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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the year ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 1-10615
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EMISPHERE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3306985
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
765 Old Saw Mill River Road
Tarrytown, New York 10591
(Address of principal executive offices) (Zip Code)
(914) 347-2220
(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--$.01 par value
Preferred Stock Purchase Rights
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 Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for at least the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) 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. [X]
As of June 30, 2003 (the last business day of the registrant's most recently
completed second quarter), the aggregate market value of the common stock held
by non-affiliates of the registrant (i.e. excluding shares held by executive
officers, directors, and control persons) was $55,622,611 computed at the
closing price on that date.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The number of shares of the Registrant's common stock, $.01 par value,
outstanding as of March 15, 2004 was 18,312,150.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and III of this 10-K incorporate information by reference from the
registrant's definitive proxy statement which will be filed no later than 120
days after December 31, 2003.
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TABLE OF CONTENTS
PAGE NO.
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PART I
Item 1. Business 2
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 17
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 33
Item 8. Financial Statements and Supplementary Data 33
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 33
Item 9A. Controls and Procedures 34
PART III
Item 10. Directors and Executive Officers of the Registrant 35
Item 11. Executive Compensation 35
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 35
Item 13. Certain Relationships and Related Transactions 35
Item 14. Principal Accountant Fees and Services 35
PART IV
Item 15. Exhibits, Financial Statements Schedules and Reports on Form 8-K 36
Signatures 37
Index to Consolidated Financial Statements F-1
Exhibits Index E-1
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made under the captions "Business" (Item 1) and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" (Item 7), the notes to the Company's audited financial statements
(Item 8) and elsewhere in this Annual Report on Form 10-K, as well as statements
made from time to time by Emisphere's representatives may constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include (without
limitation) statements regarding planned or expected studies and trials of oral
formulations that utilize the Company's eligen(TM) technology; the timing of the
development and commercialization of the Company's product candidates or
potential products that may be developed using the Company's eligen(TM)
technology; the potential market size, advantages or therapeutic uses of the
Company's potential products; variation in actual savings and operating
improvements resulting from restructurings; and the sufficiency of the Company's
available capital resources to meet the Company's funding needs. Management does
not undertake any obligation to publicly update any forward-looking statement,
whether as a result of new information, future events, or otherwise, except as
required by law. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the Company's actual
results or achievements to be materially different from any future results or
achievements expressed or implied by such forward-looking statements. Such
factors include the factors described under "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Risk Factors" and the
other factors discussed in connection with any forward-looking statements.
ITEM 1. BUSINESS
OVERVIEW OF EMISPHERE
Introduction
Emisphere Technologies, Inc. ("Emisphere", "Our", "Us" or "We") is seeking
to overcome one of the most challenging technical hurdles in the pharmaceutical
industry--the oral delivery of medicines not currently available in oral form.
We have product candidates in development across a broad range of therapeutic
areas, including cardiovascular disease, diabetes, osteoporosis, growth
disorders, asthma and allergies, obesity and infectious diseases. Further
information can be found on our website: www.emisphere.com. The contents of that
website are not incorporated herein by reference thereto. Investor related
questions should be directed to ir@emisphere.com.
History
Emisphere was originally founded as Clinical Technologies Associates, Inc.
in 1986. We went public in 1989, and were listed on NASDAQ under the ticker
symbol "CTAI". In 1990, under new management, we decided to focus on our oral
drug delivery technology, now known as the eligen(TM) technology. In 1991, we
changed our name to Emisphere Technologies, Inc., and we continued to be listed
on NASDAQ, under the new ticker symbol, "EMIS".
The eligen(TM) Technology
The eligen(TM) technology is a broadly applicable proprietary oral drug
delivery technology based on the use of proprietary, synthetic chemical
compounds known as EMISPHERE(R) delivery agents, or "carriers". These delivery
agents facilitate and/or enable the transport of therapeutic macromolecules
(such as proteins, peptides, and polysaccharides) or charged organics across
biological membranes such as the small intestine. We believe that our eligen(TM)
technology makes it possible to orally deliver a therapeutic molecule without
altering its chemical form or compromising the biological integrity of
membranes.
