders of shares of
Series A, Series B and Series D Preferred Stock shall share ratably in any
distribution of the remaining assets and funds of the Company in proportion
to their aggregate liquidation amount.
Conversion
Each share of Series A, Series B, Series C and Series D Preferred Stock is
convertible at the option of the holder, at any time, into 1.65 share of
common stock, adjustable for certain dilutive events. In July 2001, the
Company issued a warrant to purchase 225,060 shares of common stock at $3.64
per share. This issuance has been deemed a dilutive event for the Series C
and Series D Preferred Stockholders and accordingly the conversion ratio has
been adjusted to approximately 1.66 shares of common stock per share of
Series C and Series D Preferred Stock. An automatic conversion occurs into
common stock at the then applicable conversion price upon the closing of a
public offering in which the share price is not less than $9.10 per share
(adjusted for specified events) and the aggregate proceeds to the Company
are greater than $25,000,000.
Voting rights
The Series A, Series B, Series C and Series D Preferred stockholders are
entitled to the number of votes for each share of common stock which the
Preferred Stock is then convertible into on most matters submitted to a vote
of stockholders. In addition, Series A Preferred stockholders, voting as a
separate class, are entitled to elect one director of the Company. Series B
Preferred stockholders, voting as a separate class, are entitled to elect
one director of the Company.
- --------------------------------------------------------------------------------
F-17
ADERIS PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information for September 30, 2000 and 2001 is unaudited)
The Company must reserve a sufficient number of its authorized but unissued
common stock to provide for the conversion of Series A, Series B, Series C
and Series D Preferred Stock. Therefore, the following number of shares of
common stock has been reserved as of December 31, 2001:
Series A Preferred Stock............... 1,100,004
Series B Preferred Stock............... 2,475,000
Series C Preferred Stock............... 895,204
Series D Preferred Stock............... 6,797,252
---------
11,267,460
==========
(b) Stock Split
In March 2002, the Company effected a stock split of 1.65 shares per share
of common stock. All common share and per share amounts have been
retroactively restated to reflect the stock split.
(c) Common stock
The Company has 50,000,000 authorized shares of common stock, of which a
total of 2,661,178 and 2,961,478 shares have been issued as of December 31,
2000 and 2001, respectively.
(d) Restricted common stock
The Company has entered into a vesting and buyback agreement with a
shareholder/member of the Board of Directors. The agreement provides that in
the event that the shareholder is no longer on the Board of Directors, the
Company has the right to repurchase any unvested shares from the stockholder
at the original issuance price which ranges from $0.03 to $0.37 per share.
The repurchase option on the 122,100 shares of restricted common stock
outstanding at December 31, 2000 lapses on a monthly basis through 2004. As
of December 31, 2000, 106,370 shares of common stock were vested and 15,730
shares of common stock were subject to repurchase rights. In September 2001,
the Company accelerated the vesting of the remaining unvested restricted
shares and terminated its option to repurchase such restricted shares held
by the Board member upon her resignation from the Board. The Company
recorded a noncash compensation charge of approximately $79,000 during the
year ended December 31, 2001 related to the acceleration of vesting.
(7) Stock option plans
In March 1995, the Company adopted the 1995 Stock Option Plan (the 1995 Plan),
whereby the Board of Directors may grant incentive and nonstatutory stock
options. The Company initially reserved 825,000 shares of common stock for
issuance to eligible employees, directors of and consultants to the Company,
which was increased to 1,650,000 shares in June 1999 and to 2,475,000 shares in
September 1999. Options granted under the 1995 Plan expire no later than 10
years from the date of grant. For incentive stock options, the option price
shall be at least 100% of the fair value on the date of grant, and no less than
85% of the fair value for nonqualified stock options. If, at the time the
Company grants an incentive stock option, the optionee directly or by
attribution owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company, then the option price shall be at
least 110% of the fair value and shall not be exercisable more than five years
after the date of grant. Options generally vest over a period of four years
from the date of grant. Options may be granted with different vesting terms
from time to time. As of December 31, 2001, the Company had 78,554 shares
available for future grant under the 1995 Plan.
- --------------------------------------------------------------------------------
F-18
ADERIS PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information for September 30, 2000 and 2001 is unaudited)
In November 2001, the Company adopted the 2001 Incentive Award Plan (the 2001
Plan), whereby the Board of Directors may grant incentive and nonstatutory
stock options. The Company has reserved 1,155,000 shares of common stock for
issuance under the 2001 Plan. Options granted under the 2001 Plan expire no
later than 10 years from the date of grant. For incentive stock options, the
option price shall be at least 100% of the fair value on the date of grant, and
no less than 85% of the fair value for nonqualified stock options. If, at the
time the Company grants an incentive stock option, the optionee directly or by
attribution owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company, then the option price shall be at
least 110% of the fair value and shall not be exercisable more than five years
after the date of grant. Options generally vest over a period of four years
from the date of grant. Options may be granted with different vesting terms
from time to time. As of December 31, 2001, the Company had 323,400 shares
available for future grant under the 2001 Plan.
