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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM 10-K/A
----------------
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 33-90516
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NEOPHARM, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 51-0327886
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
60015
(Zip Code)
100 CORPORATE NORTH
SUITE 215
BANNOCKBURN, ILLINOIS
(Address of Principal Executive Offices)
(847) 295-8678
(Registrant's Telephone Number, Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.0002145 PAR VALUE
(Title of class)
WARRANTS TO PURCHASE SHARES OF COMMON STOCK, $.0002145 PAR VALUE
(Title of class)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value of the Registrant's common stock held by
non-affiliates (affiliates being, for these purposes only, directors, executive
officers and holders of 5% of the registrant's stock) of the registrant, par
value $.0002145 per share, (based on the closing price of such shares on the
American Stock Exchange on March 19, 1999) was $40,926,325. As of March 19, 1999
there were 8,454,621 shares of Common Stock outstanding.
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FORM 10-K TABLE OF CONTENTS
PAGE
-----
PART I
Item 1. Business......................................................................................... 3
Item 2. Properties....................................................................................... 20
Item 3. Legal Proceedings................................................................................ 20
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................ 21
Item 6. Selected Financial Data.......................................................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 22
Item 8. Financial Statements and Supplemental Data....................................................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures............ 26
PART III
Item 10. Directors and Executive Officers of the Registrant............................................... 27
Item 11. Executive Compensation........................................................................... 29
Item 12. Security Ownership of Certain Beneficial Owners and Management................................... 30
Item 13. Certain Relationships and Related Transactions................................................... 32
PART IV
Item 14. Exhibits and Financial Statement Schedules....................................................... 34
Signatures....................................................................................... 36
2
PART I
ITEM 1. BUSINESS
THE COMPANY
NeoPharm is a pharmaceutical Company engaged in the research and development
of drugs for the diagnosis and treatment of various forms of cancer. Presently
the Company has several drugs which are in varying stages of development: BUdR
(Broxuridine), liposome encapsulated doxorubicin ("LED"), liposome encapsulated
paclitaxel ("LEP"), liposome encapsulated antisense oligodeoxynucleotide
("LE-AON" and with LED and LEP the "Liposome Products"), IL-13 PE38QQR ("IL-13")
and Mesothelin SS-(dsFv)-PE38 ("Mesothelin Mab"). IL-13 and Mesothelin Mab are
both Ligand Target Cytotoxins that specifically target cancer cells and leave
normal cells unaffected. See "NeoPharm Products" below.
The Company has obtained rights to its various products as a result of
agreements and relationships entered into with various third parties including
the National Cancer Institute ("NCI"), the United States Food and Drug
Administration ("FDA"), the National Institute of Health ("NIH") and Georgetown
University. See "Research and Development, Collaborative Relationships and
Licenses" below.
To date, the Company has been engaged primarily in research and development
of its developmental stage products. The Company has developed expertise in
identification, development and preparation for regulatory approval of cancer
drugs for both therapeutic and diagnostic purposes, although the Company has no
products that are currently approved for sale. The Company currently has no
marketing or sales staff and has conducted its activities primarily through
consultants and at university research facilities. The Company will need to hire
additional personnel and gain access to marketing and sales resources in order
to continue the development and commercialization of its products. See
"Marketing and Sales" below.
NeoPharm, Inc. was incorporated in Delaware under the name OncoMed, Inc. in
June 1990, and changed it's name to NeoPharm, Inc. in March, 1995. The Company's
principal offices are located at 100 Corporate North, Suite 215, Bannockburn,
Illinois 60015, and its telephone number is (847) 295-8678.
3
NEOPHARM PRODUCTS
The Company is currently developing six compounds which all target various
forms of cancer. Cancer is the second largest cause of death in the U.S. and
there are a large number of new cases of cancer each year. However, for some
types of cancer, there are no acceptable treatments, while for others, the
currently available treatments are limited due to severe side effects. The
Company's products under development offer either improvements to currently
available technology or new technology that improves the efficacy and reduces
the side effects. Before new drugs can be approved by the U.S. Food and Drug
Administration, they must go through several test phases, from pre-clinical
trials to Phase I to Phase II and Phase III trials. The products which the
Company currently has under development are detailed in the following table:
U.S.
PATENT
COMPOUNDS USE OR ADVANTAGE DEVELOPMENT STATUS CANCER INDICATION POSITION
- ------------------------------ ----------------------------------- -------------------- -------------------- ----------
LED We believe LED allows cancer Phase I completed, Breast, Prostate, 2
patients to tolerate higher dosages initiated Phase II Hematological Patents
of chemotherapy providing greater in June 1998
therapeutic value in a number of
types of cancer tumors.
LEP We believe LEP allows cancer Phase I in September Ovarian, Breast, 3
patients to tolerate higher dosages 1998 Lung Patents
of chemotherapy, providing greater
therapeutic value in a number of
types of cancer tumors.
LE-AON LE-AON is an antisense drug useful Pre-clinical trials Head & Neck, Lung, 2
in enhancing the lethality and ongoing, initiate Brain Patents
effectiveness of radiation Phase I in the 2nd
Quarter, 1999
IL-13 Chimeric Protein IL-13 Chimeric Protein Exotoxin is Pre-clinical trials Renal Cell, Brain, 2
Exotoxin a genetically engineered compound ongoing, initiate Kaposi's Sarcoma, Patents
incorporating a highly toxic Phase I in the 2nd Breast
material that destroys cells once Quarter, 1999
linked to the target receptor on
its surface.
Broxine-Registered Trademark- We believe Broxine will prove New drug application Breast, Colon, 0
useful in characterizing tumor cell pending before the Prostate, Patents
growth in nearly all solid tumors. FDA Hematologic
Mesothelin Mab Mesothelin Mab Phase I to be Ovarian, 5
specifically targets those tumors initiated in 4th Mesotheliomas, Head Patents
that express Mesothelin Antigen on Quarter, 1999 & Neck
the surface of the cancer cells
The Company's short term goal is to use its proprietary technology to
significantly enhance the efficiency and reduce the side effects of currently
available chemotherapy compounds.
4
The Company's long term goal is to be a leading worldwide oncology drug
development Company. To reach our goals the Company has developed the following
strategies:
- focus its resources exclusively on the expanding cancer market;
- develop a balanced portfolio of anti-cancer drugs based on enhancing
proven compounds;
- develop novel therapeutic agents and leverage its expertise to identify
compounds it can license; and
- form strategic alliances with larger pharmaceutical and biotechnology
companies to obtain financial and marketing support for certain of its
product development activities.
There can be no assurance that any of the Company's products will receive
necessary regulatory approvals, be successfully commercialized and achieve
market acceptance, or that any products commercialized by the Company will not
be rendered obsolete by other developments in the field of cancer treatment. In
addition, continued development of the Company's products will require the
Company to obtain additional sources of capital and there can be no assurance
that such capital will be available when needed or on terms acceptable to the
Company.
LIPOSOME PRODUCTS. The Company's Liposome Products consist of spheres of
subcellular size composed primarily of phospholipids, certain of which are the
primary components of living cell membranes, and can be made to contain and
deliver drugs. This membrane encapsulation feature of liposomes enables the
entrapped drug to be circulated in the bloodstream in higher concentrations for
longer periods of time than the free drug. When certain drugs, including
chemotherapeutic agents, are administered in conjunction with liposomes, they
have been shown to produce fewer and less severe local and systemic side
effects. Although liposomes have been investigated and used for many years as
drug delivery systems, the difficulty in producing liposomes on a large scale,
as well as the limited shelf life of many liposomes, have limited their use in
clinical settings.
The Company's LED is currently under development in three Phase II trials.
The Company started a Phase II trial in hormone refractory prostate cancer
patients in June 1998. The Company is also starting an additional trial in
osteosarcoma (bone cancer) at higher doses of LED. These Phase II trials will be
conducted in several cancer centers in the United States. The Company has also
initiated a multi-center Phase II trial of LED in breast cancer patients who
have failed most of the chemotherapy protocols to appreciate the capacity of LED
in overcoming MDR in those patients. The Company also has a clinical trial with
LED in myeloma, a blood cancer. The Company has also initiated a Phase I
clinical study on LEP in September of 1998 for patients with lung cancer. These
trials are on-going at this time. See "Government Regulation", below.
As described in more detail below, in February, 1999, the Company signed a
License Agreement with Pharmacia and UpJohn ("P&U") to develop and commercialize
LEP and LED worldwide. The Company received an up-front payment upon execution
of the License Agreement and will receive milestone payments as clinical
progress occurs under the License Agreement. The Company will also receive
royalties on overseas sales and a co-promotion profit split on sales in the
United States. Pursuant to the License Agreement, P&U will assume all further
responsibility for, and the costs associated with, the further development and
testing of LED and LEP and the obtaining of all regulatory approvals. In
addition, the Company has agreed to sell $8,000,000 of its common stock to P&U
when certain Investigatory New Drug ("IND") applications are transferred to P&U
in accordance with a separate Stock Purchase Agreement at a price per share
equal to 110% of the then market price of the common stock during the sixty (60)
day period preceding the transfer of the INDs. The Company anticipates that the
investigatory new drug applications, which have been submitted for FDA approval,
will be transferred promptly after FDA approval, and the Company expects to
receive FDA approval early in the third quarter of 1999.
5
The amount of the up-front licensing fee paid by Pharmacia and Upjohn
pursuant to the licensing agreement dated February 19, 1999 was $9,000,000. In
addition, assuming that all of the milestone goals set forth in the license
agreement were to be attained by the parties, the Company would be eligible to
receive an additional $52,000,000 in additional milestone payments. Finally,
with respect to the LED product, if the LED product were to be approved for
commercial sale and thereafter marketed, the Company would receive a royalty
payment for sales outside of the U.S. for the first seven years after commercial
sale at a rate of 8%, declining to 5% for the eighth through tenth years of such
commercial sales. With respect to the LEP product, the Company is entitled to
receive a royalty of 12.5% for LED products sold outside of the United States
for the valid life of an enforceable NeoPharm patent, determined on a
country-by-country basis. With respect to sales of both LEP and LED products in
the United States, the Company is permitted to elect, in lieu of royalty
payments for U.S. sales, to co-promote the products within the United States.
Under the terms of the co-promotion, the Company's participation in net profits
is to be in proportion to its monetary contribution to the promotion of each
product in the United States, but in no event shall the Company's share of
profits exceed 37.5% of total net profits. In addition, the Company's right to
co-promote is contingent upon its reimbursing Pharmacia & Upjohn for an amount
equal to the amount of the Company's net profit percentage multiplied by the
amount expended by Pharmacia & Upjohn in development costs for the products in
the United States (which may not exceed 60 percent of Pharmacia & Upjohn's total
development costs throughout the world). If the Company does not elect to
co-promote the product within the U.S., then the Company would receive a flat
royalty with respect to LED equal to 10% of net sales for the first ten years of
sales in the United States, and with respect to LEP, a royalty equal to 12.5% of
net sales for the period in which Pharmacia & Upjohn has exclusivity to LEP
product. Because of the uncertainty surrounding the ability of the Company to
attain the milestones and obtain FDA approval for the product, and the
uncertainty that the product would be accepted by the medical community, it is
not possible to project with any degree of certainty what the potential revenues
(other than the milestone payments) under the contract would be.
LIGAND TARGETED CYTOTOXINS. In October 1997, the Company entered into an
exclusive worldwide licensing agreement with the FDA and the NIH to develop and
commercialize a chimeric human protein known as "IL13-PE38QQR." This is the
fusion of receptor-binding with a derivative of Pseudomonas exotoxin (PE38QQR).
The Company also entered into a Cooperative Research and Development Agreement
("CRADA") with the FDA for the clinical and commercial development of the IL-13
as an anticancer agent. See "Research and Development, Collaborative
Relationships and Licenses" below.
Extensive research by the scientists at FDA and NCI have demonstrated that
some solid human tumors such as kidney cancer (renal cell carcinoma), brain
cancer (glioblastoma), Kaposi's sarcoma and breast carcinoma express high
numbers of IL-13 receptors on their cell surfaces. These receptors sites become
a specific target for the IL-13 chimeric protein for inducing cytotoxicity at
nanogram concentration. On the other hand, normal organs of the body are shown
to exhibit minimal receptors sites thereby sparing these organs from any toxic
effect. The Company expects to scale up the production of this chimeric protein
to complete preclinical studies in the second quarter of 1999 to be followed
later in the year by Phase I clinical program in humans with renal cell
carcinoma and glioblastoma.
The Company also recently signed another Licensing Agreement with the NIH
for Mesothelin Mab for head and neck cancer and mesothelioma. Like IL-13,
Mesothelin Mab targets mesothelin receptors on cancer cells and delivers a
cytotoxin to destroy the cancer cell while leaving normal cells alone.
Mesothelin Mab is expected to enter Phase I Clinical Studies in the later part
of 1999.
BUDR PRODUCT. Clinical trials involving prognostic use of BUdR have
indicated that the information regarding tumor cell behavior provided by BUdR
can assist the oncologist in selecting appropriate therapeutic regimens for the
patients and enable better monitoring of the effectiveness of the chosen
therapy.
6
In December 1996, the Company filed an NDA with the FDA for BUdR as a
prognostic agent in the treatment of breast cancer. The Company's NDA as it
relates to BUdR as a prognostic indication in the treatment of breast cancer was
accepted for review by the FDA and was reviewed by the FDA's Oncology Advisory
Committee ("ODAC") on December 19, 1997, at which time ODAC voted not to
recommend this indication to the FDA for approval. Since the ODAC action, the
Company has met with the FDA to respond to concerns raised by ODAC for the
purpose of continuing to pursue FDA approval. Based on these discussions the
Company is gathering additional data and reanalyzing the existing data in order
to obtain the FDA's approval of the Company's NDA. The original NDA was filed in
December, 1996. The application has already been extended once and the Company
was informed on March 31, 1998 that the time for processing the original
application has expired. The Company is continuing to work with FDA to explore
the requirements for a prognostic application.
In May 1997, the Company entered into a collaboration agreement with BioChem
Therapeutics, Inc., the wholly owned subsidiary of BioChem Pharma, under which
BioChem Pharma will develop, market and distribute BUdR in Canada after receipt
of approval from the Canadian Health Protection Branch ("HPB") of BUdR for
certain specific uses, the applications for which will be submitted by BioChem
Pharma.
Under the terms of the Company's collaboration agreement with BioChem, a
nonrefundable $550,000 payment was paid to the Company upon execution of the
collaboration agreement. In addition, the collaboration agreement provides for
milestones which, if the conditions were to be achieved, would result in payment
of an additional $500,000 of which $50,000 was paid as part of the original
$550,000 payment in recognition of the filing of the Company's new drug
application with the FDA. In the event that BioChem were to gain approval for
sales in Canada, the collaboration agreement provides for royalty payments of
35% of net sales of the product in Canada up to aggregate sales of $9,000,000
(Canadian), at which point the royalty would be reduced to 25%. In addition, in
the event that a generic version of the product were to be introduced, the
royalty rate would also be reduced to 25% on all net sales. In addition, after
the fifteenth year of commercial sales, the royalty payment would be reduced to
15 percent of net sales. Under the terms of the collaboration agreement, the
Company is to provide BioChem with all data and results of ongoing clinical
trails carried on with respect to the product and to provide any assistance as
BioChem shall reasonably request in assisting it to gain regulatory approval.
The agreement may be terminated by either party upon default by the other party,
if the other party fails to cure the default within the periods specified in the
agreement.
RESEARCH AND DEVELOPMENT, COLLABORATIVE RELATIONSHIPS AND LICENSES
RESEARCH AND DEVELOPMENT. During the three year period ended December 31,
1998, the Company has expended the following amounts on research and
development: $1,611,000 for the fiscal year ended December 31, 1998, $1,412,000
for the fiscal year ended December 31, 1997 and $1,100,000 for the fiscal year
ended December 31, 1996. It is anticipated that additional research and
development will be required beyond 1999 and may necessitate the Company's
obtaining additional capital.
COLLABORATIVE RELATIONSHIPS AND LICENSES. The Company has entered into a
Clinical Trials Agreement ("CTA") with the NCI, a CRADA with the FDA, a
licensing agreement with the NIH and has licensed certain technology relating to
its Liposome Products from Georgetown University. The principal terms of the
foregoing agreements and the license are as follows:
NCI. In 1992 the Company entered into a CRADA with the NCI. Under the terms
of the NCI CRADA, the Company has exclusive rights to the data generated with
respect to BUdR by NCI for certain indications contained in the CRADA including
tumors mestastic to the brain, astrocytomas, gastrointestinal cancers, colon
cancer, pancreatic cancer, lung cancer, soft tissue sarcomas, head and neck
cancer and leukemia. The NCI CRADA expired on September 13, 1998 and the Company
then entered into a CTA with the NCI effective October 29, 1998. The CTA covers
the same research that was the subject of the
7
NCI CRADA. The CTA provides for collaboration on the clinical development for
BUdR and access to related clinical data required for regulatory approval.
Although BUdR is not covered by patents or patent applications, the Company
believes that its exclusive access to the clinical data collected by NCI
represent a significant competitive advantage for the Company in the development
and eventual commercialization of BUdR.
FDA CRADA. The Company entered into a CRADA with the FDA in October 1997
covering IL-13. Pursuant to the FDA CRADA, the Company has committed to
commercialize the IL-13 chimeric protein product which it licensed from the NIH
and FDA. The FDA has agreed to collaborate on the clinical development and
commercialization of the licensed product.
The Company is committed to pay $100,000 per year for the reasonable and
necessary expenses incurred by the FDA in carrying out the FDA's
responsibilities under the FDA CRADA. The FDA CRADA has a term of four years.
During 1997 and 1998, the Company expensed $100,000 per year on research and
development costs. The term of the FDA CRADA runs to August 27, 2001.
NIH CRADA AND LICENSING AGREEMENTS. In October 1997, the Company entered
into an exclusive worldwide licensing agreement with the NIH and the FDA to
develop and commercialize an IL-13 chimeric protein therapy (the "NIH License").
The NIH received a $75,000 non-refundable license issue payment from the Company
upon execution of the license agreement and will receive minimum annual royalty
payments of $10,000, which increase to $25,000 after the first commercial sale.
The NIH License also provides for milestone payments and royalties of 4% based
on future product sales. The Company is required to pay the costs of filing and
maintaining product patents on the licensed products. On March 22, 1999, the
Company also executed a License Agreement with the NIH for Mesothelin Mab, a
compound similar to IL-13 (Ligand Targeted Cytotoxin). The terms and conditions
of the Mesothelin Mab agreement with NIH are substantially the same as for the
NIH Agreement for IL-13 chimeric protein therapy, with the exception that
milestone payments by the Company, if any, would aggregate $500,000.
Under the terms of the patent license agreement with the NIH for Mesothelin
Mab, the Company made a non-refundable up-front payment of $75,000 upon
execution of the agreement. In addition, the Company will make minimum annual
royalty payments of $20,000 per year beginning on January 1, 2001 and continuing
on for the life of the underlying patent. The agreement also provides, however,
that in the event that a benchmark is not attained by the Company that the
minimum royalty rate increases to $150,000 per year until the benchmark is
attained. When commercial sales are initiated, if ever, the Company has agreed
to pay the NIH a royalty of 5% of net sales which, under certain circumstances
detailed in the agreement, can be adjusted downward to 4% in the event the
Company is required to pay royalties to third parties. Given the uncertainty of
development, approval and public acceptance, the aggregate amount of royalties
which may eventually be paid under the contract is impossible to calculate. The
agreement may be terminated by the NIH if the Company fails to cure the default
or become insolvent and by the Company upon sixty days written notice.