Business Strategy
Our core business strategy is to develop oral forms of injectable drugs,
either alone or with corporate partners, by applying the eligen(TM) technology
to those drugs. Typically, the injectable drugs that we target (i) have received
regulatory approval, (ii) have demonstrated safety and efficacy, and (iii) are
currently available on the market. We believe that focusing on the oral delivery
of these types of product candidates increases our probability of successfully
executing our business strategy. Our direct cost of developing an unformulated
product candidate through proof-of-concept human studies using an EMISPHERE
carrier and a therapeutic molecule is less than $1 million.
2
Product Candidates in Development
The following table sets forth (i) the therapeutic areas for which we are
developing product candidates, either alone or with corporate partners, (ii) the
candidates currently in development, (iii) the present stage of clinical
development, and (iv) the identity of our corporate partner for partnered
programs, as previously reported by Emisphere or the partner.
THERAPEUTIC AREA DRUG CANDIDATES STAGE OF DEVELOPMENT PARTNER
- ------------------------ --------------------------------------- ----------------------------- ----------------------
Cardiovascular Oral Unfractionated ("UF") Heparin Clinical subjects (2) Self-developed
(Solid)
Oral Low Molecular Weight Heparin Clinical subjects Self-developed
("LMWH") (1)
Osteoporosis Oral Salmon Calcitonin ("sCT") Phase IIa Novartis Pharma AG
Oral Recombinant Parathyroid Hormone Phase I Eli Lilly and Company
(teraparatide; "PTH 1-34")
Growth Disorders Oral Recombinant Human Growth Hormone Clinical subjects Self-developed (5)
(somatropin; "rhGH")
Diabetes Oral Insulin Clinical patients (3) Self-developed
Oral Glucagon-Like Peptides ("GLPs") Pre-clinical (4) Self-developed
Asthma/Allergies Oral Cromolyn Sodium Clinical patients Self-developed
Obesity Oral Ciliary Neutrophic Growth Factor Pre-clinical Regeneron
("CNTF") Pharmaceuticals, Inc.
Oral PYY//3-36// Pre-clinical Self-developed
Anti-infectives Oral Anthrax Antigen Pre-clinical US Army Medical
Research Institute of
Infectious Diseases
Undisclosed Feasibility Product Candidates Clinical subjects, Self-developed or
pre-clinical and feasibility undisclosed partners
- ----------
(1) Emisphere has an agreement with a producer of LMWH to supply a
particular LMWH to Emisphere. Development of this candidate is dependent
on this agreement.
(2) "Clinical subjects" = Investigating safety of carrier and drug/carrier
combination in a limited number of healthy human subjects. Determining
proper oral dose ranges to meet specified blood levels.
(3) "Clinical patients" = Investigating safety and confirming efficacy of a
product candidate in a limited number of patients using a single or
multiple dose regimen.
(4) "Pre-clinical" = Investigating safety of a product candidate in a
controlled laboratory environment and establishing activity in standard
animal models.
(5) Originally partnered with Eli Lilly and Company. Emisphere reacquired
all rights in 2003.
Recent Developments
In January 2004, we announced preliminary results from our first
multiple-dose European clinical study evaluating an oral insulin tablet using
the eligen(TM) technology in early-stage Type 2 diabetics. The 13-patient study,
consisting of seven treated patients and six control patients, evaluated the
safety, effect and tolerability of the oral insulin tablets when administered
four times daily (10 minutes before meals and at bedtime) over a two-week
period. The preliminary data suggest that EMISPHERE(R) oral insulin tablets can
positively impact glycemic control in early-stage Type 2 diabetics. Preliminary
data indicated that repeated administration of our oral insulin was not
associated with hypoglycemic events, an adverse complication that is often
associated with injected insulin and other anti-diabetic treatments.