Activity under these stock option plans is summarized as follows:
Weighted
average
Exercise exercise
Number price price per
of shares per share share
-----------------------------------------------------------------------
Granted............................... 268,950 $0.03-0.30 $ 0.27
--------- ---------- ------
Balance, December 31, 1995............. 268,950 0.03-0.30 0.27
Granted............................... 132,000 0.03-0.30 0.23
--------- ---------- ------
Balance, December 31, 1996............. 400,950 0.03-0.30 0.26
Granted............................... 424,050 0.30 0.30
Cancelled............................. (1,650) 0.30 0.30
--------- ---------- ------
Balance, December 31, 1997............. 823,350 0.03-0.30 0.28
Granted............................... 1,650 0.30 0.30
Exercised............................. (24,750) 0.03 0.03
Cancelled............................. (103,950) 0.30 0.30
--------- ---------- ------
Balance, December 31, 1998............. 696,300 0.03-0.30 0.28
Granted............................... 485,925 0.36 0.36
Exercised............................. (122,100) 0.03-0.30 0.24
Cancelled............................. (79,200) 0.30 0.30
--------- ---------- ------
Balance, December 31, 1999............. 980,925 0.03-0.36 0.33
Granted............................... 841,321 0.36-0.61 0.36
Exercised............................. (8,250) 0.03 0.03
--------- ---------- ------
Balance, December 31, 2000............. 1,813,996 0.30-0.61 0.35
Granted............................... 1,326,600 0.67 0.67
Exercised............................. (300,300) 0.36 0.36
Cancelled............................. (67,650) 0.36 0.36
--------- ---------- ------
Balance, December 31, 2001............. 2,772,646 $0.30-0.67 $ 0.49
========= ========== ======
Exercisable, December 31, 2001......... 1,361,384 $0.30-0.67 $ 0.43
========= ========== ======
Exercisable, December 31, 2000......... 863,769 $0.30-0.36 $ 0.33
========= ========== ======
Exercisable, December 31, 1999......... 608,953 $0.30-0.36 $ 0.31
========= ========== ======
- --------------------------------------------------------------------------------
F-19
ADERIS PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information for September 30, 2000 and 2001 is unaudited)
The following table summarizes information about options outstanding at
December 31, 2001:
Outstanding
---------------------------------- Exercisable
Weighted ------------------
average Weighted Weighted
remaining average average
Exercise Number contractual exercise Number exercise
prices of shares life (In years) price of shares price
--------------------------------------------------------------
$0.30 508,200 5.09 $0.30 508,200 $0.30
0.37 937,846 8.39 0.37 457,184 0.37
0.67 1,326,600 9.67 0.67 396,000 0.67
--------- ---- ----- --------- -----
2,772,646 8.40 $0.49 1,361,384 $0.43
========= ==== ===== ========= =====
The Company has computed the pro forma disclosures required under SFAS No. 123
for options granted in 1999, 2000 and 2001 using the Black-Scholes option
pricing model prescribed by SFAS No. 123. The assumptions used and weighted
average information is as follows:
December 31,
----------------------------------
1999 2000 2001
- -------------------------------------------------------------------------------------------------------
Risk-free interest rate 5.08-5.68% 5.17-6.50% 4.41-5.03
Expected dividend yield -- -- --
Expected lives 5 years 5 years 5 years
Expected volatility 85% 90% 95%
Weighted average fair value of options granted equal to fair market
value $ 0.42 $ 0.44 --
Weighted average fair value of options granted below fair market
value -- $ 2.77 $ 14.97
The pro forma effects of applying SFAS No. 123 are as follows for the years
ended December 31, 1999, 2000 and 2001:
December 31,
-----------------------------------
1999 2000 2001
- ------------------------------------------------------------------
Net income (loss)--
As reported $1,072,528 $(4,942,523) (11,080,975)
Pro forma $1,017,639 $(5,025,045) (11,238,917)
Net income (loss) per share--
As reported--basic $ 0.47 $ (1.87) (3.97)
As reported--diluted $ 0.20 $ (1.87) (3.97)
Pro forma--basic $ 0.44 $ (1.91) (4.03)
Pro forma--diluted $ 0.19 $ (1.91) (4.03)
- --------------------------------------------------------------------------------
F-20
ADERIS PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information for September 30, 2000 and 2001 is unaudited)
The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
Because the Company accounts for its stock-based awards using the intrinsic
value method in accordance with APB Opinion No. 25 and its related
interpretations, no compensation expense has been recognized in the
consolidated financial statements at the date of grant for employee stock
option arrangements for which the exercise price is equal to the deemed fair
market value of the underlying shares at that date.
In connection with stock options granted to employees during the years ended
December 31, 2000 and 2001, the Company recorded deferred compensation of
approximately $1,109,000 and $10,757,000, respectively which represents the
aggregate difference between the option exercise price and the deemed fair
market value of the common stock determined for financial reporting purposes on
the grant date. The deferred compensation will be recognized as an expense over
the vesting period of the underlying stock options, generally four years, in
accordance with the method described in FASB Interpretation No. 28, "Accounting
for Stock Appreciation Rights and Other Variable Stock Option or Award Plans
(An Interpretation of APB Opinion No. 15 and No. 25"). The Company recorded
stock-based compensation expense of $144,335 and $6,086,150 for the year ended
December 31, 2000 and 2001, respectively related to these options.
At December 31, 2001, the remaining unamortized deferred stock-based
compensation totaled $5,636,169 and will be amortized over the following
periods (assuming no forfeitures):
Year ending December 31, 2002.................... $3,014,124
Year ending December 31, 2003.................... 1,580,518
Year ending December 31, 2004.................... 790,478
Year ending December 31, 2005.................... 251,049
----------
$5,636,169
==========
- --------------------------------------------------------------------------------
F-21
ADERIS PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information for September 30, 2000 and 2001 is unaudited)
From inception (April 22, 1994) though December 31, 2001, the Company has
issued options to purchase a total of 316,800 shares to nonemployees. These
options typically vest 25% upon the first anniversary of the vesting start date
and ratably on a monthly basis thereafter through 2004. The Company has
recorded the applicable stock-based compensation expense based on the fair
value of these options as calculated by the Black-Scholes option pricing model
of $16,460, $23,154, $230,082 and $285,417 during the years ended December 31,
1999, 2000 and 2001 and the period from inception (April 22, 1994) to December
31, 2001, respectively. The assumptions used are as follows:
December 31,
--------------------------------
1999 2000 2001
--------------------------------------------------------------
Risk-free interest rate...... 5.08-5.68% 5.17-6.50% 4.51-5.55%
Expected dividend yield...... -- -- --
Expected lives............... 10 years 10 years 10 years
Expected volatility.......... 85% 90% 95%
In December 2000, the Company recorded a charge of $63,114 related to the
acceleration of one executive's 42,281 unvested options on the date of his
termination. In January 2001, the former executive exercised his 169,125
options in a cashless exercise in exchange for 135,300 shares of the Company's
common stock. The cashless exercise of options utilizing immature shares
resulted in a new measurement date and the Company recorded a noncash
compensation charge of approximately $189,000 in relation to this exercise in
the year ended December 31, 2001. This charge was calculated based on the fair
market value on the date of exercise. This cashless exercise was not a
provision of the original plan and has only been granted to this one executive.
In September 2001, the Company accelerated the vesting and extended the
exercise term of options to two Board members who resigned. In connection with
this agreement, the Company recorded a noncash compensation charge of
approximately $665,000 related to the option modification in the year ended
December 31, 2001. This charge was calculated based on the fair market value on
the date of the acceleration.
- --------------------------------------------------------------------------------
F-22
ADERIS PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information for September 30, 2000 and 2001 is unaudited)
(8) INCOME TAXES
The provision for income taxes consists of the following:
For the years ended
December 31,
-------------------
1999 2000 2001
-----------------------------------------------------------
Current payable--
Federal............................. $ -- $ -- $ --
State............................... -- -- --
Foreign............................. -- -- --
---- ---- ----
-- -- --
Deferred tax benefit-- --
Federal............................. -- -- --
State............................... -- -- --
Foreign............................. -- -- --
---- ---- ----
$ -- $ -- $ --
==== ==== ====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. As of December 31, 2000
and 2001, the components of the net deferred tax assets are approximately as
follows:
2000 2001
- ------------------------------------------------------------------------
Net operating loss carryforwards............ $ 5,597,000 $ 7,726,000
Stock compensation.......................... -- 2,900,000
Research and development tax credit
carryforwards.............................. 473,000 735,000
Other tax credit carryforwards.............. 70,000 70,000
Deferred revenue............................ 732,000 --
Depreciation and amortization............... 152,000 227,000
Other....................................... 12,000 56,000
----------- -------------
7,036,000 11,714,000
Valuation allowance......................... (7,036,000) (11,714,000)
----------- -------------
Net deferred income tax asset............ $ -- $ --
=========== =============
The Company has placed a full valuation allowance against its net deferred tax
assets since the Company believes it is more likely than not that it will not
be able to utilize its net deferred tax asset.