GEORGETOWN UNIVERSITY AGREEMENTS. The Company previously entered into two
license and sponsored research agreements with Georgetown University relating to
LED, LEP, and LE-AON ("the "Georgetown Licenses"). Under the Georgetown
Licenses, and in return for the sponsorship of supportive research, the Company
has exclusive licenses to manufacture and sell LED, LEP, and LE-AON. The Company
will also be obligated to pay Georgetown royalties on commercial sales of the
Liposome Products. In addition, the Company is obligated to make certain advance
royalty payments to Georgetown, which payments will be credited against future
royalties payable under the Company's agreements with Georgetown. The Georgetown
Licenses are generally not terminable by Georgetown, except in the event of
default by the Company. The Company's rights under the Georgetown Licenses with
respect to LED and LEP have recently been sublicensed to P&U. See "NeoPharm
Products-Liposome Products".
8
Any default and resulting termination of the Georgetown Licenses would be
materially adverse to the Company's liposome program, could require curtailment
or termination of such program and could therefore have a material adverse
effect on the Company's business, financial condition and results of operations.
Dr. Aquilur Rahman, Chief Scientific Officer of the Company, is an Adjunct
Professor of Radiology at Georgetown and Dr. Anatoly Dritschilo, a director of
the Company, is the Chairman of the Department of Radiation Medicine and Medical
Director of the Georgetown University Medical Center in Washington, D.C. See
"Certain Relationships and Related Transactions".
MARKETING AND SALES
The treatment of cancer is a highly specialized activity in which the
treating oncologist tend to be concentrated in major medical centers. The
Company's marketing strategy is designed to enable the Company to operate with a
relatively small direct sales force in the United States. As products receive
regulatory approval, the Company plans to develop a sales force of modest size
to service the over 3,500 practicing oncologists in the United States. The
Company also intends to pursue collaboration agreements with other Companies to
market the Company's products elsewhere in the world.
In May 1997, Neopharm entered into a collaboration agreement with BioChem
Pharma, under which BioChem Pharma will develop, market and distribute BUdR in
Canada after receipt of approval from the Canadian Health Protection Branch
("HPB") of BUdR for certain specific uses, the applications for which will be
submitted by BioChem Pharma.
In February 1999, the Company licensed its LEP and LED to P&U. As part of
its responsibilities under the License Agreement, P&U will have obligations to
actively market and promote the LED and LEP products throughout the world once
they have been approved for commercial sale, an event that is not expected to
occur for several more years, if ever. Under the provisions of its License
Agreement with P&U, the Company has the right to elect to co-promote the product
within the United States, provided the Company reimburse P&U for an amount equal
to P&U's development costs for the product in the United States (which costs may
not exceed 60% of P&U's total development costs throughout the world),
multiplied by the Company's net profit percentage which may not exceed 37.5% of
total net profits, as adjusted in accordance with the license agreement. See
"NeoPharm Products-Lipsome Products."
MANUFACTURING
The Company does not intend to establish its own dedicated manufacturing
facilities for the foreseeable future. Rather, the Company's manufacturing
strategy will be to develop manufacturing relationships with established
pharmaceutical manufacturers for production of BUdR, its Liposome Products,
IL-13 and Mesothelin Mab.
There are a number of FDA approved suppliers of raw materials used in the
Company's products in existence. There are also a number of facilities with FDA
Good Manufacturing Practice approval for contract manufacturing of the Company's
proposed products. The Company has a source for the manufacture of BUdR and is
in the process of arranging for sources for the manufacture of certain of its
planned Liposome Products and the IL-13 chimeric protein. The Company believes
that, in the event of the termination of its existing sources for product
supplies and manufacture, the Company will be able to enter into agreements with
other suppliers and/or manufacturers on similar terms. There can be no assurance
that there will be manufacturing capacity available to the Company at the time
the Company is ready to manufacture its products.
PATENTS AND PROPRIETARY RIGHTS
It is the Company's policy to, where possible, file patent applications to
protect technology, inventions and improvements that are important to the
development of its business. Under its agreements with Georgetown University,
the Company has licensed rights to four United States patents and one pending
9
United States patent application relating to its Liposome Products under
development. Under its agreements with the NIH, the Company has licensed rights
to two United States patent relating to the IL-13 chimeric protein under
development and three United States patents and two pending United States
patents relating to the pending Mesothelin Mab agreements. BUdR is not currently
the subject of patents or patent applications, and the Company does not expect
to obtain patent protection for its BUdR product. The Company's principal
advantage with respect to the development and planned commercialization of BUdR
is its exclusive access under the CRADA to NCI's clinical data regarding the
compound.
The patent position of participants in the pharmaceutical field generally is
highly uncertain, involves complex legal and factual questions, and has recently
been the subject of much litigation. There can be no assurance that any patent
applications relating to the Company's potential products or processes will
result in patents being issued, or that the resulting patents, if any, will
provide protection against competitors who successfully challenge the Company's
patents, obtain patents that may have an adverse effect on the Company's ability
to conduct business, or are able to circumvent the Company's patent position. It
is possible that other parties have conducted or are conducting research and
could make discoveries of compounds or processes that would precede any
discoveries made by the Company, which could prevent the Company from obtaining
patent protection for these discoveries. Finally, there can be no assurance that
others will not independently develop pharmaceutical products similar to or
obsoleting those that the Company is planning to develop, or duplicate any of
the Company's products.
The Company's competitive position is also dependent upon unpatented trade
secrets. In an effort to protect its trade secrets, the Company has a policy of
requiring its employees, Scientific Advisory Board members, consultants and
advisors to execute proprietary information and invention assignment agreements
upon commencement of employment or consulting relationships with the Company.
These agreements provide that all confidential information of the Company
developed or made known to the individual during the course of their
relationship with the Company must be kept confidential, except in specified
circumstances. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's trade secrets or other
proprietary information in the event of unauthorized use or disclosure of
confidential information. Invention assignment agreements executed by Scientific
Advisory Board members, consultants and advisors may conflict with, or be
subject to, the rights of third parties with whom such individuals have
employment or consulting relationships. In addition, there can be no assurance
that others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to the Company's trade
secrets, that such trade secrets will not be disclosed or that the Company can
effectively protect its rights to unpatented trade secrets.
The Company may be required to obtain licenses to patents or proprietary
rights of others. No assurance can be given that any licenses required under any
such patents or proprietary rights would be made available on terms acceptable
to the Company, or at all. If the Company does not obtain such licenses, it
could encounter delays in product market introductions while it attempts to
design around such patents, or could find that the development, manufacture or
sale of products requiring such licenses could be foreclosed. Litigation may be
necessary to defend against or assert such claims of infringement, to enforce
patents issued to the Company, to protect trade secrets or know-how owned by the
Company, or to determine the scope and validity of the proprietary rights of
others. In addition, interference proceedings declared by the United States
Patent and Trademark Office may be necessary to determine the priority of
inventions with respect to patent applications of the Company or its licensors.
Litigation or interference proceedings could result in substantial costs to and
diversion of effort by, and may have a material adverse impact on, the Company.
In addition, there can be no assurance that these efforts by the Company will be
successful.
10
GOVERNMENT REGULATION
INTRODUCTION. Regulation by governmental authorities in the United States
and foreign countries is a significant factor in the development, manufacture
and marketing of the Company's proposed products and in its ongoing research and
product development activities. The nature and extent to which such regulation
will apply to the Company will vary depending on the nature of any products
which may be developed by the Company. It is anticipated that all of the
Company's products will require regulatory approval by governmental agencies
prior to commercialization. In particular, human therapeutic and some diagnostic
products are subject to rigorous preclinical and clinical testing and other
approval procedures of the FDA and similar regulatory authorities in foreign
countries. Various Federal statutes and regulations also govern or influence
testing, manufacturing, safety, labeling, storage and record-keeping related to
such products and their marketing. The process of obtaining these approvals and
the subsequent compliance with appropriate Federal statutes and regulations
require the expenditure of substantial time and financial resources. Any failure
by the Company or its collaborators to obtain, or any delay in obtaining,
regulatory approval could adversely affect the marketing of any products
developed by the Company, its ability to receive product revenues and its
liquidity and capital resources.
FDA APPROVAL PROCESS. Prior to commencement of clinical studies involving
human beings, preclinical testing of new pharmaceutical products is generally
conducted on animals in the laboratory to evaluate the potential efficacy and
the safety of the product. The results of these studies are submitted to the FDA
as a part of an investigational new drug ("IND") application, which must become
effective before clinical testing in humans can begin. Typically, clinical
evaluation involves a time consuming and costly three-phase process. In Phase I,
clinical trials are conducted with a small number of subjects to determine the
early safety profile, the pattern of drug distribution and metabolism. In Phase
II, clinical trials are conducted with groups of patients afflicted with a
specific disease in order to determine preliminary efficacy, optimal dosages and
expanded evidence of safety. In Phase III, large-scale, multi-center,
comparative trials are conducted with patients afflicted with a target disease
in order to provide enough data to demonstrate the efficacy and safety required
by the FDA. The FDA closely monitors the progress of each of the three phases of
clinical testing and may, at its discretion, re-evaluate, alter, suspend or
terminate the testing based upon the data which have been accumulated to that
point and its assessment of the risk/benefit ratio to the patient.
The results of the preclinical and clinical testing on a nonbiologic drug
and certain diagnostic drugs are submitted to the FDA in the form of a new drug
application ("NDA") for approval to commence commercial sales. In responding to
an NDA, the FDA may grant marketing approval, request additional information or
deny the application if the FDA determines that the application does not satisfy
its regulatory approval criteria. There can be no assurance that approvals will
be granted on a timely basis, if at all. Similar procedures are in place in
countries outside the United States.
In 1988, the FDA issued "fast-track" regulations intended to accelerate the
approval process for the development, evaluation and marketing of new
therapeutic and diagnostic products used to treat life-threatening and severely
debilitating illnesses, especially those for which no satisfactory alternative
therapies exist. "Fast-track" designation affords the Company early interaction
with the FDA in terms of protocol design and permits, although it does not
require the FDA to grant approval after completion of Phase II clinical trials
(although the FDA may require subsequent Phase III clinical trials or even
post-approval Phase IV efficacy studies). The Company believes that a number of
its product candidates may fall under these regulations, but there can be no
assurance that any of the Company's products will receive this or other similar
regulatory treatment.
In late 1992, legislation imposing FDA user fees on drug manufacturers was
enacted. Such fees will be required for each commercial marketing drug
application submitted by the Company for FDA approval, and annual product and
establishment fees will also be imposed upon approval. The revenues raised from
these fees are earmarked specifically to increase the resources of the FDA, and
by doing so, to increase the
11
speed with which the FDA reviews and approves drug marketing applications.
Currently, the user fee for an NDA is approximately $260,000, and the statute
provides for periodic fee increases. The statute currently provides small
companies (defined as companies with less than 500 employees that are not
marketing a prescription drug product) with a reduction in the initial
application fee and contains limited provisions for fee waivers. During 1996,
the Company was granted a waiver of the user fee required with the filing of the
NDA for BUdR.
WAXMAN-HATCH ACT. The Drug Price Competition and Patent Restoration Act of
1984, also known as the Waxman-Hatch Act, contains provisions pertaining to
marketing exclusivity from generic competition for most non-biological drugs and
patent restoration for most pharmaceutical products. A five-year marketing
exclusivity period is provided for new chemical entities, and a three-year
marketing exclusivity period is provided for approved drugs for which new
clinical investigations are essential to the receipt of FDA approval to market
the product. For purposes of the Waxman-Hatch Act, a new chemical entity is
defined as a drug product that contains an active moiety not previously approved
by the FDA for marketing. The five year exclusivity period would not prevent a
competitive product from being marketed based upon new preclinical and clinical
studies conducted by the competitor.
ORPHAN DRUG ACT. Under the Orphan Drug Act, the FDA may designate drug
products as orphan drugs if there is no reasonable expectation of recovery of
the costs of research and development from sales in the United States or if such
drugs are intended to treat a rare disease or condition, which is defined as a
disease or condition that affects less than 200,000 persons in the United
States. If certain conditions are met, designation as an orphan drug confers
upon the sponsor marketing exclusivity for seven years following FDA approval of
the product, meaning that the FDA cannot approve another version of the "same"
product for the same use during such seven year period. The market exclusivity
provision does not, however, prevent the FDA from approving a different orphan
drug for the same use or the same orphan drug for a different use. The Orphan
Drug Act has been controversial, and many legislative proposals have from time
to time been introduced in Congress to modify various aspects of the Orphan Drug
Act, particularly the market exclusivity provisions. There can be no assurance
that new legislation will not be introduced in the future that may adversely
impact the availability or attractiveness of orphan drug status for any of the
Company's products.
OTHER REGULATIONS. The Company is also subject to various Federal, state
and local laws, regulations and recommendations relating to safe working
conditions, laboratory manufacturing practices and the use and disposal of
hazardous or potentially hazardous substances, including radioactive compounds
and infectious disease agents, used in connection with the Company's research
work. The extent of government regulation that might result from future
legislation or administrative action cannot be predicted accurately. The Company
has not made and does not anticipate making material capital expenditures with
respect to the protection of the environment.
PRODUCT LIABILITY AND INSURANCE
The Company's business exposes it to potential product liability risks that
are inherent in the testing, manufacturing and marketing of human therapeutic
products. The Company doesn't have any product liability insurance at this time.
Even though the Company plans to obtain product liability insurance, the Company
doesn't know if it will be able to obtain or maintain this insurance on
acceptable terms or that any insurance it obtains will provide adequate coverage
against potential liabilities. Claims or losses in excess of any liability
insurance coverage the Company obtains could have a material adverse effect on
our business, financial condition or results of operations.
COMPETITION
Competition in the discovery and development of methods for treating cancer
is intense. Numerous pharmaceutical, biotechnology and medical companies and
academic and research institutions in the
12
United States and elsewhere are engaged in the discovery, development, marketing
and sale of products for the treatment of cancer. These include surgical
approaches, new pharmaceutical products and new biologically derived products.
The Company expects to encounter significant competition for the principal
pharmaceutical products it plans to develop. Companies that complete clinical
trials, obtain regulatory approvals and commence commercial sales of their
products before their competitors may achieve a significant competitive
advantage. A number of pharmaceutical companies are developing new products for
the treatment of the same diseases being targeted by the Company. In some
instances, the Company's competitors already have products in clinical trials.
In addition, certain pharmaceutical companies are currently marketing drugs for
the treatment of the same diseases being targeted by the Company, and may also
be developing new drugs to address these disorders.
The Company believes that its competitive success will be based on its
ability to create and maintain scientifically advanced technology, develop
proprietary products, attract and retain scientific personnel, obtain patent or
other protection for its products, obtain required regulatory approvals, obtain
orphan drug status for certain products and manufacture and successfully market
its products either independently or through outside parties. Many of the
Company's competitors have substantially greater financial, clinical testing,
regulatory compliance, manufacturing, marketing, human and other resources. In
addition, the Company will continue to seek licenses with respect to key
technologies related to its fields of interest and may face competition with
respect to such efforts.
HUMAN RESOURCES
As of March 16, 1999, the Company had six full time employees, and one
part-time employee. The Company currently has consulting agreements with eight
consultants. None of the Company's employees and consultants are represented by
a collective bargaining arrangement, and the Company believes its relationship
with its employees and consultants is satisfactory. The Company intends to
continue to retain consultants and to add personnel in as the business strategy
is implemented.
SCIENTIFIC ADVISORY BOARD
The Company has assembled an eight-member Scientific Advisory Board. The
members of the Scientific Advisory Board together provide expertise in areas of
scientific and medical interest to the Company. The Company has entered into
agreements with the Scientific Advisors providing that all inventions made by
the Advisors when working for the Company will belong to the Company; however,
most of the members of the Company's Scientific Advisory Board are employed on a
full-time basis by academic or research institutions. The members of the
Scientific Advisory Board are permitted to share information among themselves
regarding the projects that they are working on with the Company. As of March
16, 1999, the Company had granted options to acquire an aggregate of 68,324
shares its Common Stock to members of the Scientific Advisory Board, and pays a
retainer to compensate its Scientific Advisory Board members.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
Statements in this Annual Report on Form 10-K under the caption "Business"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations", as well as oral statements that may be made by the Company or
officers, directors or employees of the Company acting on the Company's behalf,
that are not historical fact constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that could cause the actual results of the Company (sometimes
referred to as "we" or "us")to be materially different from the historical
results or from any
13
results expressed or implied by such forward-looking statements. Such factors
include, among others, the following:
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH TO JUDGE US. We are a
development stage Company and our history of operations consists primarily of
the development of our products and the sponsorship of research and clinical
trials. Therefore, we have only a limited history upon which you may judge our
performance and prospects.
WE LACK SIGNIFICANT REVENUES AND ANTICIPATE CONTINUING LOSSES. We have
incurred significant losses since inception. At December 31, 1998 and December
31, 1997, we had accumulated losses since inception of approximately $9,932,000
and $8,358,000 respectively. We may incur substantial additional operating
losses for at least the next several years as our research and development
efforts expand. Until we executed an agreement with Pharmacia & UpJohn Company,
we had only generated limited amounts of revenue from our license fees and we
cannot predict when or if we will be able to develop other sources of revenue or
when or if our operations will become profitable, even if we are able to
commercialize some of our products.
OUR PRODUCTS ARE IN THE EARLY STAGE OF DEVELOPMENT AND WE DON'T KNOW IF THEY
WILL BE SUCCESSFULLY DEVELOPED. Our research and development programs are at
various states of development, ranging from the pre-clinical stage, to Phase I
and Phase II clinical trials to a pending new drug application. We will need to
conduct substantial additional research and development in order to develop our
products, and we don't know whether our research and development will lead to
the development of commercially viable products that are shown to be safe and
effective in clinical trials. Our proposed products will also require clinical
testing, regulatory approval and substantial additional investment prior to
commercialization. Our proposed products are subject to the risks of failure
inherent in the development of pharmaceutical products. These risks include the
following:
- some of our products may be found to be unsafe or ineffective, or may fail
to receive the necessary regulatory clearances in a timely fashion, if at
all;
- our products, if safe and effective, may be difficult to manufacture on a
large scale or may be uneconomical to market;
- the proprietary rights of competitors may prevent us from marketing some
of our products; and
- competitors and other researchers may market more effective or less costly
products for treatment of the same diseases.
As a result, we do not know whether we will successfully develop any of our
products, receive the required governmental regulatory approvals on a timely
basis, become commercially viable or achieve market acceptance. Also, we have
only limited experience in conducting clinical trials and other aspects of the
regulatory process.
We have experienced delays in our testing and development schedules and our
expected testing and development schedules may not be met. Delays in our testing
and development schedules could have a material adverse effect on our business,
financial condition and results of operations.