- --------------------------------------------------------------------------------
F-23
ADERIS PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information for September 30, 2000 and 2001 is unaudited)
The provision for income taxes differs from the federal statutory rate due to
the following:
For the year ended
December 31,
--------------------
1999 2000 2001
- -------------------------------------------------------------------
Tax at statutory rate....................... 34.0% (34.0)% (34.0)%
State taxes, net of federal benefit......... 6.1 (5.7) (5.9)
Permanent differences....................... 0.8 1.6 --
Tax credits................................. (12.6) (2.5) (2.1)
Tax effect of foreign activities............ -- -- --
Change in valuation allowance............... (28.3) 40.6 42.0
----- ----- -----
Effective tax rate....................... -- % -- % -- %
===== ===== =====
At December 31, 2001, the Company had net operating loss carryforwards and
research and development tax credit carryforwards of approximately $19,316,000
and $735,000, respectively. The federal net operating losses and the research
and development tax credits expire beginning in 2009 through 2020. In addition,
at December 31, 2001, the Company also had alternative minimum tax (AMT) credit
carryforwards of approximately $70,000. The carryforward period for the AMT
credit is unlimited. The use of these losses may be limited due to ownership
change limitations under Section 382 of the Internal Revenue Code.
(9) EMPLOYEE BENEFITS
(a) Retirement Savings Plan
The Company had a simplified employee pension plan covering substantially all
of the Company's employees through December 31, 2000. Company matching
contributions were at the discretion of the Company's management. The Company
did not make any discretionary contributions from inception (April 22, 1994)
through December 31, 2000.
(b) 401(k) Plan
The Company adopted a 401(k) Retirement Plan (the Plan) effective January 1,
2002, in which all employees 21 years old or older are eligible to participate
upon meeting an hours of service requirement, as defined in the Plan. Under the
terms of the Plan, employees may elect to defer a percentage of their annual
compensation, subject to legal limitations. The Company may make matching
contributions at its discretion.
(10) RELATED PARTY TRANSACTIONS
In February 2000, the Company sold 489,804 shares of Series C Preferred Stock
to a customer at $10.21 per share for gross proceeds of $5,000,000. Total
revenues from this customer for the years ended December 31, 1999, 2000 and
2001 were $3,133,935, $673,019, and $4,000,000. No portion of the proceeds from
the sales of Series C Preferred Stock were allocated to revenue. In addition in
March 2001, this customer purchased 200,000 shares of Series D Preferred Stock
at $11.00 per share. This price is consistent with that paid by other investors.
- --------------------------------------------------------------------------------
F-24
ADERIS PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information for September 30, 2000 and 2001 is unaudited)
In addition in May 2000, the Company issued an additional 48,972 shares of
Series C Preferred Stock to the owner of a molecule the Company was developing
as partial payment for licensing the molecule from this Company. The license
agreement was for $1,500,000, of which the Company paid $1,000,000 in cash and
issued stock valued at $500,000 based on a price of $10.21 per share. This
amount is included in research and development expense on the accompanying
statement of operations.
(11) ACQUISITIONS
Whitby Research
On April 25, 1994, the Company purchased all of the outstanding capital stock
of Whitby Research (a wholly-owned subsidiary of Whitby, Inc.) for $500,000 in
cash. Accordingly, the acquired assets and liabilities were recorded at their
estimated fair value as of the date of acquisition, including approximately
$310,000 allocated to in-process purchased research and development costs and
approximately $190,000 allocated to property and equipment. In connection with
the purchase, the Company entered into a royalty agreement with Whitby, Inc.
for an indefinite period, in which the Company has agreed to pay future
royalties to Whitby, Inc. for certain patents, license and know-how fees
received by the Company. During the years ended December 31, 1999, 2000 and
2001, and for the period from inception (April 22, 1994) to December 31, 2001,
the Company incurred approximately $243,000, $28,000, $600,000 and $1,708,000,
respectively, of royalties under the royalty agreement, which is included in
royalty expense in the accompanying consolidated statements of operations.
Renalogics
On June 21, 1999, the Company acquired all of the outstanding capital stock of
Renalogics in exchange for a maximum of 427,616 shares of the Company's common
stock and 296,678 shares of the Company's Series B Preferred Stock.
On June 21, 1999, the Company issued to the shareholders of Renalogics 256,570
shares of the Company's common stock valued at $0.364 per share or $93,298 and
178,008 shares of the Company's Series B Preferred Stock valued at $6.00 per
share or $1,068,048 in exchange for all of the outstanding capital stock of
Renalogics. In addition, the Company forgave the principal of $192,830 and the
accrued interest of $2,795 related to the notes receivable entered into in
April and May of 1999 with Renalogics. In addition, the Company paid cash upon
the closing of the acquisition as settlement of the outstanding liabilities of
Renalogics of $27,423 that the Company was assuming as part of the acquisition.
The Company also incurred approximately $103,000 of legal, accounting and
consultation fees as a cost of this transaction. This transaction was accounted
for as a purchase in accordance with the provisions of APB Opinion No. 16,
"Accounting for Business Combinations." The purchase price of the acquisition
has been allocated as follows:
Purchased technology................... $1,472,762
Cash................................... 14,848
----------
$1,487,610
==========
The portion of the purchase price allocated to purchased technology represents
the licensing and research agreements with Emory University assumed by the
Company. Under these arrangements, the Company acquired the right to develop
and commercialize any intellectual property that resulted from Emory
University's efforts with respect to the development of a family of novel
anti-inflammatory molecules in
- --------------------------------------------------------------------------------
F-25
ADERIS PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information for September 30, 2000 and 2001 is unaudited)
exchange for certain milestone payments and royalties based on sales of a
product resulting from the intellectual property of Emory University. The
Company has paid approximately $405,000, $136,000, $0 and $541,000 in 1999,
2000, 2001 and for the period from inception (April 22, 1994) to December 31,
2001, respectively, in payments in connection with the research agreement with
Emory University, which has been recorded as research and development expense
in the accompanying consolidated statement of operations.