WE ARE DEPENDENT UPON DEVELOPING WORKING RELATIONSHIPS WITH OTHERS IN ORDER
TO DEVELOP OUR PRODUCT. In order to successfully develop our products, we must
develop and maintain strategic and collaborative relationships with government
agencies, research institutions, public and private universities and hospitals.
Our failure to develop and maintain any of the following strategic and
collaborative relationships could have a material adverse effect on our
business, financial condition and results of operations:
- Our Broxine-Registered Trademark- product was the subject of a cooperative
research and development agreement with the National Cancer Institute
which gave us exclusive rights to data generated by the National Cancer
Institute for certain cancer indications. That agreement expired on
September 13, 1998 and
14
was replaced by a clinical trials agreement which became effective October
29, 1998. Because our Broxine-Registered Trademark- product is not covered
by patents or patent applications, our exclusive access to the data
collected by the National Cancer Institute is of significant importance to
us for the conduct of clinical trials and is a principal advantage over
others.
- Our IL-13 product is the subject of a cooperative research and development
agreement with the FDA that extends through October 2001 and provides us
with rights to the development of IL-13 with the FDA and to the data
generated during the term of this agreement. This agreement may be
terminated by either party upon sixty days advance notice without cause.
Termination of this agreement would materially adversely affect our
development program and could require curtailment or termination of that
program.
- We have also entered into two license and sponsored research agreements
with Georgetown University relating to our liposomal products. These
licenses are generally not terminable by Georgetown University except in
the event of a default by us. Any such default and resulting termination
of the licenses would be materially adverse to our liposome program and
could require curtailment or termination of that program, and could
adversely effect the sublicense agreements that we have entered into with
Pharmacia & Upjohn Company for two of our liposome compounds.
WE REQUIRE SUBSTANTIAL FUNDS AND WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN
THE FUTURE. We require substantial funds to conduct research and development,
pre-clinical and clinical testing and to manufacture and market our proposed
products. Our fixed commitments, including consulting fees, rent, payments under
license agreements and other contractual commitments are substantial and are
likely to increase. Our cash requirements may vary materially from those now
planned. We may seek to satisfy our future funding requirements through
additional public or private offerings of securities, with collaborative
arrangements with corporate partners or from other sources.
Additional financing may not be available when we need it or be on terms
acceptable to us. If adequate financing is not available, we may be required to
delay, scale back or eliminate certain of our research and development programs,
to relinquish rights to some of our technologies, therapeutic and diagnostic
agents, product candidates or products, or to license third parties to
commercialize products or technologies that we would otherwise seek to develop
ourself. If additional capital is raised through the sale of equity or debt
securities, the percentage ownership of our existing stockholders will be
reduced and such securities may have rights, preferences or privileges superior
to those of our current stockholders.
WE DO NOT HAVE MANUFACTURING, MARKETING, OR SALES RESOURCES. We currently
do not have internal manufacturing, marketing or sales resources. Since we focus
on research and development and have limited resources, we do not anticipate
spending a significant amount of cash to acquire resources and develop
capabilities in these areas. Our manufacturing strategy will be to develop
manufacturing relationships with established pharmaceutical manufacturers for
the production of products. We can give no assurance that we will be able to
enter into manufacturing agreements on commercially reasonable terms, if at all.
WE DO NOT HAVE CLINICAL TESTING OR REGULATORY CAPABILITY. We currently do
not have internal clinical testing or regulatory capability. If we develop
compounds with commercial potential, we will have to hire additional personnel
skilled in the clinical testing and the regulatory compliance processes. We may
not successfully complete clinical testing of, obtain regulatory approval for,
or manufacture or market any product we may develop, either independently or
pursuant to manufacturing or marketing arrangements. Should we seek to enter
into third-party arrangements, we cannot give any assurance that such
arrangements can be successfully negotiated on commercially reasonable terms, if
at all.
WE MAY NOT BE ABLE TO PROTECT OUR PATENTS AND PROPRIETARY
INFORMATION. Because of the substantial length of time and expense associated
with bringing new products through development and regulatory approval to the
marketplace, patent and trade secret protection for new technologies, products
and
15
processes is very important to us. We have obtained licenses to ten United
States patent applications and have sixteen other issued or allowed patent
applications outside the United States. With respect to these patents, however,
no assurance can be given that:
- any patents under any pending applications or on future patent
applications will be issued;
- the scope of any patent protection will exclude competitors or provide
competitive advantages to us;
- any of our patents that may be issued will be held valid if subsequently
challenged;
- others will not claim rights in or ownership to the patents and other
proprietary rights held by us;
- others will not independently develop substantially equivalent proprietary
information or otherwise obtain access to our know-how; or
- others may be issued patents that require licensing and the payment of
significant fees or royalties by us.
Further, we may incur substantial costs in defending ourselves in suits that
may be brought against us claiming infringement of the patent rights of others,
in asserting our patent rights in a suit against another party, or in
participating in interference proceedings declared by the United States Patent
and Trademark Office for the purpose of determining the priority of invention in
connection with our patent applications or those of others. If we lose, we may
be forced to seek licenses, which may not be available on commercially
reasonable terms, if at all, or subject us to significant liabilities to a third
party and could, therefore, have a material adverse effect on us.
Our Broxine-Registered Trademark- product is not currently the subject of
patents or patent applications and we do not expect to obtain patent protection
for this product. The lack of patent protection could have a material adverse
effect on our business, financial condition and results of operations.
Finally, we also rely on trade secrets, know-how and technological advantage
to protect the technology we develop. Although we use confidentiality agreements
and employee proprietary information and invention assignment agreements to
protect our trade secrets and other unpatented know-how, these agreements may be
breached by the other party thereto or may otherwise be of limited effectiveness
or enforceability.
CERTAIN OF OUR EXECUTIVE OFFICERS HAVE RELATIONSHIPS WITH OTHER ENTITIES AND
HAVE CONFLICTS OF INTEREST. Messrs. John N. Kapoor, Mahendra Shah and Kevin M.
Harris, who each hold executive positions with us, are also associated with EJ
Financial Enterprises, Inc., a healthcare investment firm which is wholly owned
by John N. Kapoor, and therefore will have conflicts of interest in allocating
their time among various business activities, and may have legal obligations to
multiple entities. On July 1, 1994, the Company entered into a consulting
agreement with EJ Financial. The consulting agreement provides that we will pay
EJ Financial $125,000 per year (paid quarterly) for certain business and
financial services, including having certain officers of EJ Financial serve as
officers of ours without pay. EJ Financial is involved in the management of
healthcare companies in various fields, and Messrs. Kapoor, Shah and Harris are
involved in various capacities with the management and operation of these
companies. The John N. Kapoor Trust, dated September 20, 1989, the beneficiary
of which is Dr. John Kapoor, is a principal shareholder of each of these
companies as well as us. The John N. Kapoor Trust and other entities controlled
by John N. Kapoor beneficially own shares of our common stock, representing
approximately 42.5% of our outstanding shares of common stock.
Mr. Harris, our Chief Financial Officer, is also the Director of Taxes and
Planning of EJ Financial. Accordingly, Mr. Harris will not devote all of his
working hours to our affairs. In addition, EJ Financial is involved with other
companies in the oncology field. Although these companies are pursuing different
therapeutic approaches for the treatment of cancer, discoveries made by one or
more of these companies could render our products less competitive or obsolete.
16
Two of our key products have been obtained under license agreements with
Georgetown University. Dr. Acquilur Rahman, our Chief Scientific Officer and a
Director of ours, was formerly an associate professor of pathology and
pharmacology at Georgetown University. Dr. Anatholy Dritschilo, a Director of
ours, is currently chairman of the Department of Radiation Medicine and Medical
Director of the Georgetown Medical Center in Washington, D.C. As a result of
their respective positions with Georgetown both Dr. Rahman and Dr. Dritschilo
entered into agreements with Georgetown relating to the ownership of inventions
and other intellectual property developed while in Georgetown's employ. These
relationships may pose conflicts of interest for each of Messrs. Rahman and
Dritschilo. As part of their agreements with Georgetown University, Drs. Rahman
and Dritschilo have advised us that Georgetown University will share with each
of them payments which Georgetown receives from us under our license agreements
with Georgetown. While there were no royalty or other payments to Georgetown
University by us in 1998, as a result of us entering into a license agreement
with Pharmacia and Upjohn Company in February 1999, a payment of $800,000 was
recently made to Georgetown University and, assuming regulatory approval is
obtained in the future for our LED and LEP compounds, additional royalty
payments, which could be substantial, would be made by the Company to Georgetown
in the future which we understand Georgetown would then split with Dr. Rahman
and Dr. Dritschilo.
WE PREVIOUSLY ENTERED INTO A LINE OF CREDIT WITH A TRUST WHOSE BENEFICIARY
IS OUR PRINCIPAL SHAREHOLDER. On September 30, 1998, the John N. Kapoor Trust
entered into a line of credit agreement with us (the "Line of Credit") pursuant
to which we could borrow up to $3,000,000 at a rate of interest equal to 2% over
the "prime rate" announced from time to time by The Northern Trust Bank of
Chicago. Loans under the credit agreement were secured by a continuing security
agreement which provided the Trust with a security interest in our assets. The
Line of Credit was terminated by its terms in February 1999.
MEMBERS OF OUR SCIENTIFIC ADVISORY BOARD COMMIT ONLY A PORTION OF THEIR TIME
TO OUR BUSINESS AND RESEARCH ACTIVITIES AND WE MAY NOT HAVE RIGHTS TO THEIR
INVENTIONS OR DISCOVERIES. Members of our scientific advisory board are employed
on a full-time basis by academic or research institutions. These individuals
will devote only a portion of their time to our business and research
activities. Except for work performed specifically for and at our direction, the
inventions or processes discovered by our consultants and scientific advisors
will not become our property but will be the intellectual property of other
institutions with which they may have an affiliation. If this happens, we would
have to obtain licenses to such technology from such institutions. In addition,
invention assignment agreements executed by scientific advisory board members
and consultants in connection with their relationships with us may be subject to
the rights of their primary employers or other third parties with whom such
individuals have consulting relationships.
OUR BUSINESS IS DEPENDENT UPON COMPLIANCE WITH GOVERNMENTAL REGULATIONS AND
OBTAINING APPROVALS BY GOVERNMENTAL AGENCIES. Governmental authorities in the
United States and other countries regulate our research, testing, manufacturing,
labeling, distribution, marketing and advertising activities. The FDA and
comparable agencies in foreign countries impose substantial requirements on our
ability to introduce pharmaceutical products through lengthy and detailed
laboratory and clinical testing procedures, sampling procedures, sampling
activities and other costly and time consuming procedures. Our proprietary
products may require substantial clinical trials and FDA review as new drugs.
We cannot predict with certainty if or when we might submit for regulatory
review our products currently under development. Once we submit our potential
products for review, we don't know whether the FDA or other regulatory agencies
will grant approvals for any of our pharmaceutical products on a timely basis or
at all. A delay in obtaining or failure to obtain these approvals may adversely
affect our business. If we fail to comply with regulatory requirements, we could
be subjected to regulatory or judicial enforcement actions, including product
recalls or seizures, injunctions, civil penalties, criminal prosecution,
refusals to approve new products, withdrawal of approvals, and product liability
exposure. Sales of our products outside the United States will be subject to
regulatory requirements governing clinical trials and marketing approval. These
requirements vary widely from country to country and could delay the
introduction of our products in those countries.
17
THE DEMAND FOR OUR PRODUCTS MAY BE ADVERSELY AFFECTED BY HEALTH CARE REFORM
AND POTENTIAL LIMITATIONS ON THIRD-PARTY REIMBURSEMENT. The continuing effort of
governmental and third-party payors to contain or reduce the costs of health
care may reduce our revenues and profitability. We cannot predict the effect
that health care reforms may have on our business, and it is possible that any
reforms will hurt our business. In addition, in both the United States and
elsewhere, sales of prescription pharmaceuticals are dependent in part on the
availability of reimbursement to the consumer from third-party payors, such as
government and private insurance plans. Third-party payors are increasingly
challenging the prices charged for medical products and services. We cannot be
certain that our current and proposed products will be considered cost-effective
and that reimbursement to the consumer will be available or will be sufficient
to allow us to sell products on a competitive basis.
WE ARE SUBJECT TO REGULATIONS REGARDING HAZARDOUS MATERIALS AND
ENVIRONMENTAL MATTERS. We are subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
hazardous materials and certain waste products. We currently maintain a supply
of several hazardous materials at our facilities. While we currently outsource
our research and development programs involving the controlled use of
biohazardous materials, if we conduct such programs, we might be required to
incur significant cost to comply with environmental laws and regulations. In the
event of an accident, we could be held liable for any damages that result, and
such liability could exceed our resources.
WE DON'T HAVE PRODUCT LIABILITY INSURANCE AT THIS TIME. We currently do not
have any product liability insurance and our business exposes us to potential
product liability risks which are inherent in the testing, manufacturing and
marketing of human therapeutic products. Although we plan to obtain product
liability insurance when and if our products become commercially available,
there can be no assurance that we will be able to obtain or maintain this
insurance on acceptable terms or that any insurance we obtain will provide us
with adequate coverage against potential liabilities. Claims or losses in excess
of any liability insurance coverage we obtain could have a material adverse
effect on our business and prospects.
WE MAY BE AFFECTED BY LITIGATION INVOLVING OUR CHAIRMAN. John N. Kapoor,
our chairman and principal stockholder, was previously the chairman and
president of Lyphomed Inc. Fujisawa Pharmaceutical Co. Ltd. was a major
stockholder of Lyphomed from the mid-1980s until 1990, at which time Fujisawa
completed a tender offer for the remaining shares of Lyphomed, including the
shares held by Dr. Kapoor. Fujisawa filed suit in federal district court in
Illinois against Dr. Kapoor alleging that between 1980 and 1986, Lyphomed filed
a large number of allegedly fraudulent new drug applications with the FDA, and
that Dr. Kapoor's failure to disclose these violations to Fujisawa constituted a
violation of federal securities laws and the Racketeer Influenced and Corrupt
Organizations Act. Fujisawa also alleged state common-law claims of constructive
trust, fraud, breach of fiduciary duties and breach of warranty against Dr.
Kapoor. In addition to substantial monetary relief in excess of $100,000,000
(which amount could be trebled under RICO), Fujisawa also seeks a constructive
trust on the assets of Dr. Kapoor, which may include Dr. Kapoor's shares of our
common stock or rights to acquire shares of our common stock.
Dr. Kapoor has vigorously defended himself against all these allegations. In
the federal lawsuit, Dr. Kapoor's motion for summary judgement was granted by
the trial court. However, the Seventh Circuit Court of Appeals subsequently
reversed, in part, the trial court's decision, reinstating the RICO claims
against Dr. Kapoor. Dr. Kapoor's subsequent motion for summary judgment was
denied and the matter has been referred to a special master for mediation
discussions. It is anticipated that in the absence of resolution of the matter,
a trial would be held in late 1999 or early in 2000. Fujisawa's claims under
state law against Dr. Kapoor are also pending. A related suit filed by Dr.
Kapoor in Delaware Chancery Court seeking to require Lyphomed to advance to Dr.
Kapoor the cost of his defense to all of Fujisawa's lawsuits was decided in Dr.
Kapoor's favor and that decision was subsequently affirmed by the Delaware
Supreme Court. Finally, a countersuit filed by Dr. Kapoor against Fujisawa in
the Circuit Court of Cook County for breach of contract was dismissed without
prejudice with the court determining that the proper forum for such an action
was as part of the pending federal lawsuit. The decision of the lower court was
affirmed on appeal and Dr. Kapoor has filed a counterclaim for breach of
contract as part of the federal court action.
18
If a decision is made in favor of Fujisawa, Fujisawa may acquire the right
to control Dr. Kapoor's shares of our common stock, which comprise 42.5% of our
common stock. This decision could have a material adverse effect on us.
SHARES ELIGIBLE FOR FUTURE SALE COULD ADVERSELY AFFECT OUR STOCK PRICE. If
our stockholders sell substantial amounts of our common stock, including shares
issued upon the exercise of outstanding options and warrants, in the public
market, the market price of our common stock could fall. These sales might also
make it more difficult to sell our equity or equity related securities in the
future at a time and price that we deem appropriate. Of the 8,454,621 shares of
common stock outstanding as of March 19, 1999, 3,792,746 shares are freely
transferable without restriction or further registration under the Securities
Act. The remaining 4,661,875 shares are "restricted securities," and may only be
sold pursuant to a registration statement under the Securities Act or an
applicable exemption from registration thereunder.
WE ARE CONTROLLED BY OUR OFFICERS AND DIRECTORS. As of March 31, 1999, our
directors and officers beneficially owned a total of 58.93% of the outstanding
shares of our common stock. Accordingly, our officers and directors, if acting
together, have the ability to elect a majority of our directors and otherwise
control our operations.
WE MAY REDEEM THE REDEEMABLE WARRANTS. Since July 25, 1997, the redeemable
warrants have been subject to redemption by us at $0.01 per redeemable warrant
on thirty (30) days' prior written notice to the redeemable warrantholders. We
can only redeem the warrants if the average closing sale price of our common
stock as reported on the American Stock Exchange equals or exceeds $5.60 per
share for twenty (20) trading days within a period of thirty (30) consecutive
trading days ending on the fifth trading day prior to the date of the notice of
redemption. If we redeem the redeemable warrants, holders of the redeemable
warrants will lose their rights to purchase shares of our common stock issuable
upon the exercise of the redeemable warrants.
Upon receipt of a notice of redemption, holders would be required to:
- exercise the redeemable warrants and pay the exercise price at a time when
it may be disadvantageous for them to do so;
- sell the redeemable warrants at the current market price, if any, when
they might otherwise wish to hold the redeemable warrants; or
- accept the redemption price which is likely to be substantially less than
the market value of the redeemable warrants at the time of redemption.
Since November 4, 1998, our common stock has traded above $5.60. As a
result, we may redeem the redeemable warrants, if we wish. We are currently
evaluating the merits of calling the redeemable warrants.
HOLDERS OF REDEEMABLE WARRANTS MAY BE RESTRICTED FROM SELLING THE SHARES OF
OUR COMMON STOCK UNDERLYING THE REDEEMABLE WARRANTS. The redeemable warrants are
not exercisable unless, at the time of the exercise, we have a current
prospectus covering the shares of common stock issuable upon exercise of the
redeemable warrants, and such shares have been registered, qualified or deemed
to be exempt under the securities laws of the state of residence of the
exercising holder of the redeemable warrants. We do not intend to qualify the
redeemable warrants for exercise in the states in which the holders reside. As a
result, holders of the redeemable warrants may be deprived of value. Although we
have agreed to use our best efforts to keep a registration statement covering
the shares of common stock issuable upon exercise of the redeemable warrants
effective for the term of the redeemable warrants, if we fail to do so for any
reason, your ability to resell the shares underlying the redeemable warrants
will be materially adversely effected.
Purchasers may buy redeemable warrants in the aftermarket or may move to
jurisdictions in which the shares underlying the redeemable warrants are not
registered or qualified during the period that the
19
redeemable warrants are exercisable. If this happens, we can't issue shares to
those persons desiring to exercise their redeemable warrants, and holders of
redeemable warrants would have no choice but to attempt to sell the redeemable
warrants in a jurisdiction where such sale is permissible or allow the
redeemable warrants to expire unexercised.
THE YEAR 2000 RISK MAY ADVERSELY AFFECT US. Many currently installed
computer systems and software products are coded to accept only two digit
entries in the date code field. As a result, software that records only the last
two digits of the calendar year may not be able to distinguish whether "00"
means 1900 or 2000. This may result in software failures or the creation of
erroneous results. We believe that our products and internal systems are
currently year 2000 compliant. We are confirming our year 2000 compliance by
obtaining representations by third party vendors of their products' year 2000
compliance, as well as specific testing of our products. The failure of products
or systems maintained by third parties or our products and systems to be year
2000 complaint could cause us to incur significant expenses to remedy any
problems, or seriously damage our business. We have not incurred significant
costs to date complying with year 2000 requirements, and we do not believe that
we will incur significant costs for such purposes in the foreseeable future.
ITEM 2. PROPERTIES
The Company's administrative offices are located in approximately 1330
square feet of subleased office space in Bannockburn, Illinois. This subleased
space is provided to the Company at a market rate rent by Option Care, Inc, an
affiliate of the Company's Chairman and principal shareholder, John N. Kapoor.
Until moving to the Bannockburn location in November of 1997, the Company
occupied office space in Lake Forest, Illinois. This space was provided as part
of a consulting agreement with EJ Financial. (See Note 8--"Transactions with
Related Parties" in Notes to Financial Statements).
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation or other legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1998.
20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
From January 25, 1996 until December 2, 1996 the Company's Common Stock was
quoted on the Nasdaq Stock Market's SmallCap Market under the trading symbol
NPRM. Beginning on December 2, 1996, and continuing through the date of this
report, the Common Stock has been traded on the American Stock Exchange ("AMEX")
under the symbol NEO.
1997 HIGH LOW
- ------------------------------------------------------------------------------------------------- --------- ---------
First Quarter.................................................................................... 9 5/8 6 3/8
Second Quarter................................................................................... 7 1/2 3 1/16
Third Quarter.................................................................................... 5 1/2 3 5/8
Fourth Quarter................................................................................... 9 3 3/4
1998 HIGH LOW
- ------------------------------------------------------------------------------------------------- --------- ---------
First Quarter.................................................................................... 5 3/4 3 3/4
Second Quarter................................................................................... 4 15/16 2 15/16
Third Quarter.................................................................................... 4 1/2 2
Fourth Quarter................................................................................... 13 1/4 3 5/8
As of March 19, 1999, there were 63 holders of record of the Common Stock,
and the Company estimates that as of such date there were more than 400
beneficial holders of the Common Stock. The Company has never paid a cash
dividend on its Common Stock and has no present intention of paying cash
dividends in the foreseeable future. Any determination in the future to pay
dividends will depend on the Company's financial condition, capital
requirements, results of operations, contractual limitations and other factors
deemed relevant by the Board of Directors.
21
ITEM 6. SELECTED FINANCIAL DATA
INCEPTION
FOR THE YEARS ENDED (JUNE 15,1990)
DECEMBER 31, THROUGH
------------------------------------------------------------------------- DECEMBER 31,
1994 1995 1996 1997 1998 1998
------------- ------------- ------------- ------------- ------------- --------------
Statement of Operations
Data:
Revenues....................... $ -- $ -- $ -- $ 550,000 $ -- $ 550,000
Operating expenses:
Research and development....... 813,761 1,068,683 1,099,631 1,411,692 1,611,343 7,085,874
General and administrative..... 107,286 244,901 956,924 1,370,486 1,691,132 4,837,984
------------- ------------- ------------- ------------- ------------- --------------
Loss from operations........... (921,047) (1,313,584) (2,056,555) (2,232,178) (3,302,475) (11,373,858)
Interest income................ $ -- $ -- $ 238,275 $ 210,501 $ 88,752 $ 537,528
Interest expense............... (162,620) (356,043) (47,365) -- -- (735,606)
------------- ------------- ------------- ------------- ------------- --------------
Interest income
(expense)--net............... (162,620) (356,043) 190,910 210,501 88,752 (198,078)
------------- ------------- ------------- ------------- ------------- --------------
Loss Before Income Taxes....... $ (1,083,667) $ (1,669,627) $ (1,865,645) $ (2,021,677) $ (3,213,723) $ (11,571,936)
Income Taxes................... -- -- -- -- (1,640,000) (1,640,000)
------------- ------------- ------------- ------------- ------------- --------------
Net Loss....................... $ (1,083,667) $ (1,669,627) $ (1,865,645) $ (2,021,677) $ (1,573,723) $ (9,931,936)
------------- ------------- ------------- ------------- ------------- --------------
------------- ------------- ------------- ------------- ------------- --------------
Basic and Diluted
Net loss per share............. $ (.32) $ (.36) $ (.24) $ (.25) $ (.19)
------------- ------------- ------------- ------------- -------------
DECEMBER 31,
----------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
Balance Sheet Data:
Cash........................... $ 9,205 $ 671 $4,479,041 $2,776,697 $ 40,681
Working capital (deficit)...... (2,137,037) (4,553,057) 4,013,010 2,348,904 1,077,255
Total assets................... 112,988 495,891 4,492,208 2,854,499 1,781,548
Line of credit with bank....... 656,452 2,007,652 -- -- --
Loan payable to principal
stockholder.................. 1,500,000 1,500,000 -- -- --
Deficit accumulated during the
development stage............ (2,801,264) -- (1,865,645) (3,887,322) (5,461,045)
Total stockholders' equity
(deficit).................... (2,691,773) (4,361,392) 4,026,177 2,374,072 1,178,122
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since the Company's inception in June 1990, NeoPharm has devoted its
resources primarily to fund research and product development programs. The
Company has been unprofitable since inception and has had no revenues from the
sale of products. The Company expects to continue to incur losses as it expands
its research and development activities and sponsorship of clinical trials. As
of December 31, 1998, the Company's accumulated deficit was approximately $5.5
million.
22
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The Company had no operating revenues during the three fiscal years ended
December 31, 1998 except for a $550,000 payment received from BioChem Pharma in
1997 as part of a licensing and distribution agreement. Interest income for 1998
totaled $88,752. The Company completed its initial public offering in January
1996. Cash in excess of funds needed to retire debt, pay for issuance costs or
pay outstanding payables was invested in short term investments.
The Company incurred research and development expenses of approximately
$1,611,000 in 1998 as compared to approximately $1,412,000 in 1997 and
$1,100,000 in 1996. The increase in 1998 research and development expenses is
primarily due to the increased research activity and the addition of two new
employees related to the Company's Liposome Products. 1998, 1997 and 1996
expenses include payments made by the Company to Georgetown and the NCI pursuant
to the Company's license and sponsored research agreements with Georgetown, its
CRADA with the NCI, payments to U.S. Food and Drug Administration pursuant to
the CRADA, and the NIH pursuant to its license agreement. The Company expects
research and development spending to increase over the next several years. See
"Item 1--Research and Development, Collaborative Relationships and Licenses."
General and administrative expenses increased to approximately $1,691,000 in
1998 from approximately $1,370,000 in 1997. The increase was primarily the
result of increased professional fees of $103,000, executive recruitment costs
of $81,000, increased public relations costs of $29,000, increased insurance
costs of $9,000, increased space costs of $35,000 and an increase in other
miscellaneous expenses of $64,000. General and administrative expenses for 1997
compared to 1996 increased approximately $413,000. This increase was primarily
the result of increased professional fees of $103,000 related to corporate
public filings, increased personel costs and compensation expense related to
non-employee stock options of $144,000 executive relocation expenses of $76,000,
increased travel costs of $37,000 and on increase of miscellaneous office
expense of $53,000.
The Company incurred zero interest expense in both 1998 and 1997. Interest
expense for 1997 compared to 1996 decreased approximately $47,000. The Company
had outstanding debt for a portion of 1996. Proceeds from the initial public
offering, completed in January, 1996, were used to retire both the debt owed to
the principal shareholder and the line of credit provided by Harris Bank and
Trust N.A. The principal stockholder converted the principal of and interest on
the loan into shares of Common Stock and Warrants at the initial public offering
price. Interest expense totaled approximately $356,000 in 1995. The proceeds of
borrowings were used to fund the Company's operations during the period from
1994 to 1996. See "Item 13--Certain Relationships and Related Transactions" and
Note 3 of Notes to the Financial Statements.
INCEPTION TO DECEMBER 31, 1998
The Company was taxed as an S Corporation from inception through October 11,
1995 when the S Corporation status was voluntarily terminated. Because the
Company was taxed as an S Corporation, all of its net losses from inception
through October 11, 1995 were passed through to its stockholders. Accordingly,
the Company did not accumulate operating loss carry forwards prior to October
11, 1995. The deficit accumulated while under S Corporation status was
reclassified to Additional Paid-In Capital in 1995. The Company has begun
accruing net operating loss carry forwards.
LIQUIDITY AND CAPITAL RESOURCES
Cash expenditures have exceeded revenues from the Company's inception
through December 31, 1998. The Company's operations have primarily been funded
through a loan from its Chairman, a bank line-of-credit and since January 1996,
the Company's initial public offering of common stock. The
23
Company expects to incur additional expenses, resulting in potentially
significant losses, as it continues and expands its research and development
activities and undertakes additional clinical trials of compounds obtained under
proprietary licenses. The Company also expects to incur substantial
administrative and commercialization expenditures in the future as it seeks FDA
approval of drugs under development and initiates marketing activities.
At December 31, 1998, the Company has approximately $41,000 in cash and cash
equivalents and net working capital of approximately $1.1 million. On October
22, 1998, the Company established a $3,000,000 line of credit (the "Line of
Credit") with the John N. Kapoor Trust dtd. 9/20/89, an entity affiliated with
the Company's Chairman. Interest on borrowings on the Line of Credit were
accrued at the rate of 2% over the prime rate of the Northern Trust Bank. The
accrued interest and outstanding principal were repaid on January 29, 1999 and
the line of Credit terminated upon the signing of the Pharmacia and Upjohn
licensing agreement in February 1999. The Company believes that cash and cash
equivalents should be adequate to fund operations for the next 12 months.
However, management can offer no assurances that additional funding will not be
required during that period.
The amount of the up-front licensing fee paid by Pharmacia and Upjohn
pursuant to the licensing agreement dated February 19, 1999 was $9,000,000. In
addition, assuming that all of the milestone goals set forth in the license
agreement were to be attained by the parties, the Company would be eligible to
receive an additional $52,000,000 in additional milestone payments. Finally,
with respect to the LED product, if the LED product were to be approved for
commercial sale and thereafter marketed, the Company would receive a royalty
payment for sales outside of the U.S. for the first seven years after commercial
sale at a rate of 8%, declining to 5% for the eighth through tenth years of such
commercial sales. With respect to the LEP product, the Company is entitled to
receive a royalty of 12.5% for LED products sold outside of the United States
for the valid life of an enforceable NeoPharm patent, determined on a
country-by-country basis. With respect to sales of both LEP and LED products in
the United States, the Company is permitted to elect, in lieu of royalty
payments for U.S. sales, to co-promote the products within the United States.
Under the terms of the co-promotion, the Company's participation in net profits
is to be in proportion to its monetary contribution to the promotion of each
product in the United States, but in no event shall the Company's share of
profits exceed 37.5% of total net profits. In addition, the Company's right to
co-promote is contingent upon the Company reimbursing Pharmacia & Upjohn for an
amount equal to the amount of the Company's net profit percentage multiplied by
the amount expended by Pharmacia & Upjohn in development costs for the products
in the United States (which may not exceed 60 percent of Pharmacia & Upjohn's
total development costs for the products throughout the world). If the Company
does not elect to co-promote the product within the U.S., then the Company would
receive a flat royalty with respect to LED equal to 10% of net sales for the
first ten years of sales in the United States, and with respect to LEP, a
royalty equal to 12.5% of net sales for the period in which Pharmacia & Upjohn
has exclusivity to LEP product. Because of the uncertainty surrounding the
Company's ability to attain the milestones and obtain FDA approval for the
products, and the uncertainty that the products would be accepted by the medical
community, it is not possible to predict with any degree of certainty what the
potential revenues (other than the milestone payments) under the contract would
be.
The Company's assets at December 31, 1998 were $1,781,548 compared to
$2,854,499 at December 31, 1997. This decrease in assets was primarily due to a
reduction of cash and cash equivalents of approximately $2,736,000 as a result
of cash used in operating activities of approximately $2,716,000, cash used to
purchase equipment and furniture of approximately $102,000 and cash provided by
issuance of stock of approximately $82,000.
The Company's liabilities at December 31, 1998 increased to approximately
$603,000 from approximately $480,000 at December 31, 1997.
The Company received a $9,000,000 non-refundable up-front fee upon signing
the licensing agreement with Pharmacia & Upjohn in February, 1999. Additionally,
the Company anticipates selling
24
$8,000,000 of its stock to Pharmacia & Upjohn under a separate stock purchase
agreement in the third quarter of 1999. While Pharmacia & Upjohn will assume the
costs associated with all future development and testing of LEP and LED, the
Company anticipates that its research and development costs will remain constant
or increase as it accelerates the development of its other products.
Cash and cash equivalents decreased to $2,776,697 at December 31, 1997 from
$4,479,041 at December 31, 1996. This decrease of $1,072,344 was the result of
cash used in operating activities of $1,858,794, cash used to purchase equipment
and furniture of $18,728, and cash provided by the issuance of stock of
$175,178.
Cash and cash equivalents increased to $4,479,041 at December 31, 1996 from
$671 at December 31, 1995. This increase of $4,478,370 was the result of cash
provided by financing activities of $6,635,223, primarily the net proceeds of
the initial public offering, cash used to fund operating expenses of $2,146,190
and cash used to purchase equipment and furniture of $10,663.
All of the products currently being developed by the Company will require
approval by the FDA before they can be sold commercially in the United States.
The results of the preclinical and clinical testing on a nonbiologic drug and
certain diagnostic drugs are submitted to the FDA in the form of an NDA for
approval to commence commercial sales. In responding to an NDA, the FDA may
grant marketing approval, request additional information or deny the application
if the FDA determines that the application does not satisfy its regulatory
approval criteria.
The Company may seek to satisfy its future funding requirements through
public or private offerings of securities, with collaborative or other
arrangements with corporate partners or from other sources. Additional financing
may not be available when needed or on terms acceptable to the Company. If
adequate financing is not available, the Company may be required to delay, scale
back or eliminate certain of its research and development programs, to
relinquish rights to certain of its technologies, therapeutic and diagnostic
agents, product candidates or products, or to license third parties to
commercialize products or technologies that the Company would otherwise seek to
develop itself.
THE YEAR 2000 ISSUE
The year 2000 problem is the result of computer programs being written using
two digits rather than four to define the applicable year. Computer equipment
software and devices that are time-sensitive may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations.
The Company has conducted an assessment of its business systems that could
encounter Year 2000 problems. This assessment included both information
technology systems and non-information technology systems. Based on this
internal assessment, the Company has not identified any material Year 2000
issues. We retained an outside consultant to review our assessment. The
consultant recommended several corrective measures which are in the process of
being completed. The cost of this review and corrective measures is expected to
be less than $5,000.
The Company relies on vendors, service providers and collaboration partners
for raw materials, contract manufacturing, research activities, product testing,
clinical trials, administrative services and other services. The Company has
sent information requests to its third party providers to determine if they are
Year 2000 compliant or have effective plans in place to address the Year 2000
issue and to determine the extent of the Company's vulnerability to the failure
of our third party providers to remedy such issues. Based upon the responses
that the Company receives from these third parties, the Company will assess its
risks and develop appropriate contingency plans as needed. We do not currently
have a contingency plan in place; however, it is the Company's intention to
complete its plan by October 31, 1999.
The Company believes that its internal systems will be Year 2000 compliant
and that the most likely worse case scenario would result from third parties
failing to achieve Year 2000 compliance. There is a risk
25
of short-term interruptions in the supply of raw materials, manufacturing of
products for clinical trials, conducting and reporting of clinical trials and
new product development. Our ongoing clinical trials could be delayed if there
is an interruption in the supply of raw materials from our vendors and/or the
manufacturing of products by our contract manufacturers. Further, our clinical
trials could be delayed if there is an interruption in the clinical trials or
the reporting of information related to these trials by one or more of the third
party research organizations. Finally, our clinical trials could be delayed if
there is an interruption in the gathering, analysis and reporting of information
related to the trials by our third party service providers. Such disruptions and
delays could result in deferred or lost revenue and increased expenses.
We do not expect the Year 2000 problems to have a material adverse impact on
our business or results of operations. However, no assurance can be given that
unanticipated or undiscovered Year 2000 problems will not arise that could have
a material adverse effect on the Company's business and results of operations.
In addition, there can be no assurance that Year 2000 non-compliance by any of
the Company's significant vendors, service providers or collaboration partners
will not have a material adverse effect on the Company's business or results of
operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Financial Statements and Supplementary Data are incorporated herein by
reference to the Company's Financial Statements included as Exhibit 1. The
information is contained as follows:
PAGE
----
Report of Arthur Andersen LLP, Independent Public
Accountants............................................... 35
Balance Sheets.............................................. 36
Statements of Operations.................................... 37
Statements of Stockholders' Equity (Deficit)................ 38
Statements of Cash Flows.................................... 41
Notes to Financial Statements............................... 43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
POSITION
HELD
NAME AGE POSITION SINCE
- ---------------------------------------- ---- ---------------------------------------- --------
John N. Kapoor, Ph.D.(2)................ 55 Director, Chairman of the Board 1990
Aquilur Rahman, Ph.D.................... 56 Director, Chief Scientific Officer 1990
Anatoly Dritschilo, M.D.(1)(2).......... 54 Director 1990
James M. Hussey (3)..................... 39 President, Chief Executive Officer, and 1998
Director
Erick E. Hanson(1)...................... 52 Director 1997
Mahendra G. Shah, Ph.D.................. 54 Vice President, Corporate and Business 1991
Development
Sander A. Flaum......................... 62 Director 1998
Kevin Harris............................ 38 Chief Financial Officer 1998
Lewis Strauss, M.D...................... 48 Vice President- Chief Medical Officer 1998
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Mr. Hussey assumed the positions of President, Chief Executive Officer and
Director of the Company on March 16, 1998. He replaced Dr. William C. Govier
who served as President, Chief Executive Officer and Director of the Company
until retiring on January 16, 1998.
All directors hold office until the next annual meeting of the stockholders
and until their successors are duly elected. Officers are appointed to serve,
subject to the discretion of the Board of Directors, until their successors are
appointed.
John N. Kapoor, Ph.D., Chairman of the Board of Directors, has been a
director of the Company since July 1990. Prior to forming the Company, Dr.
Kapoor formed EJ Financial Enterprises, Inc., a health care consulting and
investment company, in March 1990, of which Dr. Kapoor is currently President.