The Company estimated that there was value to the licensing agreement from
Emory University which they had purchased in the acquisition. Accordingly, the
Company capitalized the full amount to purchased technology and assigned it a
three-year life, management's estimate for the period of time it would take the
Company to recognize the value of the technology covered by the licensing
agreement. The Company began amortizing the purchased technology on a
straight-line basis over the estimated useful life. In addition, the former
president of Renalogics became the president of the Company as of June 21, 1999.
During December 2000, the Company reevaluated the commercial potential of the
licensing agreement with Emory University and the employment arrangement it had
with the former president of Renalogics and concluded that it would not pursue
the further commercialization of this technology. Accordingly, the Company
terminated its licensing agreement with Emory University and wrote off the
remaining $724,242 of unamortized value of the purchased technology. In
addition, as of December 31, 2000, the Company terminated the former president
of Renalogics.
In connection with the acquisition of Renalogics, the Company is required to
issue an additional 171,046 shares of its common stock and 118,670 shares of
its Series B Preferred Stock, which will convert to 195,805 shares of common
stock, to the shareholders of Renalogics upon closing of an underwritten
initial public offering of the Company's common stock at a price of at least
$10.00 per share or upon the sale of the Company for a price greater than $60
million. As of December 31, 2001, none of these milestones had been achieved.
As there is no longer value related to the assets acquired in this acquisition,
the Company will expense this contingent purchase amount if it is paid based on
the fair value of stock on the date it is issued.
The following unaudited pro forma financial information combines the Company's
and Renalogics' results of operations as if the acquisition had taken place on
January 1, 1998. The pro forma results are not necessarily indicative of what
the results of operations actually would have been if the transaction had
occurred on the applicable dates indicated and are not intended to be
indicative of future results of operations:
Year ended
December 31,
------------
1999
- ----------------------------------------------------
Revenues............................... $6,850,560
Operating (loss) income................ 814,506
Net (loss) income...................... 829,511
Net (loss) income per share, basic..... 0.60
Net (loss) income per share, diluted... 0.25
- --------------------------------------------------------------------------------
F-26
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Renalogics, Inc.:
We have audited the accompanying balance sheets of Renalogics, Inc. (a Georgia
corporation) as of December 31, 1998 and June 21, 1999, and the related
statements of operations, redeemable convertible preferred stock and
stockholders' deficit and cash flows for year ended December 31, 1998, for
period from January 1, 1999 to June 21, 1999 and for the period from inception
(September 10, 1996) to June 21, 1999. These financial statements are the
responsibility of the Renalogics, Inc.'s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Renalogics, Inc. as of
December 31, 1998 and June 21, 1999, and the results of its operations and its
cash flows for year ended December 31, 1998, for period from January 1, 1999 to
June 21, 1999 and for the period from inception (September 10, 1996) to June
21, 1999 in conformity with accounting principles generally accepted in the
United States.
/S/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
August 22, 2001
- --------------------------------------------------------------------------------
F-27
RENALOGICS, INC.
(A development stage company)
- --------------------------------------------------------------------------------
BALANCE SHEETS
December 31, June 21,
1998 1999
- --------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents................................................... $ 84,453 $ 14,848
----------- -----------
Total assets............................................................ $ 84,453 $ 14,848
=========== ===========
Liabilities, Redeemable Convertible Preferred Stock And Stockholders' Deficit
Current Liabilities:
Accounts payable and accrued expenses....................................... $ 59,400 $ 27,423
Notes payable to Discovery Therapeutics, Inc. (Discovery)................... -- 192,830
Convertible notes payable to stockholders................................... 200,000 --
----------- -----------
Total current liabilities............................................... 259,400 220,253
----------- -----------
Series A Redeemable Convertible Preferred Stock (at redemption value)
Authorized--2,000,000 shares, of which all 2,000,000 shares are
designated Series A redeemable convertible preferred stock issued and
outstanding--1,600,000 shares and 1,812,559 shares of Series A
redeemable convertible preferred stock (at redemption value)
December 31, 1998 and June 21, 1999, respectively......................... 1,500,000 1,712,559
----------- -----------
Stockholders' Deficit:
Common stock, $0.01 par value--
Authorized--6,000,000 shares
Issued and outstanding--1,583,333 shares at December 31, 1998 and
June 21, 1999........................................................... 15,833 15,833
Deficit accumulated during the development stage............................ (1,690,780) (1,933,797)
----------- -----------
Total stockholders' deficit............................................. (1,674,947) (1,917,964)
----------- -----------
Total liabilities and stockholders' deficit............................. $ 84,453 $ 14,848
=========== ===========
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
F-28
ADERIS PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information for September 30, 2000 and 2001 is unaudited)
Period Period from
from Inception
January 1, (September 10,
Year Ended 1999 to 1996) to
December 31, June 21, June 21,
1998 1999 1999
- ---------------------------------------------------------------------
Expenses:
Research and development.. $ 434,541 $ 54,931 $ 1,069,011
General and administrative 348,399 181,519 864,689
--------- --------- -----------
Total expenses........ 782,940 236,450 1,933,700
Interest Expense........... 4,164 6,850 11,014
Interest Income............ 10,265 283 19,578
--------- --------- -----------
Net loss.............. $(776,839) $(243,017) $(1,925,136)
========= ========= ===========
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
F-29
RENALOGICS, INC.
(A development stage company)
- --------------------------------------------------------------------------------
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Stock
Subscription
Receivable
Series A from Stock
Redeemable Convertible Series A Subscription
Preferred Stock Redeemable Common Stock Receivable
---------------------- Convertible ------------------- from
Redemption Preferred $0.01 Common
Shares Value Stockholder Shares Par Value Stockholder
--------- ---------- ------------ --------- --------- ------------
Balance, September 10, 1996................... -- $ -- $ -- -- $ -- $ --
Issuance of common stock.................... -- -- -- 666,667 6,667 --
Issuance of Series A redeemable convertible
preferred stock............................ 333,334 250,000 -- -- -- --
Net loss.................................... -- -- -- -- -- --
--------- ---------- --------- --------- ------- -------
Balance, December 31, 1996.................... 333,334 250,000 -- 666,667 6,667 --
Issuance of common stock.................... -- -- -- 906,666 9,066 (2,194)
Issuance of Series A redeemable convertible
preferred stock, net of issuance costs of
$8,661..................................... 1,266,666 1,250,000 (150,000) -- -- --
Net loss.................................... -- -- -- -- -- --
--------- ---------- --------- --------- ------- -------
Balance, December 31, 1997.................... 1,600,000 1,500,000 (150,000) 1,573,333 15,733 (2,194)
Issuance of common stock.................... -- -- -- 10,000 100 --
Payment of stock subscription receivables... -- -- 150,000 -- -- 2,194
Net loss.................................... -- -- -- -- -- --
--------- ---------- --------- --------- ------- -------
Balance, December 31, 1998.................... 1,600,000 1,500,000 -- 1,583,333 15,833 --
Issuance of Series A redeemable convertible
preferred stock upon conversion of
principal and interest on notes payable to
stockholders............................... 212,559 212,559 -- -- -- --
Net loss.................................... -- -- -- -- -- --
--------- ---------- --------- --------- ------- -------
Balance, June 21, 1999........................ 1,812,559 $1,712,559 $ -- 1,583,333 $15,833 $ --
========= ========== ========= ========= ======= =======
Deficit
Accumulated
During the Total
Development Shareholders'
Stage Deficit
----------- -------------
Balance, September 10, 1996................... $ -- $ --
Issuance of common stock.................... -- 6,667
Issuance of Series A redeemable convertible
preferred stock............................ -- --
Net loss.................................... (95,424) (95,424)
----------- -----------
Balance, December 31, 1996.................... (95,424) (88,757)
Issuance of common stock.................... -- 6,872
Issuance of Series A redeemable convertible
preferred stock, net of issuance costs of
$8,661..................................... (8,661) (8,661)
Net loss.................................... (809,856) (809,856)
----------- -----------
Balance, December 31, 1997.................... (913,941) (900,402)
Issuance of common stock.................... -- 100
Payment of stock subscription receivables... -- 2,194
Net loss.................................... (776,839) (776,839)
----------- -----------
Balance, December 31, 1998.................... (1,690,780) (1,674,947)
Issuance of Series A redeemable convertible
preferred stock upon conversion of
principal and interest on notes payable to
stockholders............................... -- --
Net loss.................................... (243,017) (243,017)
----------- -----------
Balance, June 21, 1999........................ $(1,933,797) $(1,917,964)
=========== ===========
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
F-30
ADERIS PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information for September 30, 2000 and 2001 is unaudited)
Period from
Period from Inception
January 1, (September 10,
Year Ended 1999 to 1996) to
December 31, June 21, June 21,
1998 1999 1999
- ------------------------------------------------------------------------------------------------------
Operating Activities
Net loss.................................................. $(776,839) $(243,017) $(1,925,136)
Adjustments to reconcile net loss to net cash used in
operating activities--
Common stock issued for payment of research and
development services.................................. -- -- 833
Noncash interest on convertible notes payable to
stockholders.......................................... -- 12,559 12,559
Changes in operating assets and liabilities--
Interest receivable................................... 1,167 -- --
Accounts payable and accrued expenses................. (2,700) (31,977) 27,423
--------- --------- -----------
Net cash used in operating activities............... (778,372) (262,435) (1,884,321)
--------- --------- -----------
Financing Activities
Net proceeds from sale of common stock.................... 100 -- 12,806
Net proceeds from sale of Series A redeemable
convertible preferred stock, net of issuance costs...... -- -- 1,341,339
Payment of stock subscription receivable from common
stockholder............................................. 2,194 -- 2,194
Payment of stock subscription receivable from Series A
redeemable convertible preferred stockholder............ 150,000 -- 150,000
Convertible notes payable to stockholders................. 200,000 -- 200,000
Notes payable to Discovery................................ -- 192,830 192,830
--------- --------- -----------
Net cash provided by financing activities........... 352,294 192,830 1,899,169
--------- --------- -----------
(Decrease) Increase in Cash and Cash Equivalents........... (426,078) (69,605) 14,848
Cash and Cash Equivalents, beginning of period............. 510,531 84,453 --
--------- --------- -----------
Cash and Cash Equivalents, end of period................... $ 84,453 $ 14,848 $ 14,848
========= ========= ===========
Supplemental Disclosure of Noncash Financing Activities
Issuance of Series A redeemable convertible preferred stock
upon conversion of principal and interest of notes
payable to stockholders.................................. $ -- $ 212,559 $ 212,559
========= ========= ===========
Issuance of common stock for research and development
services................................................. $ -- $ -- $ 833
========= ========= ===========
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
F-31
RENALOGICS, INC.
(A development stage company)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 21, 1999
(1) OPERATIONS
Renalogics, Inc. (the Company) was incorporated as a Georgia corporation on
September 10, 1996. The Company is engaged in the development and
commercialization of therapeutic products for the treatment of
glumerulonephritis and other diseases.
The Company is in the development stage and is devoting substantially all of
its efforts towards research and development. The Company incurred net losses
of approximately $1,925,000 during the period from inception (September 10,
1996) to June 21, 1999. The Company has an accumulated deficit of approximately
$1,934,000 as of June 21, 1999. The Company is subject to risks and challenges
similar to other development stage biotechnology companies. These risks
include, but are not limited to, dependence on key individuals, successful
development and marketing of its products, the ability to obtain adequate
financing to support growth and future operations and competition from
substitute products and larger companies with greater financial, technical,
management and marketing resources.
On June 21, 1999, Discovery Therapeutics, Inc. (Discovery) completed its
acquisition of the Company. In consideration for the acquisition of the
Company, the stockholders of the Company received 155,497 shares of Discovery's
common stock, $0.001 par value per share and 178,008 shares of Discovery's
Series B convertible preferred stock in exchange for all of the outstanding
capital stock of the Company. Discovery will issue the stockholders of the
Company an additional 103,664 shares of its common stock and 118,670 shares of
its Series B convertible preferred stock upon achievement of certain
milestones. In connection with the acquisition, the principal of $192,830 and
accrued interest of $2,795 of the notes due to Discovery were forgiven by
Discovery.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation
The Company's financial statements have been presented on the basis that it
will continue as a going-concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business.
The Company reported net losses of approximately $777,000 and $243,000 for
the year ended December 31, 1998 and for the period from January 1, 1999 to
June 21, 1999, respectively, and had an accumulated deficit of approximately
$1,934,000 at June 21, 1999. However, as discussed in Note 1, the Company
was acquired on June 21, 1999 by Discovery. Continuation of the Company's
operations will be dependent on business decisions made by the management of
Discovery, funding provided by Discovery and the Company's results of
operations.
(b) Use of estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect amounts reported in the
accompanying financial statements and notes. Actual results could differ
from those estimates.
(c) Cash and cash equivalents
Cash and cash equivalents include all highly liquid investments with a
maturity of 90 days or less at the time of purchase.
- --------------------------------------------------------------------------------
F-32
RENALOGICS, INC.
(A Development Stage Company)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 21, 1999
(d) Research and development expenses
The Company expenses all research and development costs as incurred.
(e) Concentrations of credit risk
Financial instruments that subject the Company to concentrations of credit
risk consist of cash and cash equivalents. The Company maintains its cash
balances with one highly rated financial institution.