Dr. Kapoor is presently Chairman of Option Care, Inc., a provider of home health
care services; Chairman of Unimed Pharmaceuticals, Inc., a developer and
marketer of pharmaceuticals for cancer, endocrine disorders and infectious
diseases; and Chairman of Akorn, Inc., a manufacturer, distributor, and marketer
of generic ophthalmic products. Dr. Kapoor received his Ph.D. in medicinal
chemistry from the State University of New York in 1970 and a B.S. in pharmacy
from Bombay University in India.
Aquilur Rahman, Ph.D., joined the Company as Chief Scientific Officer and as
a member of the Board of Directors in July 1990. Dr. Rahman joined the Company
on a full time basis in March 1996. Dr. Rahman is currently adjunct professor of
radiology and was an associate professor of pathology and pharmacology at
Georgetown University until March 1996. Dr. Rahman has more than 15 years of
research experience in developing methods of chemotherapy treatment for cancer.
Dr. Rahman received his Masters of Science in Biochemistry from the University
of Dacca (Bangladesh) in 1964 and his Ph.D. in Pharmaceutics from the University
of Strathclyde (Glasgow, U.K.) in 1972.
Anatoly Dritschilo, M.D., joined the Company as a Member of the Board of
Directors in July 1990. Since August 1979, Dr. Dritschilo has been Chairman of
the Department of Radiation Medicine and
27
Medical Director of the Georgetown University Medical Center in Washington, D.C.
Dr. Dritschilo received his B.S. in Chemical Engineering from the University of
Pennsylvania, his M.S. in Engineering in 1969 from Newark College of
Engineering, and his M.D. in 1973 from the College of Medicine of New Jersey.
James M. Hussey joined the Company in March 1998 as its President, Chief
Executive Officer, and a member of the Board of Directors. Mr. Hussey was
previously the Chief Executive Officer of Physicians Quality Care, a managed
care organization from 1994 to January, 1998. Previous to that, Mr. Hussey held
several positions with Bristol-Myers Squibb from 1984 to 1994, most recently as
the General Manager Midwest Integrated Regional Business Unit. Mr. Hussey
received a B.S. from the College of Pharmacy at Butler University and an M.B.A.
from the University of Illinois.
Erick E. Hanson, joined the Company as a Director in April 1997. Mr. Hanson
is currently President of Hanson and Associates, a consulting firm working with
venture capital companies. Previously, Mr. Hanson served as President and Chief
Executive Officer of OptionCare, Inc., a provider of home health care services.
Prior to joining OptionCare, Inc. Mr. Hanson held a variety of positions with
Caremark, Inc., including from 1991-1995, Vice President Sales and Marketing.
Mr. Hanson served as President and Chief Operating Officer of Clinical Partners,
Inc. in Boston, MA, from 1989-1991 and prior to 1989 was associated with Blue
Cross and Blue Shield of Indiana for over twenty years. Mr. Hanson presently
serves on the Board of Directors for Condell Medical Centers.
Sander A. Flaum, joined the Company as a Director in July 1998. Mr. Flaum is
President and Chief Executive Officer of Robert A. Becker EURO/RSCG, a marketing
and advertising company. Prior to becoming President of Robert A. Becker, Mr.
Flaum was Executive Vice President of Kleinter Advertising and prior to that
served as Marketing Director of Lederle Laboratories, a division of American
Cyanamid where he was employed from 1965-1984.
Mahendra G. Shah, Ph.D., has served as Vice President of Corporate and
Business Development of the Company since October 1991. Dr. Shah is also a Vice
President of EJ Financial Enterprises, Inc., a position he has held since
October 1991. Prior to joining the Company, Dr. Shah was the Senior Director of
New Business Development with Fujisawa USA from January 1987 to October 1991.
Dr. Shah received his M.S. in 1978 and Ph.D. in 1984 in Industrial Pharmacy from
St. John's University and an M.S. in 1969 and a B.S. in 1967 in Pharmaceutical
Chemistry from Gujarat University in India.
Kevin M. Harris has served as Chief Financial Officer and Secretary of the
Company since June 1998. Mr. Harris is also Director of Taxes and Planning at
E.J. Financial Enterprises, Inc. a health care consulting and investment
Company. Prior to joining E.J. Financial Enterprises in 1997, Mr. Harris was
Vice-President of Finance of Duo-Fast Corporation. Previously, Mr. Harris worked
eleven years in public accounting, including six years with Arthur Andersen &
Company. Mr. Harris received a B.Sc. in accounting from Illinois State
University in 1983 and a M.S. from DePaul University in 1988. Mr. Harris is a
Certified Public Accountant and a Certified Financial Planner.
Lewis Strauss, M.D., joined the Company as Chief Medical Officer, in April,
1998. After completing his medical training at Cornell Medical College and his
pediatric residency at The John Hopkins School of Medicine in Baltimore, Dr.
Strauss served as a Pediatric Oncologist at John Hopkins Oncology Center
(1980-1991) and at Northwestern University (1991-1997).
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on a review of the copies of reports furnished to the Company
or written representations that no reports were required, the Company believes
that during the 1998 fiscal year, all filing requirements applicable to its
officers, directors and greater that 10% beneficial owners were complied with,
with the exception that (i) the Initial Statement Of Beneficial Ownership Of
Securities on Form 3, required to be filed by each of James M. Hussey, President
and Chief Executive Officer of the Company, Dr. Louis C.
28
Strauss, Chief Medical Officer for the Company and Sander A. Flaum, Director of
the Company, were not filed within 10 days of each of those individuals assuming
their respective offices, (ii) Dr. Anatoly Dritschilo did not timely file a Form
4 report relating to transfers which has been made for estate planning purposes,
and (iii) Mr. Kevin Harris did not timely file a Form 4 report regarding his
initial acquisition of shares. Each of the aforementioned individuals has now
made the required filings.
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the total compensation for services rendered
to the Company for the fiscal year ended December 31, 1998, by each person who
held the position of Chief Executive Officer at any time during 1998 and for
each executive officer who received more than $100,000 in salary and bonus in
1998.
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------------------------------------------- -----------------------
ANNUAL RESTRICTED
COMPENSATION OTHER ANNUAL STOCK
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS($) COMPENSATION($) AWARD($) OPTIONS(#)
- ---------------------------------- ----------- ---------- ------------- ---------------- ---------- -----------
William C. Govier................. 1998 $ 5,800 $ 0 $ 0 $ 0 0
Chief Executive Officer and 1997 $ 138,600 $ 0 $ 0 $ 0 0
President (1) 1996 121,000 $ 39,600 $ 0 $ 0 50,000(3)
James M. Hussey................... 1998 $ 197,900 $ 90,000 $ 7,100 $ 187,500 400,000(4)
Chief Executive Officer and
President (1)
Aquilur Rahman.................... 1998 $ 178,000 $ 54,000 $ 9,600 $ 0 0
Chief Scientific Officer 1997 $ 167,000 $ 51,000 0 0 0
1996 $ 144,100 $ 45,000 0 0 50,000(5)
Lewis Straus M.D.................. 1998 $ 110,000 $ 16,800 $ 20,000 $ 35,000 20,000(6)
Chief Medical Officer (2)
- ------------------------
(1) Dr. Grovier resigned as President, Chief Executive Officer and a Director
effective January 18, 1998. Effective March 16, 1998, Mr. James M. Hussey
succeeded Dr. Govier as President and Chief Executive Officer and was
appointed to fill the vacancy in the Board of Directors created by Dr.
Govier's departure.
(2) Dr. Stauss joined the Company as Chief Medical Officer on April 6, 1998.
(3) The stock options granted to Dr. Govier were cancelled after his resignation
on January 18, 1998 as President, Chief Executive Officer and a Director of
the Company in accordance with the terms of the 1995 Stock Option Plan.
(4) The stock options became exercisable for 25% of the covered shares on
January 16, 1999 and will become exercisable with respect to an additional
25% on each anniversary of such date
(5) The stock options became exercisable for 50% of the covered shares on August
13, 1997 and the remaining shares became exercisable August 15, 1998 in
accordance with the terms of the 1995 Stock Option Plan.
(6) The stock options become exercisable for 25% of the covered shares on April
6, 1999. And will become exercisable with respect to an additional 25% on
each anniversary of such date.
29
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to grants of options
to purchase Common Stock granted to the Named Executive Officers during the
fiscal year ended December 31, 1998:
INDIVIDUAL GRANTS
POTENTIAL REALIZABLE
VALUE AS ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
OPTIONS PRICE APPRECIATION
GRANTED TO EXERCISE FOR OPTION TERM
GRANTED EMPLOYEES IN PRICE PER EXPIRATION --------------------------
NAME OPTIONS (#) FISCAL YEAR SHARE DATE 5% 10%
- ------------------------------------------ ----------- --------------- ----------- ----------- ------------ ------------
James M. Hussey........................... 400,000 71.81% $ 4.75 1/16/08 $ 1,194,900 $ 3,028,111
Lewis Strauss............................. 20,000 3.59% $ 3.75 4/06/08 $ 47,167 $ 119,531
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR, AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to stock options
exercised during the fiscal year ended December 31, 1998, and the value at
December 31, 1998 of unexercised stock options held by our executive officers:
FISCAL YEAR END OPTION VALUES
NUMBER OF VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS AT FISCAL OPTIONS IN-THE
YEAR-END MONEY
SHARES EXERCISABLE/ AT FISCAL YEAR-END
ACQUIRED ON REALIZED UNEXERCISEABLE EXERCISABLE/
NAME EXERCISE (#) VALUE($) (#) UNEXERCISEABLE($)*
- ------------------------------------------------- ----------------- --------------- ----------------- ------------------
William C. Govier................................ 0 0 0/0 $ 0/$0
James M. Hussey.................................. 0 0 0/400,000 $ 0/$2,950,000
Aquilur Rahman................................... 0 0 50,000/0 $ 256,250/$0
Lewis Strauss.................................... 0 0 0/20,000 $ 0/$167,500
- ------------------------
* Represents the fair market value at December 31, 1998, of the common stock
underlying the options minus the exercise price.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's common stock as of March 31, 1999 for (i) all people
that beneficially own more than 5% of the Company's outstanding common stock,
(ii) all directors, (iii) all executive officers and (iv) all executive officers
and directors as a group. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities. Percentage of beneficial
ownership is based on 8,454,621 shares of common stock outstanding as of March
31, 1999, plus 664,004 shares subject to warrants and options that are
considered to be beneficially owned by certain of the persons listed. Shares of
common stock subject to options or warrants
30
exercisable or convertible within 60 days of March 31, 1999 are deemed
outstanding for computing the percentage of the person or group holding such
options or warrants.
AMOUNT AND NATURE OF
PERCENTAGE OF PERCENTAGE OF
BENEFICIAL SHARES BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNERSHIP(1) OWNED
- ----------------------------------------------------------------------- --------------------- -------------------
John N. Kapoor......................................................... 4,008,258(2) 42.51%
EJ Financial Enterprises, Inc.
225 E. Deerpath, Suite 250
Lake Forest, IL 60045
John N. Kapoor 1994-A.................................................. 1,550,453(3) 17.00%
Annuity Trust
225 E. Deerpath, Suite 250
Lake Forest,IL 60045
John P. Curran......................................................... 933,800(4) 10.24%
c/o Curran Partners, L.P.
237 Park Avenue
New York, N.Y. 10017
Aquilur Rahman......................................................... 915,540 10.04%
100 Corporate North, Suite 215
Bannockburn, IL 60015
James M. Hussey........................................................ 166,373(5) 1.82%
100 Corporate North, Suite 215
Bannockburn, IL 60015
Erick E. Hanson........................................................ 2,000 *
100 Corporate North, Suite 212
Bannockburn, IL 60015
Sander Flaum........................................................... 2,000 *
100 Corporate North, Suite 215
Bannockburn, IL 60015
William C. Govier...................................................... 233,134 2.56%
225 E. Deerpath, Suite 250
Lake Forest,IL 60045
Anatoly Dritschilo..................................................... 259,136 2.84%
100 Corporate North, Suite 215
Bannockburn, IL 60015
Mahendra Shah.......................................................... 187,106 2.05%
225 E. Deerpath, Suite 250
Lake Forest,IL 60045
Kevin M. Harris........................................................ 600 *
225 E. Deerpath, Suite 250
Lake Forest,IL 60045
Lewis Strauss.......................................................... 15,862 *
100 Corporate North, Suite 215
Bannockburn, IL 60015
All officers and a directors as group (9 persons)...................... 5,556,875 58.93%
- ------------------------
* Indicates ownership of less than 1%
31
(1) Based on 8,454,621 shares of Common Stock outstanding as of March 31, 1999,
plus 664,004 shares subject to warrant and options that are considered to be
beneficially owned by the persons listed. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission (the
"Commission") and generally includes voting or investment power with respect
to securities. Shares of Common Stock subject to options or warrants
exercisable or convertible within 60 days are deemed outstanding for
computing the percentage of the person or group holding such options or
warrants.
(2) Includes 620,059 shares held by John N. Kapoor Trust, dtd 9/20/89, of which
Dr. Kapoor is the sole trustee and sole beneficiary and 904,812 shares held
by EJ Financial/NEO Management, L.P. (the "Limited Partnership") of which
John N. Kapoor is the Managing General Partner. The address of the John N.
Kapoor Trust and the Limited Partnership is 225 East Deerpath, Suite 250,
Lake Forest, Illinois 60045. The John N. Kapoor Trust also owns warrants to
purchase 287,004 shares of common stock, which are assumed to have been
exercised for purposes of disclosing the ownership indicated. The amount
shown also includes 300,000 shares of common stock which are held by the
John N. Kapoor Charitable Trust of which Dr. Kapoor and his spouse are
co-trustees. Dr. Kapoor disclaims beneficial ownership of the shares held by
the charitable trust. The amount shown also includes 1,550,453 shares of
common stock which are owned by the John N. Kapoor 1994-A Annuity Trust of
which the sole trustee is Editha Kapoor, Dr. Kapoor's spouse. In addition,
the amount shown also includes 310,848 shares of common stock which are
owned by four trusts which have been established for Dr. Kapoor's children
of which the sole trustee is Dr. Kapoor's spouse, Editha Kapoor. Dr. Kapoor
does not have or share voting, investment or dispositive power with regards
to the shares owned by the Annuity Trust or the Children's Trusts and Dr.
Kapoor disclaims beneficial ownership of such shares.
(3) The sole trustee of the John N. Kapoor 1994-A Annuity Trust (the "Annuity
Trust") is Editha Kapoor, Dr. Kapoor's spouse. Mrs. Kapoor also serves as
trustee for four trusts which have been established for their children (the
"Children's Trusts") and which collectively own 310,848 shares and as co-
trustee with Dr. Kapoor of the Charitable Trust. The shares held by the
Childrens' Trusts and the Charitable Trust are not included in the reported
shares.
(4) Includes 659,000 shares of common stock which are held by Curran Partners,
L.P. of which John Curran is general partner, and 104,000 shares which are
issuable within 60 days pursuant to warrants issued by the Company.
(5) Includes 100,000 shares that may be acquired pursuant to vested options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November, 1997 the Company relocated its principal corporate office to
space subleased from Option Care, Inc. Mr. Hanson, a director of the Company,
was formerly President, CEO and a Director of Option Care. In addition, Dr.
Kapoor, Chairman of the Company's Board of Directors, is a director and
principal shareholder of Option Care. Dr. Kapoor holds 57.5% of the outstanding
shares of Option Care, Inc. The sublease was negotiated at arms length. The
Company expensed approximately $38,700 for rent under the Option Care sublease
during 1998.
On July 1, 1994, the Company entered into a Consulting Agreement with EJ
Financial Enterprises, Inc. ("EJ Financial"). The Consulting Agreement provides
that the Company will pay EJ Financial $125,000 per year (paid quarterly) for
certain business and financial services, including having certain officers of EJ
Financial serve as officers of the Company. Dr. John Kapoor, the Company's
Chairman of the Board is the president and a director of EJ Financial. Dr.
Mahendra Shah, Vice President of the Company, is also a Vice President of EJ
Financial. Mr. Kevin Harris, Chief Financial Officer of the Company, is Director
of Taxes and Planning of EJ Financial. Dr. Kapoor, Dr. Shah and Kevin Harris are
paid by EJ Financial. While the Company does not provide regular compensation to
Dr. Kapoor, Dr. Shah
32
or Mr. Harris, in 1999, a bonus of $20,000 was paid to Mr. Harris in recognition
of his assistance to the Company. They do not receive salaries from the Company.
These charges reflect the increased need for EJ Financial's services in
connection with the operation of NeoPharm as a publicly-held company. Unless
terminated by the parties, the management services agreement with EJ Financial
automatically renews in June of each year for a one year term.
On October 22, 1998, the Company established a $3,000,000 line of credit
(the "Line of Credit") with the John N. Kapoor Trust dtd 9/20/89 (the "Trust")
the sole trustee and sole beneficiary of which is John N. Kapoor, the Company's
Chairman. Interest on borrowings on the Line of Credit accrued at the rate of 2%
over the prime rate charged by the Northern Trust Bank. The accrued interest and
outstanding principal became due and payable at the earlier of October 1, 2001
or the date on which the Company completed a public or private offering of debt
or equity securities or a licensing agreement for its products. There were no
borrowings on the Line of Credit during 1998 and borrowings of $250,000 in 1999.
The Line of Credit was terminated in February 1999 as a result of the Company
entering in a license agreement with Pharmacia & Upjohn and the Line of Credit
was thereupon repaid in the amount of $250,000 of principal and $1,100 of
interest.
Dr. Aquilur Rahman, Chief Scientific Officer and a Director of the Company,
was formerly an associate professor of pathology and pharmacology at Georgetown
University. Dr. Anatoly Dritschilo, a Director of the Company, is currently
chairman of the Department of Radiation Medicine and Medical Director of the
Georgetown Medical Center in Washington, D.C. As a result of their respective
positions with Georgetown University both Dr. Rahman and Dr. Dritschilo entered
into agreements with Georgetown relating to the ownership of inventions and
other intellectual property developed while in Georgetown's employ. As part of
their agreements with Georgetown University, Dr. Rahman and Dritschilo have
advised the Company that Georgetown University will share with each of them
payments which Georgetown receives from the Company under the License Agreements
between the Company and Georgetown. While there were no royalty or other
payments to Georgetown University by the Company in 1998, as a result of the
Company entering into a License Agreement with Pharmacia & Upjohn in February
1999, a payment of $800,000 was recently made to Georgetown University and,
assuming regulatory approval is obtained in the future for the Company's LED and
LEP compounds, additional royalty payments, which could be substantial, would be
made by the Company to Georgetown in the future which the Company understands
Georgetown would then share with the foregoing named individuals.
In connection with the Company's initial public offering, the Company
adopted a policy whereby any further transaction between the Company and its
officers, directors, principal shareholders and any affiliates of the foregoing
persons will be on terms no less favorable to the Company than could reasonably
be obtained in arm's length transactions with independent third parties, and
that any such transactions also be approved by a majority of the Company's
disinterested outside directors.
33
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
3.1 Certificate of Incorporation, as amended filed with the Commission as Exhibit 3.1 to
the Company's Registration Statement on Form S-1 (File No. 33-90516), is
incorporated by reference.
3.2 Bylaws of the Registrant, as amended filed with the Commission as Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (File No. 33- 90516), is incorporated
by reference.