(f) Stock-based compensation
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," requires the measurement of the fair value of
stock options or warrants granted to employees to be included in the
statement of operations or, alternatively, disclosed in the notes to
financial statements. The Company has determined that it will account for
stock-based compensation of employees under the intrinsic value method of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," and elect the disclosure-only alternative under SFAS
No. 123. The Company records the fair market value of stock options and
warrants granted to nonemployees in exchange for services in accordance with
Emerging Issues Task Force (EITF) No. 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services," in the statement of
operations. To date, there have been no option and no warrant grants to
either employees or nonemployees.
(g) Comprehensive loss
SFAS No. 130, "Reporting Comprehensive Income," requires companies to report
comprehensive income (loss) as a measure of overall performance.
Comprehensive loss includes all changes in equity during a period, except
those resulting from investments by owners and distributions to owners. For
the period from inception (September 10, 1996) to June 21, 1999, the
Company's comprehensive loss is the same as its reported net loss.
(h) Fair value of financial instruments
Financial instruments principally consist of cash and cash equivalents and
notes payable to stockholders. The estimated fair values of these
instruments approximates their carrying values. The estimated fair values
have been determined through information obtained from market sources and
management estimates.
(i) Recently issued accounting pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS No. 133, as amended by SFAS No. 137
and SFAS No. 138, will be effective for the Company's financial reporting
beginning in the first quarter of fiscal 2001. SFAS No. 133 will require the
Company to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
The accounting for gains and losses from changes in the fair value of a
particular derivative will depend on the intended use of the derivative. The
Company does not expect the adoption of SFAS No. 133 to have a material
impact on the results of its operations or financial position.
- --------------------------------------------------------------------------------
F-33
RENALOGICS, INC.
(A development stage company)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
June 21, 1999
(3) STOCKHOLDERS' DEFICIT
(a) Redeemable convertible preferred stock
In September 1996, the Company sold 333,334 shares of Series A redeemable
convertible preferred stock (Series A Preferred Stock) at $0.75 per share,
resulting in net proceeds of $250,000. In May 1997, the Company sold 666,666
shares of Series A Preferred Stock at $0.75 per share, resulting in net
proceeds of $498,466. In November 1997, the Company sold 600,000 shares of
Series A Preferred Stock at $1.25 per share, resulting in net proceeds of
$742,873 of which $150,000 was not paid until 1998 and, therefore,
represents the stock subscription receivable from Series A Redeemable
Convertible Preferred stockholder in the accompanying financial statements.
The rights, preferences and privileges of the Series A Preferred Stock are
as follows:
Dividends
The Company is not required to pay dividends to any preferred stockholders.
However, in the event a dividend is declared, Series A Preferred
stockholders are entitled to receive dividends at a rate of $0.075 per share
prior to any dividend payments to common stockholders. These dividends are
not cumulative.
Liquidation
In the event of any voluntary or involuntary liquidation, dissolution, or
winding-up of the Company, as defined, the holders of Series A Preferred
Stock then outstanding shall be entitled to be paid an amount equal to the
original purchase price per share plus any declared but unpaid dividends. As
of December 31, 1998 and June 21, 1999, the liquidation value of Series A
Preferred Stock was $1,500,000 and $1,712,559, respectively.
After the liquidation preference payments to all Series A Preferred
stockholders, the remaining assets of the Company shall be distributed
ratably among the holders of common stock and Series A Preferred Stock based
on the number of shares of common stock that each share of Series A
Preferred Stock is then convertible into.
If upon any such liquidation, dissolution, or winding-up of the Company, the
remaining assets of the Company available for distribution to its
stockholders are insufficient to pay the holders of shares of Series A
Preferred Stock the full amount which they are entitled to, the holders of
shares of Series A Preferred Stock shall share ratably in any distribution
of the remaining assets and funds of the Company in proportion to the
respective amounts which would otherwise be payable in respect of the shares
held by them upon such distribution if all amounts payable on or with
respect to such shares were paid in full.
Conversion
Each share of Series A Preferred Stock is convertible at the option of the
holder, at any time, into one share of common stock, adjustable for certain
dilutive events. An automatic conversion occurs into common stock at the
then applicable conversion price upon the closing of a public offering in
which the share price is not less than $5.00 per share (adjusted for
specified events) and the aggregate proceeds to the Company are not less
than $15,000,000.
- --------------------------------------------------------------------------------
F-34
RENALOGICS, INC.
(A development stage company)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
June 21, 1999
Voting rights
The Series A Preferred stockholders are entitled to the number of votes for
each share of common stock which the Series A Preferred Stock is then
convertible on most matters submitted to a vote of stockholders. In
addition, Series A Preferred stockholders, voting as a separate class, are
entitled to elect four directors.
Redemption rights
The Company will be required to redeem, subject to certain conditions, on
September 1, 2003, the mandatory redemption date, all of the outstanding
Series A Preferred Stock at a price equal to the purchase price per share
plus any declared but unpaid dividends.
(b) Common stock
The Company has 6,000,000 authorized shares of common stock, of which
1,583,333 shares have been issued as of June 21, 1999. As of June 21, 1999,
the Company has reserved a total of 2,000,000 shares of common stock for the
conversion of Series A Preferred Stock.
(4) NOTES PAYABLE
On October 15, 1998, the Company executed notes payable to various
stockholders for $200,000. The Company has the option to convert these notes
payable into shares of preferred stock. The notes bear interest at a rate of
10% per annum and mature on the earlier of conversion into preferred stock
or June 30, 1999, as amended. On May 31, 1999, the Company converted the
principal of $200,000 and the accrued interest of $12,559 into 212,559
shares of Series A Preferred Stock.
During 1999, the Company also received $192,830 from Discovery in the form
of a note payable. The note bears interest at a rate of 10% per annum and
matures on the earlier of the date that is 15 days after the closing of a
transaction or December 31, 1999. Upon acquisition this note plus the
accrued interest of $2,795 was forgiven.
(5) INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with the provisions of SFAS No. 109, "Accounting for Income
Taxes," whereby deferred tax assets or liabilities are recognized based on
temporary differences between the financial statements and tax bases of
assets and liabilities using currently enacted tax rates.
No income tax provision or benefit has been recorded for the period from
inception (September 10, 1996) to June 21, 1999.
As of June 21, 1999, the Company had a deferred tax asset of approximately
$803,000 related primarily to the Company's net operating loss carryforwards
of approximately $1,923,000, which expire through 2019, and research and
development credit carryforwards of approximately $71,000. The Company has
not recognized any of its potential tax benefits in the accompanying
financial statements because the future realizability of such assets is
uncertain. The use of losses may be limited due to ownership change
limitations under Section 382 of the Internal Revenue Code.
- --------------------------------------------------------------------------------
F-35
RENALOGICS, INC.