4.1 Specimen Common Stock Certificate filed with the Commission as Exhibit 4.1 to the
Company's Registration Statement on Form S-1 (File No. 33- 90516), is incorporated
by reference.
4.2 Specimen Warrant Certificate filed with the Commission as Exhibit 4.2 to the
Company's Registration Statement on Form S-1 (File No. 33-90516), is incorporated by
reference.
4.3 Form of Representative's Warrant Agreement between the Registrant and the
Representative, including form of Representative's Warrant filed with the Commission
as Exhibit 4.3 to the Company's Registration Statement on Form S-1 (File No.
33-90516), is incorporated by reference.
4.4 Form of Warrant Agreement between the Registrant, the Representative and Harris
Trust and Savings Bank, including form of Warrant filed with the Commission as
Exhibit 4.4 to the Company's Registration Statement on Form S-1 (File No. 33-90516),
is incorporated by reference.
10.1 1995 Stock Option Plan, with forms of Incentive and Nonstatutory Stock Option
Agreements filed with the Commission as Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (File No. 33-90516), is incorporated by reference.
10.2 1995 Director Option Plan, with form of Director Stock Option Agreement filed with
the Commission as Exhibit 10.2 to the Company's Registration Statement on Form S-1
(File No. 33-90516), is incorporated by reference.
10.3 Form of Director and Officer Indemnification Agreement. filed with the Commission as
Exhibit 10.3 to the Company's Registration Statement on Form S-1 (File No.
33-90516), is incorporated by reference.
10.4 Cooperative Research and Development Agreement between the Company and the National
Cancer Institute dated September 13, 1993 filed with the Commission as Exhibit 10.4
to the Company's Registration Statement on Form S-1 (File No. 33-90516), is
incorporated by reference.
10.5 License Agreement between the Company and Georgetown University dated July, 1990
filed with the Commission as Exhibit 10.5 to the Company's Registration Statement on
Form S-1 (File No. 33-90516), is incorporated by reference.
10.6 License Agreement between the Company and Georgetown University dated April 18, 1994
filed with the Commission as Exhibit 10.6 to the Company's Registration Statement on
Form S-1 (File No. 33-90516), is incorporated by reference.
10.7 Loan Repayment Note, dated June 18, 1990, by and between the Company and the John N.
Kapoor Trust filed with the Commission as Exhibit 10.7 to the Company's Registration
Statement on Form S-1 (File No. 33-90516), is incorporated by reference.
34
10.8 Consulting Agreement, dated July 1, 1994, by and between the Company and EJ
Financial Services, Inc. filed with the Commission as Exhibit 10.8 to the Company's
Registration Statement on Form S-1 (File No. 33-90516), is incorporated by
reference.
10.09 Harris Bank and Trust Company Loan Agreement dated March 16, 1995, as amended on
October 5, 1995. filed with the Commission as Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (File No. 33-90516), is incorporated by
reference.
10.10 Option Agreement, dated as of August 13, 1996, between the Company and John N.
Kapoor and Anatoly Dritschilo, incorporated by reference to Exhibit 10.11 of the
Company's report on Form 10-K for the fiscal year ended December 31, 1996.
*10.11 Cooperative Research and Development Agreement between the Company and the Food and
Drug Administration dated August 27, 1997.
*10.12 License Agreement between the Company and the National Institute of Health dated
September 23, 1997.
*10.13 Employment agreement between James M. Hussey and the Company dated March 16, 1998.
10.14 1998 Equity Incentive Plan filed with the Commission on October 30, 1998 as Exhibit
4.1 to the Company's Registration Statement on Form S-8 (File No. 333-66365), is
incorporated by reference.
*10.15 Collaboration Agreement by and between the Company and BioChem Therapeutic Inc.
dated May 12, 1997.
10.16 License Agreement by and between the Company and Pharmacia and Upjohn Company dated
February 19, 1999, filed with the Commission as Exhibit 10.1 of the Company's report
on Form 8-K (File No.33-09516), is incorporated by reference.
10.17 Stock Purchase Agreement by and between the Company and Pharmacia and Upjohn Company
dated February 19, 1999, filed with the Commission on as Exhibit 10.2 of the
Company's report on Form 8-K (File No. 33-09516), is incorporated by reference.
*10.18 Amendment No. 1 dated January 22, 1999 to the License Agreement between the Company
and Georgetown University dated January, 1990.
*10.19 Amendment No. 1 dated January 22, 1999 to the License Agreement between the Company
and Georgetown University dated April 18, 1994.
10.20 Line of Credit Agreement, dated as of September 30, 1998, by and between Registrant
and the John N. Kapoor Trust dated September 20, 1989 filed with the Commission on
November 16, 1998 as exhibit 10.15 to the Registrant's report on Form 10-Q (File No.
33-09516), is incorporated by reference.
*11.1 Calculation of Earnings Per Share.
*27 Financial Data Schedule
- ------------------------
* Filed Previously.
(b) Financial Statements
(1) FINANCIAL STATEMENTS
The financial statements filed as part of this Registration Statement are
listed in the Index to Financial Statements of the Company on Page 34.
35
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
NEOPHARM, INC.
By: /s/ JAMES M. HUSSEY
-----------------------------------------
James M. Hussey
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
ANNUAL REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ JOHN N. KAPOOR
- ------------------------------ Director, Chairman of the June 15, 1999
John N. Kapoor Board
/s/ AQUILUR RAHMAN
- ------------------------------ Director, Chief Scientific June 15, 1999
Aquilur Rahman Officer
Director, President, and
/s/ JAMES M. HUSSEY Chief Executive Officer
- ------------------------------ (Principal Executive June 15, 1999
James M. Hussey Officer)
/s/ ERICK E. HANSON
- ------------------------------ Director June 15, 1999
Erick E. Hanson
Chief Financial Officer
/s/ KEVIN M. HARRIS Principal Financial
- ------------------------------ Officer and Principal June 15, 1999
Kevin M. Harris Accounting Officer)
/s/ SANDER FLAUM
- ------------------------------ Director June 15, 1999
Sander Flaum
36
INDEX TO FINANCIAL STATEMENTS
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
PAGE
----
Report of Arthur Andersen LLP, Independent Public
Accountants............................................... 38
Balance Sheets.............................................. 39
Statements of Operations.................................... 40
Statements of Stockholders' Equity (Deficit)................ 41
Statements of Cash Flows.................................... 44
Notes to Financial Statements............................... 46
37
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of NeoPharm, Inc.:
We have audited the accompanying balance sheets of NeoPharm, Inc. (a
Delaware corporation in the development stage) as of December 31, 1997 and 1998,
and the related statements of operations, stockholders' equity (deficit) and
cash flows for each of the three years in the period ended December 31, 1998 and
for the period from inception (June 15, 1990) to December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NeoPharm, Inc. as of
December 31, 1997 and 1998, and the results of its operations and cash flows for
each of the three years in the period ended December 31, 1998 and for the period
from inception (June 15, 1990) to December 31, 1998, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 22, 1999
38
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
BALANCE SHEETS
DECEMBER 31,
----------------------
1997 1998
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents........................................ $2,776,697 $ 40,681
Notes receivable--shareholder.................................... 52,634 --
Deferred taxes (Note 5).......................................... -- 1,640,000
---------- ----------
Total current assets........................................... 2,829,331 1,680,681
Equipment and furniture:
Equipment........................................................ 32,492 82,690
Furniture........................................................ 26,231 78,877
Less accumulated depreciation.................................... (33,555) (60,700)
---------- ----------
Total equipment and furniture, net............................. 25,168 100,867
---------- ----------
Total assets................................................... $2,854,499 $1,781,548
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Obligations under research agreements............................ 150,000 260,000
Accounts payable................................................. 275,427 275,926
Accrued compensation............................................. 55,000 67,500
---------- ----------
Total current liabilities...................................... 480,427 603,426
---------- ----------
Commitments and contingencies (Notes 6 and 7)
Stockholders' equity:
Common stock, $.0002145 par value; 15,000,000 shares authorized,
8,195,810 and 8,341,779 shares issued and outstanding as of
December 31, 1997 and 1998, respectively....................... 1,758 1,789
Additional paid-in capital....................................... 6,259,636 6,637,378
Deficit accumulated during the development stage................. (3,887,322) (5,461,045)
---------- ----------
Total stockholders' equity..................................... 2,374,072 1,178,122
---------- ----------
Total liabilities and stockholders' equity..................... $2,854,499 $1,781,548
---------- ----------
---------- ----------
The accompanying notes to financial statements are an integral part of these
balance sheets.
39
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF OPERATIONS
INCEPTION
(JUNE 15,
FOR THE YEARS ENDED 1990)
DECEMBER 31, THROUGH
------------------------------------------- DECEMBER 31,
1996 1997 1998 1998
------------- ------------- ------------- --------------
Revenues............................................ $ -- $ 550,000 $ -- $ 550,000
Expenses:
Research and development............................ 728,773 903,088 1,255,855 3,871,074
General and administrative.......................... 749,996 1,176,405 1,519,138 3,969,621
Related party expenses (Note 8)..................... 577,786 702,685 527,482 4,083,163
Total expenses.................................... 2,056,555 2,782,178 3,302,475 11,923,858
Loss from operations.......................... (2,056,555) (2,232,178) (3,302,475) (11,373,858)
Interest income..................................... 238,275 210,501 88,752 537,528
Interest expense.................................... (47,365) -- -- (735,606)
Interest income (expense)--net.................. 190,910 210,501 88,752 (198,078)
Loss before income taxes............................ $ (1,865,645) $ (2,021,677) $ (3,213,723) $(11,571,936)
Income taxes........................................ -- -- (1,640,000) (1,640,000)
Net income/(loss)................................... $ (1,865,645) $ (2,021,677) $ (1,573,723) $ (9,931,936)
Net income/(loss) per share
Basic............................................. $ (.24) $ (.25) $ (.19)
Diluted........................................... $ (.24) $ (.25) $ (.19)
Weighted average shares outstanding
Basic............................................. 7,803,412 8,146,746 8,213,980
Diluted........................................... 8,312,378 8,939,143 8,757,187
The accompanying notes to financial statements are an integral part of these
statements.
40
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (JUNE 15, 1990)
THROUGH DECEMBER 31, 1998
DEFICIT
COMMON STOCK ACCUMULATED TOTAL
--------------------- ADDITIONAL DURING STOCKHOLDERS'
PAR PAID-IN DEVELOPMENT EQUITY
SHARES VALUE CAPITAL STAGE (DEFICIT)
---------- --------- ------------ ------------- -------------
Balance at inception, June 15, 1990.................. -- $ -- $ -- $ -- $ --
Initial issuance of stock for cash on June 21, 1990
($.0002145 per share).............................. 3,263,888 700 -- -- 700
Services contributed to Company by related party..... -- -- 13,542 -- 13,542
Net loss............................................. -- -- -- (188,441) (188,441)
---------- --------- ------------ ------------- -------------
Balance at December 31, 1990......................... 3,263,888 700 13,542 (188,441) (174,199)
---------- --------- ------------ ------------- -------------
Services contributed to Company by related party..... -- -- 25,000 -- 25,000
Net loss............................................. -- -- -- (468,771) (468,771)
---------- --------- ------------ ------------- -------------
Balance at December 31, 1991......................... 3,263,888 700 38,542 (657,212) (617,970)
---------- --------- ------------ ------------- -------------
Services contributed to Company by related party..... -- -- 25,000 -- 25,000
Net loss............................................. -- -- -- (567,962) (567,962)
---------- --------- ------------ ------------- -------------
Balance at December 31, 1992......................... 3,263,888 700 63,542 (1,225,174) (1,160,932)
---------- --------- ------------ ------------- -------------
Services contributed to Company by related party..... -- -- 25,000 -- 25,000
Net loss............................................. -- -- -- (492,423) (492,423)
---------- --------- ------------ ------------- -------------
Balance at December 31, 1993......................... 3,263,888 700 88,542 (1,717,597) (1,628,355)
---------- --------- ------------ ------------- -------------
Issuance of stock pursuant to exercise of stock
options............................................ 1,398,810 300 7,449 -- 7,749
Services contributed to Company by related party..... -- -- 12,500 -- 12,500
Net loss............................................. -- -- -- (1,083,667) (1,083,667)
---------- --------- ------------ ------------- -------------
Balance at December 31, 1994......................... 4,662,698 1,000 108,491 (2,801,264) (2,691,773)
---------- --------- ------------ ------------- -------------
The accompanying notes to financial statements are an integral part of these
statements.
41
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
FOR THE PERIOD FROM INCEPTION (JUNE 15, 1990)
THROUGH DECEMBER 31, 1998
DEFICIT
COMMON STOCK ACCUMULATED TOTAL
--------------------- ADDITIONAL DURING STOCKHOLDERS'
PAR PAID-IN DEVELOPMENT EQUITY
SHARES VALUE CAPITAL STAGE (DEFICIT)
---------- --------- ------------ ------------- ------------
Balance at December 31, 1994......................... 4,662,698 1,000 108,491 (2,801,264) (2,691,773)
---------- --------- ------------ ------------- ------------
Issuance of stock pursuant to exercise of stock
options............................................ 37,302 8 -- -- 8
Net loss............................................. -- -- -- (1,669,627) (1,669,627)
Reclassification of the deficit accumulated as the
result of the termination of the Company's S
Corporation status................................. -- -- (4,470,891) 4,470,891 --
---------- --------- ------------ ------------- ------------
Balance at December 31, 1995......................... 4,700,000 1,008 (4,362,400) -- (4,361,392)
---------- --------- ------------ ------------- ------------
Conversion of interest and loan payable to principal
stockholder into common stock ($3.525 per share)... 574,008 123 2,023,262 -- 2,023,385
Issuance of stock pursuant to the Company's public
offering net of costs incurred..................... 2,772,260 595 7,896,521 -- 7,897,116
Issuance of stock pursuant to exercise of stock
options............................................ 84,000 18 259,304 -- 259,322
Net Loss............................................. -- -- -- (1,865,645) (1,865,645)
Issuance of options to non-employees................. -- -- 73,391 -- 73,391
---------- --------- ------------ ------------- ------------
Balance at December 31, 1996......................... 8,130,268 $ 1,744 $ 5,890,078 $ (1,865,645) $4,026,177
---------- --------- ------------ ------------- ------------
The accompanying notes to financial statements are an integral part of these
statements.
42
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
FOR THE PERIOD FROM INCEPTION (JUNE 15, 1990)
THROUGH DECEMBER 31, 1998
DEFICIT
COMMON STOCK ACCUMULATED TOTAL
--------------------- ADDITIONAL DURING STOCKHOLDERS'
PAR PAID-IN DEVELOPMENT EQUITY
SHARES VALUE CAPITAL STAGE (DEFICIT)
---------- --------- ------------ ------------- -------------
Balance at December 31, 1996......................... 8,130,268 $ 1,744 $ 5,890,078 $ (1,865,645) $ 4,026,177
---------- --------- ------------ ------------- -------------
Issuance of stock pursuant to exercise of stock
options............................................ 55,542 12 175,166 -- 175,178
Issuance of stock pursuant to restricted stock
grants............................................. 10,000 2 48,748 -- 48,750
Net Loss............................................. -- -- -- (2,021,677) (2,021,677)
Issuance of options to non-employees................. -- -- 145,644 -- 145,644
---------- --------- ------------ ------------- -------------
Balance at December 31, 1997......................... 8,195,810 $ 1,758 $ 6,259,636 $ (3,887,322) $ 2,374,072
---------- --------- ------------ ------------- -------------
Issuance of stock pursuant to exercise of stock
options............................................ 22,500 5 82,339 -- 82,344
Issuance of stock Pursuant to Restricted stock
Grants............................................. 74,235 16 263,109 -- 263,125
Exercise of warrants................................. 49,234 10 (10) -- --
Net loss............................................. -- -- -- (1,573,723) (1,573,723)
Issuance of options to non-employees................. -- -- 32,304 -- 32,304
---------- --------- ------------ ------------- -------------
Balance at December 31, 1998......................... 8,341,779 $ 1,789 $ 6,637,378 $ (5,461,045) $ 1,178,122
---------- --------- ------------ ------------- -------------
---------- --------- ------------ ------------- -------------
The accompanying notes to financial statements are an integral part of these
statements.
43
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
INCEPTION
(JUNE 15,
FOR THE YEARS ENDED 1990)
DECEMBER 31, THROUGH
------------------------------------------- DECEMBER 31,
1996 1997 1998 1998
------------- ------------- ------------- --------------
Cash flows used in operating activities:
Net loss............................................ $ (1,865,645) $ (2,021,677) $ (1,573,723) $ (9,931,936)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization....................... 6,279 6,727 27,145 72,499
Gain on disposal of equipment....................... -- -- -- (408)
Deferred income taxes............................... -- -- (1,640,000) (1,640,000)
Services contributed (non-cash) by related party.... -- -- -- 101,042
Interest payable to principal shareholder converted
to stock.......................................... 523,385 -- -- 523,385
Compensation expense from non-employee stock
option............................................ 73,391 145,644 32,304 251,339
Restricted stock grants in lieu of cash
compensation...................................... -- 48,750 263,125 311,875
(Increase)Decrease in other assets.................. -- (52,634) 52,634 (11,100)
(Decrease)Increase accounts payable and accrued
liabilities....................................... (883,600) 14,396 122,999 603,426
------------- ------------- ------------- --------------
Net cash and cash equivalents used in
operating activities........................ (2,146,190) (1,858,794) (2,715,516) (9,719,878)
------------- ------------- ------------- --------------
Cash flows used in investing activities:
Purchase of equipment and furniture................. (10,663) (18,728) (102,844) (162,669)
Proceeds from disposal of equipment................. -- -- -- 810
------------- ------------- ------------- --------------
Net cash and cash equivalents used in investing
activities........................................ (10,663) (18,728) (102,844) (161,859)
------------- ------------- ------------- --------------
Cash flows from financing activities:
Proceeds from loan payable to principal
stockholder....................................... -- -- -- 1,500,000
Advance on line of credit........................... 107,000 -- -- 2,114,652
Reduction in line of credit......................... (2,114,652) -- -- (2,114,652)
Costs incurred related to the initial public
offering.......................................... (201,885) -- -- (688,321)
Proceeds from initial public offering............... 8,585,438 -- -- 8,585,438
Proceeds from issuance of common stock.............. 259,322 175,178 82,344 525,301
Cashless exercise of warrants, charge............... -- -- (484,955) (484,955)
Cashless exercise of warrants, proceeds............. -- -- 484,955 484,955
------------- ------------- ------------- --------------
Net cash and cash equivalents provided by
financing activities........................ 6,635,223 175,178 82,344 9,922,418
------------- ------------- ------------- --------------
Net increase (decrease) in cash..................... 4,478,370 (1,702,344) (2,736,016) 40,681
Cash and cash equivalents, beginning of period...... 671 4,479,041 2,776,697 --
------------- ------------- ------------- --------------
Cash and cash equivalents, end of period............ $ 4,479,041 $ 2,776,697 $ 40,681 $ 40,681
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
Supplemental disclosure of cash paid for:
Interest............................................ $ 113,846 $ 84,585 $ -- $ 212,222
Income taxes........................................ -- -- -- --
The accompanying notes to financial statements are an integral part of these
statements.