(A Development Stage Company)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 21, 1999
The Company's effective tax rate differed from the federal statutory rate as
follows:
For the period
For the year For the period from inception
ended from January 1, (September 10,
December 31, 1999 to 1996) to
1998 June 21, 1999 June 21, 1999
- ---------------------------------------------------------------------------------
Federal statutory tax rate........... (34.0)% (34.0)% (34.0)%
State taxes--Net of federal benefit.. (4.0) (4.0) (4.0)
Change in valuation allowance........ 38.0 38.0 38.0
----- ----- -----
-- % -- % -- %
===== ===== =====
(6) RELATED PARTY TRANSACTIONS
For the year ended December 31 1998, the period from January 1, 1999 to June
21, 1999 and the period from inception (September 10, 1996) to June 21,
1999, the Company paid consulting fees to various shareholders which totaled
approximately $354,000, $148,000 and $778,000, respectively.
In May 1997, the Company entered into licensing and research agreements with
Emory University (Emory) under which Emory agreed to assign certain patent
and other rights to the Company and perform various research and development
services for the Company. Under these agreements, the Company agreed to pay
Emory through February 1999 total fees of approximately $700,000 and 83,333
shares of the Company's common stock. During 1997, the Company issued Emory
83,333 shares of its common stock. The Company recorded this transaction at
the deemed fair value of the common stock on the grant date totaling $833,
which was more clearly evident than the fair value of the consideration
received. During the year ended December 31, 1998, the period from January
1, 1999 and June 21, 1999 and the period from inception (September 10, 1996)
to June 21, 1999, the Company incurred approximately $278,000, $22,000 and
$700,000 of costs related to these agreements, which are included in
research and development expenses. In addition, there are minimum royalties
or royalties based on sales of products developed under the agreement. As of
June 21, 1999, none of the criteria had been achieved related to this
additional consideration.
- --------------------------------------------------------------------------------
F-36
- --------------------------------------------------------------------------------
[LOGO] Logo of Aderis Pharmaceuticals
- --------------------------------------------------------------------------------
Part II
- --------------------------------------------------------------------------------
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than the
underwriting discount and commissions, payable by the Registrant in connection
with the sale of the Common Stock being registered. All amounts are estimates
except the SEC registration fee, the NASD filing fees and the Nasdaq National
Market listing fee.
Amount to
Be Paid
----------
SEC registration fee................... $ 24,000
NASD filing fee........................ 10,500
Nasdaq National Market listing fee..... 100,000
Legal fees and expenses................ 750,000
Accounting fees and expenses........... 500,000
Printing and engraving................. 355,000
Transfer agent fees.................... 3,500
Miscellaneous.......................... 50,000
----------
Total............................... $1,793,000
==========
- --------
Item 14. Indemnification of Directors and Officers
Our Amended and Restated Certificate of Incorporation in effect as of the date
hereof, and our Restated Certificate of Incorporation to be in effect upon the
closing of this offering (collectively, the "Certificate") provide that, except
to the extent prohibited by the Delaware General Corporation Law, as amended
(the "DGCL"), the Registrant's directors shall not be personally liable to the
Registrant or its stockholders for monetary damages for any breach of fiduciary
duty as directors of the Registrant. Under the DGCL, the directors have a
fiduciary duty to the Registrant which is not eliminated by this provision of
the Certificate and, in appropriate circumstances, equitable remedies such as
injunctive or other forms of nonmonetary relief will remain available. In
addition, each director will continue to be subject to liability under the DGCL
for breach of the director's duty of loyalty to the Registrant, for acts or
omissions which are found by a court of competent jurisdiction to be not in
good faith or involving intentional misconduct, for knowing violations of law,
for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
prohibited by the DGCL. This provision also does not affect the directors'
responsibilities under any other laws, such as the Federal securities laws or
state or Federal environmental laws. The Registrant has applied for liability
insurance for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors and
officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this
provision shall not eliminate or limit the liability of a director: (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) arising under
Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit. The DGCL provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's bylaws, any agreement, a vote of stockholders or otherwise. The
Certificate eliminates the personal liability of directors to the fullest
extent permitted by Section 102(b)(7) of the DGCL and provides that the
Registrant may fully indemnify any person who was or is a party or is
threatened to be
- --------------------------------------------------------------------------------
II-1
Part II
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made a party to any threatened, pending or completed action, suit or proceeding
(whether civil, criminal, administrative or investigative) by reason of the
fact that such person is or was a director or officer of the Registrant, or is
or was serving at the request of the Registrant as a director or officer of
another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise, against expenses (including attorney's fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Certificate. The Registrant is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
Item 15. Recent Sales of Unregistered Securities
The following sets forth information regarding all securities sold by the
registrant since January 1, 1999:
1. In February 2000, we issued and sold an aggregate of 489,804 shares of our
series C preferred stock at a price per share of $10.21 to collaboration
partner Schwarz Pharma AG, an accredited investor, for an aggregate purchase
price of $5,000,898.84. These shares will convert into common stock at the
rate of slightly more than 1.66 shares of common stock for one share of
series C preferred stock, at the completion of this offering. This sale was
made in reliance on Section 4(2) of the Securities Act or Regulation D
promulgated thereunder as a sale by an issuer not involving a public
offering.
2. In May 2000, we issued and sold an aggregate of 48,972 shares of our series
C preferred stock at a price per share of $10.21 to former collaboration
partner Bayer AG, an accredited investor, for an aggregate purchase price of
$500,004.12. These shares will convert into common stock at the rate of
slightly more than 1.66 shares of common stock for one share of series C
preferred stock, at the completion of this offering. This sale was made in
reliance on Section 4(2) of the Securities Act or Regulation D promulgated
thereunder as a sale by an issuer not involving a public offering.
3. In February 2001 and March 2001, we issued and sold an aggregate of
2,713,200 shares of our series D preferred stock at a price per share of
$11.00 to stockholder Mac & Co FBO New York Life BioVenture Partners LLC,
stockholder Sanderling and its affiliated entities, stockholder Schwarz
Pharma AG, new accredited investor China Development Industrial Bank Inc.,
new accredited investor MDS Life Sciences and its affiliated entities and
six other new accredited investors, for an aggregate purchase price of
$29,845,200. These shares will convert into common stock at the rate of
slightly more than 1.66 shares of common stock for one share of series D
preferred stock, at the completion of this offering. This sale was made in
reliance on Section 4(2) of the Securities Act or Regulation D promulgated
thereunder as a sale by an issuer not involving a public offering.
4. In August 2001, we issued and sold an aggregate of 1,363,634 shares of our
series D preferred stock at a price per share of $11.00 to new accredited
investor Schroder and its affiliated entities and two other new accredited
investors, for an aggregate purchase price of $14,999,974. These shares will
convert into common stock at the rate of slightly more than 1.66 shares of
common stock for one share of series D preferred stock, at the completion of
this offering. This sale was made in reliance on Section 4(2) of the
Securities Act or Regulation D promulgated thereunder as a sale by an issuer
not involving a public offering.
5. Between January 1, 1999 and April 11, 2001, we granted stock options to
purchase an aggregate of 1,822,246 shares of our common stock at an exercise
price ranging from $0.36 to $0.67 per share to our employees and consultants
under our 1995 Stock Option Plan. These issuances were made in reliance on
Rule 701 promulgated under Section 3(b) of the Securities Act as a
transaction pursuant to compensatory benefit plans and contracts relating to
compensation as provided under Rule 701.
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Part II
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6. In July 2001, we issued a warrant to purchase an aggregate of 225,060 shares
of common stock at an exercise price of $3.64 to Gerard Klauer Mattison &
Co., Inc., an accredited investor, for services rendered in connection with
the sale of our series D preferred stock. This sale was made in reliance on
Section 4(2) of the Securities Act or Regulation D promulgated thereunder as
a sale by an issuer not involving a public offering.
7. Between November 14, 2001 and January 8, 2002, we granted stock options to
purchase an aggregate of 834,900 shares of our common stock at an exercise
price of $0.67 per share to our employees and consultants under our 2001
Incentive Award Plan. These issuances were made in reliance on Rule 701
promulgated under Section 3(b) of the Securities Act as a transaction
pursuant to compensatory benefit plans and contracts relating to
compensation as provided under Rule 701.
The sale of the above securities were deemed to be exempt from registration
under the Securities Act of 1933 in reliance on Section 4(2) of the Securities
Act, or Regulation D promulgated thereunder, or, with respect to issuances to
employees and consultants, Rule 701 promulgated under Section 3(b) of the
Securities Act as transactions by an issuer not involving a public offering or
transactions pursuant to compensatory benefit plans and contracts relating to
compensation as provided under such Rule 701. The recipients of securities in
each such transaction represented their intentions to acquire the securities
for investment purposes only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the
instruments representing such securities issued in such transactions. All
recipients either received adequate information about the registrant or had
adequate access, through their relationships with the Registrant to such
information. No underwriters were employed in any of the above transactions.
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Part II
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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 Aderis Pharmaceuticals, Inc. as
currently in effect.
3.2+ Bylaws of Aderis Pharmaceuticals, Inc., as currently in effect.
3.3+ Form of Amended and Restated Certificate of Incorporation to be effective upon the closing
of this offering.
3.4+ Bylaws of Aderis Pharmaceuticals, Inc., to be effective upon the closing of this offering.
4.1+ Specimen Common Stock certificate.
4.2+ Restated Investor Rights Agreement dated March 31, 1995, as amended by the First
Amendment dated November 3, 1995, the Second Amendment dated June 21, 1999, the Third
Amendment dated February 21, 2001 and the Fourth Amendment dated August 15, 2001.
4.3+ Warrant to Purchase Common Stock, dated July 18, 2001, granted to Gerard Klauer
Mattison & Co., Inc.
5.1+ Opinion of Latham & Watkins.
10.1+ Form of Indemnification Agreement between Aderis and each of our directors and officers.
10.2+ 1995 Stock Option Plan as amended by the First Amendment dated June 7, 1999 and the
Second Amendment dated August 10, 2001.
10.3+ Amended and Restated 2001 Incentive Award Plan.
10.4* Development and License Agreement by and between Discovery Therapeutics, Inc. and
Fujisawa Healthcare, Inc., dated July 29, 1999.
10.5* Development and Commercialization Agreement by and between Medco Research, Inc. and
Discovery Therapeutics, Inc., dated August 19, 1997.
10.6* Exclusive License Agreement by and between Discovery Therapeutics, Inc. and Schwarz
Pharma AG, dated August 10, 1999, as amended by Amendment No. 1 dated December 22,
1999.
10.7+* Earn Out Agreement by and between Whitby, Inc. and Discovery Therapeutics, Inc. dated
April 25, 1994.
10.8+ Property Lease by and between Straley Corporation and Discovery Therapeutics, Inc. dated
December 15, 2000, as amended by Lease dated November 15, 2001.
10.9+ Property Lease by and between Morton G. Thalhimer, Inc. and Discovery Therapeutics, Inc.
dated February 24, 1998, as amended by the First Addendum dated January 7, 1999, the Second
Addendum dated July 14, 1999, and the Third Addendum dated September 12, 2000.
10.10+ Employment Agreement by and between Peter G. Savas and Aderis Pharmaceuticals, Inc.,
dated January 2, 2002.
10.11+ Employment Agreement by and between Kenneth L. Rice, Jr. and Aderis Pharmaceuticals,
Inc., dated January 2, 2002.
10.12+ Employment Agreement by and between William S. Wheeler and Aderis Pharmaceuticals,
Inc., dated January 2, 2002.
16.1+ Letter from Ernst & Young LLP.
21.1+ List of Subsidiaries of Aderis.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Arthur Andersen LLP (Renalogics).
23.3+ Consent of Latham & Watkins (included in Exhibit 5.1).
24.1+ Power of Attorney (See Signature Page on Page II-5).
99.1+ Letter to Securities and Exchange Commission pursuant to Temporary Note 3T.
- --------
+ Previously filed.
* Confidential treatment requested.
(b) Financial Statement Schedules.
None.
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Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriter at
the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424 (b)(1) or (4), or
497(h) under the Securities Act of 1933, shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and this offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
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Part II
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Hopkinton,
State of Massachusetts, on this 25th day of April 2002.
ADERIS PHARMACEUTICALS, INC.
By: /s/ PETER G. SAVAS
-----------------------------------
Name: Peter G. Savas
Title: Chariman of the Board of
Directors,
Cheif Executive Officer and
Persident
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities indicated:
Signature Title Date
-------------------- -------------------------------- --------------
/s/ PETER G. SAVAS Chairman of the Board of April 25, 2002
-------------------- Directors, Chief Executive
Peter G. Savas Officer and President
(Principal Executive Officer)
* Vice President and Chief April 25, 2002
-------------------- Commercial Officer (Principal
Kenneth L. Rice, Jr. Financial Officer)
* Vice President--Finance April 25, 2002
-------------------- (Principal Accounting Officer)
Joseph R. Vidal
* Director April 25, 2002
--------------------
Stan M. Benson
* Director April 25, 2002
--------------------
Gary Frashier
* Director April 25, 2002
--------------------
James Garvey
* Director April 25, 2002
--------------------
Robert McNeil, Ph.D.
* Director April 25, 2002
--------------------
Wayne I. Roe
* Director April 25, 2002
--------------------
Michael Ross, Ph.D.
/s/ PETER G. SAVAS
*By: _______________
Peter G. Savas
Attorney-in-Fact
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II-6