44
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
(CONTINUED)
Supplemental disclosure of non-cash transactions:
In 1996, the Company converted the $2,023,385 loan and $523,385 of accrued
interest expense owed to the principal shareholder into 574,008 shares of common
stock and 143,502 warrants to purchase common stock. The loan and accrued
interest were converted at the initial public offering price.
In 1997, two consultants to the Company each received 5,000 shares of
restricted common stock as compensation. These grants were valued at the closing
price of the traded common shares on the date of the grants.
In 1998, the Company granted 69,235 shares of restricted common stock to
employees as compensation and recorded compensation expense of $222,500. The
Company also donated a total of 5,000 shares of restricted common stock to two
charitable organizations on behalf of a consultant who provided services to the
Company and recorded an administrative expense of $40,625. Additionally, holders
of the Company's Representatives warrants that were issued as part of the
initial public offering exercised on a cashless basis 49,000 of the 135,000
outstanding warrants. Each warrant entitles the holder to two shares of common
stock for an exercise price of $9.80.
The accompanying notes to financial statements are an integral part of these
statements.
45
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND BUSINESS:
NeoPharm, Inc. (the "Company"), a Delaware corporation in the development
stage, was incorporated on June 15, 1990, under the name of OncoMed, Inc. In
March 1995, the Company changed its name to NeoPharm, Inc. The Company is
developing products to provide therapeutic and prognostic benefits in the
treatment of various forms of cancer. The Company has one product which is the
subject of a Cooperative Research and Development Agreement ("CRADA") with the
National Cancer Institute ("NCI"), a unit of the National Institute of Health
("NIH") and a product, licensed from the NIH, that is the subject of a CRADA
with the United States Food and Drug Administration ("FDA"). The Company also
has rights to products developed under license and sponsored research agreements
with Georgetown University ("Georgetown").
The Company is in the development stage that requires substantial capital
for research, product development and market development activities. The Company
has not yet initiated marketing of a commercial product. The Company has filed
one New Drug Application ("NDA") with the FDA for BUdR (Broxuridine) in a
prognostic application. This and other proposed products will require clinical
testing, regulatory approval and substantial additional investment prior to
commercialization. The future success of the Company is dependent on its ability
to obtain additional working capital to develop, manufacture and market its
products and, ultimately, upon its ability to attain future profitable
operations. There can be no assurance that the Company will be able to obtain
necessary financing or regulatory approvals to be able to successfully develop,
manufacture and market its products, or attain successful future operations.
Insufficient funds could require the Company to delay, scale back or eliminate
one or more of its research and development programs or to license third parties
to commercialize products or technologies that the Company would otherwise seek
to develop without relinquishing its rights thereto. Accordingly, the
predictability of the Company's future success is uncertain.
The Company's rights to its products are subject to the terms of its
agreements with NCI, NIH, FDA and Georgetown. Termination of any, or all, of
these agreements would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, uncertainty exists
as to the Company's ability to protect its rights to patents and its proprietary
information. There can also be no assurance that research and discoveries by
others will not render some or all of the Company's programs or products
noncompetitive or obsolete. Nor can there be any assurance that unforeseen
problems will not develop with the Company's technologies or applications, or
that the Company will be able to address successfully technological challenges
it encounters in its research and development programs. Although the Company
plans to obtain product liability insurance, it currently does not have any nor
is there any assurance that it will be able to attain or maintain such insurance
on acceptable terms or with adequate coverage against potential liabilities.
2. SIGNIFICANT ACCOUNTING POLICIES:
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred. These costs
include, among other things, consulting fees and costs reimbursed to Georgetown
pursuant to the agreements as described in Note 6. Payments related to the
acquisition of technology rights, for which development work is in process, are
expensed and considered a component of research and development costs. The
Company also allocates
46
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
indirect costs, consisting primarily of operational costs for administering
research and development activities, to research and development expenses.
REVENUE RECOGNITION--LICENSE FEES
The Company has licensed certain of its technologies to third parties in
return for up-front license fees and subsequent milestone-based payments. The
Company's policy is to recognize revenue upon receipt of the license fees or
milestone payments provided the payments are non-refundable and are not subject
to material future performance obligations. All payments received to-date have
been non-refundable. Further, the Company has no material obligations to provide
future services or financial support under the terms of the license agreements.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
EQUIPMENT AND FURNITURE
Equipment and furniture are recorded at cost and are depreciated using an
accelerated method over the estimated useful economic lives of the assets
involved. The estimated useful lives employed in computing depreciation are five
years for computer equipment and seven years for furniture. Maintenance and
repairs that do not extend the life of assets are charged to expense when
incurred.
INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, Earnings Per Share, which establishes standards for computing
and presenting earnings per share for publicly held common stock or potential
common stock. Effective December 31, 1997, the Company adopted the principles of
Statement No. 128 in calculating and presenting its earnings per share. The
computation of net earnings (loss) per share is based on the weighted average
common shares outstanding during the periods, and includes, when dilutive,
common stock equivalents consisting of warrants and stock options.
47
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The following table sets forth the computation of the basic and diluted loss
per share from continuing operations:
1996 1997 1998
----------- ----------- -----------
Numerator:
Net loss from continuing operations... ($1,865,645) ($2,021,677) ($1,573,723)
----------- ----------- -----------
----------- ----------- -----------
Denominator:
Denominator for basic loss per share
Weighted average shares............... 7,803,412 8,146,746 8,213,980
Effect of dilutive securities:
Stock options....................... 508,966 445,742 467,379
Warrant exercise.................... 0 346,655 75,829
----------- ----------- -----------
Dilutive potential common shares........ 508,966 792,397 543,207
Denominator for diluted loss per
share-
Weighted average shares and assumed
Conversions........................... 8,312,378 8,939,143 8,757,187
----------- ----------- -----------
----------- ----------- -----------
Basic (loss) per share................ $ (0.24) $ (0.25) $ (0.19)
----------- ----------- -----------
----------- ----------- -----------
Diluted (loss) per share.............. $ (0.24) $ (0.25) $ (0.19)
----------- ----------- -----------
----------- ----------- -----------
Options to purchase 99,925, 255,962 and 242,521 shares of common stock were
outstanding as of December 31, 1996, 1997 and 1998, respectively but were not
included in the computation of diluted earnings per share because the options
exercise prices were greater than the average market price of the common shares
and, therefore, would be antidilutive. The Company's warrants first became
exercisable on January 25, 1997. The underlying Representatives warrants to
purchase 135,000 shares of common stock were not included in the computation of
diluted earnings per share because the warrant exercise price was greater than
the average market price of the common shares and, therefore would be
antidilutive. For additional disclosure regarding the stock options and
warrants, see Notes 4 and 9.
MANAGEMENT'S USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the reporting
period. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). As provided by SFAS 123, the Company has elected to continue to account
for its stock-based compensation programs according to the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees".
48
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Accordingly, compensation expense has been recognized to the extent of employee
or director services rendered based on the intrinsic value of compensatory
options or shares granted under the plans. The Company has adopted the
disclosure provisions required by SFAS 123 (see "Note 4--Stock Options" in Notes
to Financial Statements).
RECLASSIFICATION
Certain amounts in previously issued financial statements have been
reclassified to conform to 1998 classifications.
SEGMENT REPORTING
The Company currently operates under a single segment.
3. DEBT:
On June 18, 1990, the Company executed a loan agreement with Dr. John N.
Kapoor, a principal stockholder. The loan agreement allowed the Company to
borrow up to $1,500,000. Funds borrowed under the agreement incurred interest at
the lesser of 10% or the prime rate as determined by the Northern Trust Bank.
The Company had borrowed funds up to the maximum of $1,500,000 at December 31,
1995.
Interest on borrowed funds accrued until the second anniversary of the
funding. Thereafter, principal and interest were to be repaid in 12 quarterly
installments. Any principal payment not paid within 5 days of the date when due
was subject to additional interest of 15% per annum.
From June 1990 through April 1994, the Company financed its operations by
borrowing under this loan agreement. No payments of interest or principal were
made during this period. In January of 1996, in accordance with the agreement
between the principal stockholder and the Company, with the completion of the
initial public offering, the principal stockholder converted the outstanding
loan balance, plus accrued interest through November 30, 1995, into shares of
the Company's common stock and common stock purchase warrants at a per share
conversion price equal to the offering price, $3.525 per share, $.10 per
warrant. The Company issued 574,008 shares and 143,502 warrants.
During 1995 and early 1996, the Company maintained a line of credit with
Harris Bank with maximum borrowings of $2,500,000. The line of credit was
personally guaranteed by the principal stockholder. In early 1996, the Company
paid all outstanding balances and closed the line of credit.
On October 22,1998, the Company established a $3,000,000 line of credit with
the John N. Kapoor Trust dtd. 9/20/89, an entity affiliated with the Company's
Chairman. Interest on borrowings on the line of credit will accrue at the rate
of 2% over the prime rate of the Northern Trust Bank. The accrued interest and
outstanding principal becomes due and payable the earlier of October 1, 2001 or
the date upon which the Company completes a public or private offering of debt
or equity securities or a licensing agreement for its products. There were no
borrowings on this line of credit at December 31, 1998.
49
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
4. STOCK OPTIONS
OPTION AGREEMENTS
The Company adopted a stock plan in 1990. The Company granted options under
the plan to purchase 1,460,978 shares. The options have an exercise price of
$.0002145 per share with the exception of options to purchase 248,676 shares
issued in December 1993, which have an exercise price of $.03217 per share.
Effective January 1995, this plan has been terminated. No additional grants will
be made under this plan.
On January 25, 1995, the board of directors approved the NeoPharm, Inc. 1995
Stock Option Plan (the "Plan"), which provided for the grant of up to 900,000
options to acquire the Company's common stock. The board of directors amended
the Plan on May 16, 1997, increasing the number of options to 1,400,000. The
option prices shall be not less than 85 percent of the fair market value of the
stock as determined by the Administrator pursuant to the Plan. The board also
approved the NeoPharm, Inc. 1995 Director Option Plan, which provides for the
grant of up to 100,000 options to acquire the Company's common stock. The option
prices shall be the fair market value on the date of grant. Vesting under these
plans range from 0 to 4 years and all options expire after 10 years. Effective
July 23, 1998 the 1995 Stock Option Plan and the 1995 Directors Option Plan were
suspended. No additional grants will be made under either plan.
On July 23, 1998, the board of directors approved the NeoPharm, Inc. 1998
Equity Incentive Plan (the "1998 Plan"), which provides for the grant of options
to acquire up to 2,000,000 shares of the Company's common stock. Additionally,
250,000 of the 2,000,000 shares can be used for restricted stock grants to
employees and consultants. The option prices shall be not less than 85% of the
fair market value of the stock as determined by the Administrator pursuant to
the 1998 Plan. The consideration paid for shares of restricted stock shall not
be less that the par value of the Company's common stock.
The Company accounts for the plans under APB Opinion No. 25, under which no
compensation cost has been recognized for stock option awards to employees as
all options have been granted with an exercise price equal to the fair market
value on the date of grant. Had compensation cost for such stock option awards
under the plans been determined consistent with FASB Statement No. 123, the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts:
1996 1997 1998
----------- ----------- -----------
Net Income/(Loss): As Reported (1,865,645) (2,021,677) (1,573,723)
Pro Forma (2,061,099) (2,379,751) (1,827,864)
Primary EPS: As Reported (.24) (.25) (.19)
Pro Forma (.26) (.29) (.22)
Fully Diluted EPS: As Reported (.24) (.25) (.19)
Pro Forma (.26) (.29) (.22)
Included in the grants described above are options to purchase 413,824
shares granted to non-employees. The Company accounts for these options using a
fair value method with the fair value of these options determined at the date of
grant. From inception through December 31, 1995 the Company deemed the fair
value of these options on the date of grant to be nominal, and no expense was
recorded. For the year ended December 31, 1996, 1997 and 1998, the fair value
was calculated using the Black-Scholes pricing model, and an expense of $73,391,
$145,644 and $32,304 was recorded respectively.
50
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
4. STOCK OPTIONS (CONTINUED)
A summary of stock option activity is as follows:
OPTIONS OUTSTANDING
-------------------------------------
NUMBER OF EXERCISE PRICE
GRANT/EXERCISE DATE SHARES PER SHARE
- -------------------------------------------------------------------------- ----------- ------------------------
Grants:
1990.................................................................... 1,184,324 $ .0002145
1992.................................................................... 27,978 .0002145
1993.................................................................... 248,676 .03217
----------- ------------------------
Balance at December 31, 1993.............................................. 1,460,978 $ .0002145-$.03217
----------- ------------------------
Exercises:
November 17, 1994--issued Jan. 1995..................................... (1,398,810) $ .0002145-$.03217
November 17, 1994--issued Jan. 1995..................................... (37,302) $ .0002145
----------- ------------------------
Balance at December 31, 1994.............................................. 24,866 $ .03217
----------- ------------------------
Grants:
February, 1995.......................................................... 308,000 $ 3.50
May, 1995............................................................... 10,000 3.50
September, 1995......................................................... 100,000 3.50
November, 1995.......................................................... 100,000 3.50
----------- ------------------------
Balance at December 31, 1995.............................................. 542,866 $ .03217-$3.50
----------- ------------------------
Grants:
May, 1996............................................................... 30,000 $ 6.00
August, 1996............................................................ 260,000 $ 7.00
Exercises:
June, 1996.............................................................. (19,000) $ 3.50
July, 1996.............................................................. (43,000) 3.50
August, 1996............................................................ (10,000) 3.50
September, 1996......................................................... (2,000) 3.50
December, 1996.......................................................... (10,000) .03217
----------- ------------------------
Balance at December 31, 1996.............................................. 748,866 $ .03217,3.50,6.00,7.00
----------- ------------------------
Grants:
January, 1997........................................................... 1,000 $ 7.38
April, 1997............................................................. 2,000 7.00
May, 1997............................................................... 5,000 4.88
August, 1997............................................................ 5,000 4.94
Exercises:
June, 1997.............................................................. (7,000) $ 3.50
July, 1997.............................................................. (15,000) 3.50
October, 1997........................................................... (9,042) 3.50, .03217
November, 1997.......................................................... (1,500) 3.50
December, 1997.......................................................... (23,000) 3.50
Cancellations: July 1997.................................................. (15,000) 7.00
----------- ------------------------
Balance at December 31, 1997.............................................. 691,324 $ .03217--7.38
----------- ------------------------
51
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
4. STOCK OPTIONS (CONTINUED)
OPTIONS OUTSTANDING
-------------------------------------
NUMBER OF EXERCISE PRICE
GRANT/EXERCISE DATE SHARES PER SHARE
- -------------------------------------------------------------------------- ----------- ------------------------
Grants:
January, 1998........................................................... 400,000 $ 4.75
April, 1998............................................................. 20,000 3.75
July, 1998.............................................................. 37,000 3.875
September, 1998......................................................... 100,000 2.25
Exercises:
December, 1998.......................................................... (22,500) $ 3.50-4.9375
Cancellations:
April, 1998............................................................. (50,000) 7.00
----------- ------------------------
Balance at December 31, 1998.............................................. 1,175,824 $ .03217--$7.00
----------- ------------------------
----------- ------------------------
Options eligible for exercise on December 31, 1993 included 1,212,302
options at an exercise price of $.0002145 and 248,676 options at an exercise
price of $.03217. Options eligible for exercise on December 31, 1994 included
24,866 options at an exercise price of $.03217. Options eligible for exercise on
December 31, 1995 included 24,866 options at an exercise price of $.03217 and
518,000 options at an exercise price of $3.50. Options eligible for exercise on
December 31, 1996 included 14,866 at an exercise price of $.03217 and 444,000
options at an exercise price of $3.50. Options eligible for exercise on December
31, 1997 included 9,324 at an exercise price of $.03217, 394,000 options at an
exercise price of $3.50, 15,000 options at an exercise price of $6.00, 124,500
options at an exercise price of $7.00, and 1000 options at an exercise price of
$7.375. Options eligible for exercise on December 31, 1998 include 9,324 options
at an exercise price of $0.03217, 374,000 options at an exercise price of $3.50,
2500 options at an exercise price of $4,875, 30,000 options at an exercise price
of $6.00, 197,000 options at an exercise price of $7.00 and 1000 options at an
exercise price of $7.375.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for the option grants in 1996, 1997 and 1998 respectively:
risk-free interest rates of 6.45 percent, 6.58 percent and 5.50 percent;
expected dividend yields of 0.00 percent; expected life of 5 years; expected
volatility of 76.21 percent, 79.93 percent and 89.82 percent.
5. FEDERAL INCOME TAXES:
From inception through October 11, 1995, the Company operated as an S
Corporation for income tax purposes. Losses incurred during this period are
reported on the stockholders' tax return, and are not available to the Company
as a net operating loss carryforward.
On October 11, 1995, the Company voluntarily terminated its S Corporation
election. Since that time, losses incurred represent net operating loss
carryforwards which can be used to offset future taxable income. Total net
operating loss carryforwards were approximately $5,330,000 and approximately
52
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
5. FEDERAL INCOME TAXES: (CONTINUED)
$8,582,000 as of December 31, 1997 and 1998, respectively. The net operating
loss carry forwards will expire as follows:
YEAR AMOUNT
- -------------------------------------------------------------------------------- ------------
2010............................................................................ $ 191,000
2011............................................................................ 3,188,000
2012............................................................................ 1,951,000
2013............................................................................ 3,252,000
------------
$ 8,582,000
------------
------------
Additionally, the Company has general business credit carry forwards of
approximately $128,000 which expire in the years 2011 through 2013.
In accordance with the provisions of Statement of Financial Accounting
Standard No. 109, a valuation allowance has been established on the net
operating loss tax asset due to the uncertainty of its realization as follows:
DECEMBER 31,
-------------------------------------------
1996 1997 1998
------------- ------------- -------------
Deferred tax asset............................... $ 1,401,000 $ 2,260,000 $ 3,560,000
Valuation allowance.............................. (1,401,000) (2,260,000) (1,920,000)
------------- ------------- -------------
Deferred tax asset (net)......................... $ 0 $ 0 $ 1,640,000
------------- ------------- -------------
------------- ------------- -------------
Prior to year-end, the Company had engaged in substantive discussions with
Phamacia & Upjohn regarding the licensing of certain of its technologies (see
Note 10). As a result, at December 31, 1998, it was more likely than not a
portion of the deferred tax asset would be realized. The valuation allowance was
reduced accordingly and the tax benefit related to $1,640,000 of the general
business credits and net operating loss carry forwards was recognized as of
December 31, 1998.
6. COMMITMENTS:
LICENSE AND RESEARCH AGREEMENTS
From time to time the Company enters into license and research agreements
with third parties. At December 31, 1998, the Company had five agreements in
effect as described below.
NATIONAL CANCER INSTITUTE
The Company entered into a CRADA with NCI. Pursuant to the agreement, the
Company committed to commercialize certain products received from NCI. The
Company agreed to provide product to support NCI sponsored clinical trials and
use its best efforts to file an NDA. NCI agreed to collaborate on the clinical
development of the products and to provide access to the data necessary to
obtain pharmaceutical regulatory approval.
53
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
6. COMMITMENTS: (CONTINUED)
During the years ended December 31, 1998, 1997 and 1996, the Company paid
approximately $0, $102,000 and $0, respectively, for product used in clinical
trials. The Company is committed to pay NCI $120,000 per year for reasonable and
necessary expenses incurred by NCI in carrying out NCI's responsibilities under
the CRADA. During 1998, 1997 and 1996, the Company expensed, as research and
development costs, the $120,000 payable to NCI for these expenses. NCI was
required to provide the Company an accounting of the use of funds. Any amounts
not expended at the end of the agreement were refundable to the Company. All
amounts were expended pursuant to the CRADA. Included as an obligation under
research agreements in the accompanying balance sheets is an accrual for
$120,000 of expenses due to NCI at December 31, 1997.
The CRADA expired on September 13, 1998. The Company then entered into a
Clinical Trials Agreement ("CTA") with the NCI. The CTA covers the same research
that were the subject of the NCI CRADA. The CTA provides for collaboration on
the clinical development of the products and access to clinical data necessary
for future regulatory approval. The Company has no further financial obligations
to NCI other than an agreement to provide supplies of test product for the
covered clinical protocols.
U.S. FOOD AND DRUG ADMINISTRATION
In 1997 the Company entered into a CRADA with the FDA. Pursuant to the
CRADA, the Company committed to commercialize the IL-13 chimeric protein product
which it licensed from the NIH and FDA. The FDA agreed to collaborate on the
clinical development and commercialization of the licensed product.
The Company is committed to pay $100,000 per year for the reasonable and
necessary expenses incurred by the FDA in carrying out the FDA's
responsibilities under the CRADA. The CRADA has a term of four years. During
1998 and 1997, the Company expensed approximately $100,000 per year as research
and development costs. The CRADA will expire on August 27, 2001. Included as
obligations under research agreements in the accompanying balance sheets are
accruals for $134,000 and $20,000 due the FDA at December 31, 1998 and December
31, 1997, respectively.
NATIONAL INSTITUTE OF HEALTH
The Company entered into an exclusive worldwide licensing agreement with the
NIH and the FDA to develop and commercialize an IL-13 chimeric protein therapy.
The agreement required a $75,000 non-refundable license issue payment and
minimum annual royalty payments of $10,000 which increases to $25,000 after the
first commercial sale. The agreement further provided for milestone payments and
royalties based on future product sales. The Company is required to pay the
costs of filing and maintaining product patents on the licensed products. The
agreement shall extend to the expiration of the last to expire of the patents on
the licensed products, if not terminated earlier. The agreement may be
terminated by mutual consent of NIH and the Company. Either party may terminate
if the other party breaches a material term or condition and such breach is not
cured within a certain period of time. Also, either Party may unilaterally
terminate by giving advanced notice. During 1998 and 1997, the Company expensed
approximately $117,000 and $10,000 respectively on research and development
costs. Included as obligations under research agreements in the accompanying
balance sheets is an accrual for $10,000 of minimum royalties due to NIH at
December 31, 1998 and December 31, 1997.
54
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
6. COMMITMENTS: (CONTINUED)
BIOCHEM PHARMA
The Company entered into a collaboration agreement with BioChem
Therapeutics, Inc., the wholly owned subsidiary of BioChem Pharma, under which
BioChem will have an exclusive license to develop, market and distribute
broxuridine in Canada. Under the terms of the collaboration agreement between
BioChem and NeoPharm, a nonrefundable $550,000 up-front payment was paid upon
execution of the collaboration agreement. In addition, the collaboration
agreement provides for milestones which, if the conditions were to be achieved,
would result in payment of an additional $550,000. In the event that BioChem
were to gain approval for sales in Canada, the collaboration agreement provides
for royalty payments of 35% of net sales of the product in Canada up to
aggregate sales of $9,000,000 (Canadian), at which point the royalty would be
reduced to 25%. In addition, in the event that a generic version of the product
were to be introduced, the royalty rate would also be reduced to 25% on all net
sales. In addition, after the fifteenth year of commercial sales, the royalty
payment would be reduced to 15 percent of net sales. Under the terms of the
collaboration agreement, NeoPharm is to provide BioChem with all data and
results of ongoing clinical trials carried on with respect to the product and to
provide such assistance as BioChem shall reasonably request in assisting it to
gain regulatory approval. The Agreement may be terminated by either party upon
default by the other party, if the other party fails to cure the default. If the
agreement were terminated by BioChem due to a Default by the Company, the
Company may be obligated to reimburse BioChem for certain of its costs and
expenses.
PHARMACIA AND UPJOHN
Subsequent to year end, the Company entered into a Licensing Agreement on
February 19, 1999 with Pharmacia and Upjohn to license LEP and LED worldwide.
The Company received certain upfront and milestone payment opportunities and
royalties on sales outside the United States and co-promotion profit splits on
sales within the United States. The Company also has the option to license two
additional products in its liposomal drug delivery platform from the Pharmacia
and Upjohn product portfolio. For additional information regarding this
agreement, see Note 10.
GEORGETOWN UNIVERSITY
The Company entered into two license and research agreements with Georgetown
whereby the Company obtained an exclusive worldwide license to use certain
technologies. In exchange for the grant of these exclusive licenses, the Company
will pay Georgetown, beginning with the first commercial sale of a product
incorporating the licensed technologies, a royalty on net sales by the Company
of products incorporating any of such technologies. The royalty will be payable
for the life of the related patents.
During the years ended December 31, 1998, 1997 and 1996, the Company paid
and expensed approximately $123,000, $247,000 and $204,000 respectively,
pursuant to the license and research agreements. Included as an obligation under
research agreements in the accompanying balance sheets is an accrual for
$116,000 for research expenses at December 31, 1998.
55
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
6. COMMITMENTS: (CONTINUED)
OTHER
The Company entered into consulting arrangements with members of its
Scientific Advisory Board who are also employed on a full-time basis by academic
or research institutions. Since inception through December 31, 1998, members of
the Scientific Advisory Board were issued options (see Note 4) to purchase an
aggregate 68,324 shares of Company stock at the fair market value at the date of
grant. Additionally, the Scientific Advisory Board members received aggregate
payments of approximately $88,000 since the inception of these consulting
arrangements for work performed and expenses incurred through December 31, 1998.
The Company is obligated for rental payments under a sublease arrangement
with OptionCare, Inc. for office space in Bannockburn, Illinois. Until moving to
the Bannockburn location in November of 1997, the Company occupied office space
in Lake Forest, Illinois. This space was provided as part of a consulting
agreement with EJ Financial. (See Note 8). This sublease expired on November 30,
1998. The Company continues to sublease the same space on comparable terms under
a month to month lease.
7. CONTINGENCIES
The pharmaceutical industry has traditionally experienced difficulty in
maintaining product liability insurance coverage at desired levels. To date, no
significant product liability suit has ever been filed against the Company.
However, if a suit were filed and a judgment entered against the Company that
significantly exceeded the policy limits, it could have a material adverse
effect upon the Company's operations and financial condition.
Currently, the Company is not a party to any litigation or other legal
proceedings.
8. TRANSACTIONS WITH RELATED PARTIES
The Company receives management services from EJ Financial Enterprises, Inc.
("EJ Financial"), a healthcare consulting and investment firm in which Dr.
Kapoor is the principal stockholder. From inception through June 30, 1994, EJ
Financial charged the Company $25,000 per year for services provided plus actual
expenses incurred. Through June 30, 1994, no payment for these services was
made, but rather was treated as additional capital contributions by Dr. Kapoor
in the accompanying statements of stockholders' equity (deficit). Effective July
1, 1994, EJ Financial increased its charge for management services provided to
$125,000 per year plus actual expenses. The agreement reflected an increased
need for technical support in the areas of research and development and
operations. Charges to the Company are based on actual time spent by EJ
Financial personnel on the Company's affairs. Management believes that the cost
for management services allocated to the Company represents the cost of the
services provided. From inception through December 31, 1998, the Company
expensed approximately $562,900 for management services and $266,800 as
reimbursement of actual expenses incurred by EJ Financial that directly related
to the Company.
The Company subleases office space from Option Care Inc., a home infusion
company in which Dr. Kapoor, the Company's Chairman, is a major stockholder.
From inception through December 31, 1998, the Company expensed approximately
$38,700 for rent under the Option Care subleases.
56
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
From June 1990 through April 1994, the Company financed its operations by
borrowing under a loan agreement with Dr. Kapoor, a principal shareholder. No
payments of interest or principal were made during this period. In January 1996,
in accordance with the agreement between the principal stockholder and the
Company, with the completion of the initial public offering, the principal
stockholder converted the outstanding loan balance of $1,500,000 plus accrued
interest through November 30, 1995 of $523,385 into shares of the Company's
common stock and common stock purchase warrants at a per share conversion price
equal to the offering price, $3.525 per share, $.10 per warrant. The Company
issued 574,008 shares and 143,502 warrants.
From October, 1998 through February, 1999 the Company had a $3,000,000 line
of credit in place with the John N. Kapoor Trust dtd 9/20/89, an entity
affiliated with the Company's Chairman. The Company borrowed $250,000 on the
line of credit on January 8, 1999. The $250,000 plus all accrued interest was
repaid on January 29, 1999. The line of credit terminated upon the signing of
the licensing agreement on February 19, 1999 (See Note 10).
The Company's Chief Scientific Officer, Dr. Aquilur Rahman, was employed on
a full-time basis by Georgetown until joining the Company in March 1996. As was
previously mentioned, Georgetown and the Company are parties to license and
sponsored research agreements for product research and development (see Note 6).
During 1998, 1997 and 1996, the Company expensed approximately $123,000,
$247,000 and $204,000 related to work performed and expenses incurred by
Georgetown. Since inception through December 31, 1998, the Company has expensed
approximately $2,119,000 under the agreements. Additionally, Dr. Rahman received
options in June 1990 (See Note 4) to purchase 932,540 shares of Company stock at
the fair market value on the date of the grant of the options.
On July 16, 1997, the Company loaned $50,000 to Dr. Rahman pursuant to a
promissory note. The note accrued interest at a rate of 9%. The principal
together with accrued interest of $3,255 was repaid on April 6, 1998.
Prior to February 1996, the Company's former President and Chief Executive
Officer ("CEO"), William C. Govier, was a consultant to the Company on clinical
trials and NDA filing matters, both as an individual and as a consultant with
Aegis Technology, Inc. ("Aegis"), an entity co-founded by Govier. Dr. Govier
retired from the Company on January 16, 1998. As the Company's President and
CEO, Govier received options in December 1993, to purchase 233,134 shares of
Company stock at the fair market value on the date of grant, which were later
fully exercised (See Note 4). His colleague and co-founder of Aegis, Gail
Salzberg, also received options in December 1993 (see Note 4) to purchase 15,542
shares of Company stock at the fair market value on the date of grant, of which
7,770 options were 100% vested and 7,772 options vested upon future performance
of services. The Company expensed approximately $1,095,800 since inception
through December 31, 1998, related to work performed and expenses incurred by
Govier, his colleague and Aegis. During 1998, 1997 and 1996, the Company
expensed approximately $232,300, $262,500 and $159,500 respectively, related to
these arrangements.
57
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
The following table summaries the related party expenses discussed above:
INCEPTION
(JUNE 15,
FOR THE YEARS ENDED 1990)
DECEMBER 31, THROUGH
---------------------------------- DECEMBER 31,
RELATED PARTY EXPENSE TYPE 1996 1997 1998 1998
- --------------------------------------- --------------------- ---------- ---------- ---------- ------------
Georgetown University.................. Research & Fees $ 203,257 $ 247,052 $ 123,205 $2,049,000
Dr. Aquilur Rahman..................... Consulting 3,333 -- -- 70,000
Gail Salzberg.......................... Consulting 163,568 261,552 232,283 1,064,021
Aegis Technology, Inc.................. Consulting 700 -- -- 31,779
---------- ---------- ---------- ------------
Total research and development expenses:.................... $ 370,858 $ 508,604 $ 355,488 $3,214,800
Option Care, Inc....................... Rent and Expenses -- 3,000 35,663 38,663
E.J. Financial Enterprises............. Consulting 125,000 125,000 125,000 562,900
E.J. Financial Enterprises............. Direct Expense 81,928 66,081 11,331 266,800
---------- ---------- ---------- ------------
Total general and administration expenses:.................. 206,928 194,081 171,994 868,363
Total related party expenses:............................... $ 577,786 $ 702,685 $ 527,482 $4,083,163
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
9. STOCKHOLDERS' EQUITY
In January 1995, the Company amended its Certificate of Incorporation to
increase the number of authorized shares of common stock to 15,000,000 shares.
In October 1995, the Company amended its Certificate of Incorporation to convert
each 1.28681 shares of outstanding Common Stock into one share of Common Stock
and to restate the par value of the Common Stock from $0.000333 per share to
$0.000429 per share. The reverse stock split has been reflected retroactively in
these financial statements for all periods presented.
In January 1996, the Company completed a public offering of newly issued
1,350,000 shares of common stock and 675,000 warrants, for proceeds of
approximately $8,585,000 net of expenses. On March 8, 1996 the Company issued
36,130 shares of common stock and 18,565 warrants related to the underwriter's
over-allotment option for proceeds of approximately $267,000, net of expenses.
Additionally, the Company issued 574,008 shares and 143,502 warrants upon
conversion of its debt (see note 3). Since July 25, 1997, the warrants have been
subject to redemption at $0.01 per warrant on thirty (30) days prior written
notice to the warrant holders. However, the warrants can only be redeemed if the
average closing price of the Company's stock as reported on AMEX equals or
exceeds $5.60 per share for twenty (20) trading days within a period of thirty
(30) consecutive trading days ending on the fifth trading day prior to the date
of the notice of redemption. Each warrant can be converted into two shares of
common stock at $4.90 per share.
In connection with the public offering, the Company issued 135,000
Representative's warrants to the underwriter. The warrants can be converted into
270,000 shares of common stock at $4.90 per share and/or
58
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
9. STOCKHOLDERS' EQUITY (CONTINUED)
67,500 underlying warrants at $0.14 per warrant. The underlying warrants in turn
can be converted into 135,000 shares of common stock at $6.86 per share.
On August 14, 1996, the Company's Board of Directors declared a two-for-one
stock split of issued and outstanding Common Stock for stockholders of record as
of the close of business on August 26, 1996. Accordingly, all numbers of common
shares and per share data have been restated to reflect the stock split. The par
value of common stock has been adjusted from $0.000429 per share to $0.0002145
per share.
10. SUBSEQUENT EVENTS
PHARMACIA AND UPJOHN LICENSE AGREEMENT
On February 19, 1999, the Company entered into an exclusive worldwide
license agreement with Pharmacia and Upjohn Company ("P&U"). Pursuant to the
agreement, the Company granted P&U an exclusive worldwide license to develop,
use, manufacture, distribute, market, and sell the Company's Liposomal
Encapsulated Doxorubicin ("LED") and Liposomal Encapsulated Paclitaxel ("LEP")
products for all approved indications. All of the development costs, clinical
and pre-clinical, regulatory and manufacturing scale up expenses for LED and LEP
incurred after the date of the agreement shall be borne by P&U. The Company
shall use reasonable efforts to assist P&U in obtaining and confirming the
rights granted to P&U under the agreement. However, any reasonable costs or
expenses incurred by the Company to provide such assistance shall be reimbursed
by P&U.
The Company received a $9,000,000 non-refundable license fee upon signing
the agreement. Upon the transfer of the U.S. Investigational New Drug ("IND")
applications for LED and LEP to P&U, P&U shall purchase $8,000,000 of the
Company's newly issued common stock. The share price shall be equal to 110% of
the average closing price of the Company's Common Stock for the 60-day period
preceding the P&U purchase date. The Company will record the newly issued shares
at $.0002145 par value with the remaining proceeds reflected as additional paid
in capital. The Company anticipates that the IND's will be transferred and the
stock will then be issued and the cash proceeds received early in the third
quarter of 1999.
The Company shall receive milestone payments upon the completion of each
phase of clinical development and upon regulatory approval for both LED and LEP.
If all milestone goals set forth in the agreement are met, the Company would be
eligible to receive an additional $52,000,000 in milestone payments.
If the LED product were to be approved for commercial sale and thereafter
marketed, the Company would receive a royalty payment for sales outside of the
U.S. for the first seven years after commercial sale at a rate of 8%, declining
for 5% for the eighth through tenth years of such commercial sales. With respect
to the LEP product, the Company is entitled to receive a royalty of 12.5% for
LED products sold outside of the United States for the valid life of an
enforceable NeoPharm patent, determined on a country-by-country basis. With
respect to sales of both LEP and LED products in the United States, the Company
is permitted to elect, in lieu of royalty payments for U.S. sales, to co-promote
the products within the United States. Under the terms of the co-promotion, the
Company's participations in net profits is to be in proportion to its monetary
contribution to the promotion of each product in the United States, but in no
event shall the Company's share of profits exceed 37.5% of total net profits. In
addition, the Company's
59
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
10. SUBSEQUENT EVENTS (CONTINUED)
right to co-promote is contingent upon the Company reimbursing P&U for an amount
equal to the amount of the Company's net profit percentage multiplied by the
amount expended by P&U in development costs for the products in the United
States (which may not exceed 60 percent of P&U's total development costs
throughout the world). If the Company does not elect to co-promote the product
within the U.S., then the Company would receive a flat royalty with respect to
LED equal to 10% of net sales for the first ten years of sales in the United
States, and with respect to LEP, a royalty equal to 12 1/2% of net sales for the
period in which P&U has exclusivity to LEP product. Because of the uncertainty
surrounding the ability of the Company to attain the milestones and obtain FDA
approval for the product, and the uncertainty that the product would be accepted
by the medical community, it is not possible to project with any degree of
certainty what the potential revenues (other than the milestone payments) under
the contract would be.
AMENDMENT OF GEORGETOWN AGREEMENTS
The Company has two license and research agreements with Georgetown
University that cover the use of certain technologies used in the Company's LED
and LEP products (See Note 6). In January 1999, the Company and Georgetown
University agreed to amend the agreements to reduce the level of future
sublicense royalties on LEP and LED sales payable to Georgetown in return for a
one time sublicense fee of $800,000. The Company made the $800,000 payment to
Georgetown in March 1999, after the execution of the PNU agreement.
NATIONAL INSTITUTE OF HEALTH
As of March 22, 1999, the Company and NIH entered into an exclusive
worldwide licensing Agreement to develop and commercialize a Mesothelium Antigen
Therapy (Mesothelin Mab). The Company will license Mesothelium Mab from the NIH
and in return, the agreement requires the Company to make a $75,000
non-refundable license issue payment and a minimum annual royalty payment of
$20,000 per year beginning January 1, 2001. The agreement further provides for
milestone payments and royalties based on future product sales. The Company is
required to pay the costs of filing and maintaining product patents on the
licensed products. The agreement, once it is executed by the NIH, shall extend
to the expiration of the last to expire of the patents on the licensed products,
if not terminated earlier. The agreement may be terminated by mutual consent of
NIH and the Company. Either party may terminate if the other party breaches a
material term or condition and such breach is not cured within a certain period
of time. Also, each party may unilaterally terminate by giving advanced notice.
60