OVERVIEW OF DRUG DELIVERY INDUSTRY
The drug delivery industry develops technologies for the improved
administration of therapeutic compounds, with the goal of expanding markets for
existing products and extending drug franchises. Also, drug delivery companies
seek to develop products on their own that would be patent protected by applying
proprietary technologies to off-patent pharmaceutical products. Primarily, drug
delivery technologies are focused on improving safety, efficacy, ease of patient
use and patient compliance. Pharmaceutical and biotechnology companies consider
improved drug delivery as a means of gaining competitive advantage over their
peers.
3
Therapeutic macromolecules, of which proteins are the largest sub-class,
and charged organics are prime targets for the drug delivery industry for two
reasons.
First, therapeutic macromolecules and charged organics address large
markets for which there is an established medical need. These drugs are widely
used, as physicians are familiar with them and are accustomed to prescribing
them. According to published sources, worldwide annual sales of protein
therapeutics are valued at approximately $22 billion and are growing at
approximately 15% per year.
Second, therapeutic molecules and charged organics are significantly
enhanced through alternative delivery. These medicines are comprised of proteins
and other large or highly charged molecules that, if orally administered under
traditional oral delivery methods, would degrade in the stomach or intestine
before they are absorbed into the bloodstream. Therefore, they are administered
by injection. Injections are undesirable for many reasons, including patient
discomfort, inconvenience and risk of infection. Poor patient acceptance of, and
compliance with, injectable therapies can lead to increased incidences of
medical complications. In addition, injectable therapies result in high
healthcare costs because many drug injections require administration in
hospitals or doctors' offices.
Oral delivery is the preferred method when compared to other delivery
systems. Patient acceptance of and adherence to a dosing regimen is relatively
high among orally delivered medications as compared to non-oral delivery
approaches. Our business strategy is based upon our belief that the development
of an efficient, safe and reproducible oral delivery system for macromolecules
represents a significant commercial opportunity. Given the advantages of oral
delivery over injectable forms, we believe that oral administration of
biopharmaceutical drugs would significantly expand the markets for these drugs.
CURRENT APPROACHES TO DRUG DELIVERY
Transdermal (via the skin) and "Needleless" Injection
The size of most macromolecules makes penetration of the skin inefficient
or ineffective. Some peptides and proteins can be transported across the skin
barrier into the bloodstream using high-pressure "needleless" injection devices.
The devices, which inject proteins through the skin into the body, have been
available for many years. We believe these devices have not been well accepted
due to patient discomfort, relatively high cost, and the inconvenience of
placing the drugs into the device.
Nasal
The nasal route (through the membrane of the nose) of drug administration
has been limited by low and variable bioavailability for proteins and peptides.
As a result, penetration enhancers often are used with nasal delivery to
increase bioavailability. These enhancers may cause local irritation to the
nasal tissue and may result in safety concerns with long-term use. A limited
number of peptides using nasal delivery have been approved for marketing in the
United States.
Pulmonary (via the lung)
Pulmonary delivery (through the membrane of the lungs) of drugs is emerging
as a delivery route for large molecules. Although local delivery of respiratory
drugs to the lungs is common, the systemic delivery (i.e., delivery of the drugs
to the peripheral vasculature) of macromolecule drugs is less common because it
requires new formulations and delivery technologies to achieve efficient, safe
and reproducible dosing.
Intraoral (via the membranes in the mouth)
Intraoral delivery is also emerging as a delivery route for large
molecules. Buccal delivery (through the membrane of the cheek) and sublingual
delivery (through the membrane under the tongue) are forms of intraoral
delivery.
We believe that our eligen(TM) technology, enabling oral delivery instead
of injectable or other forms of administration, provides an important
competitive advantage in the drug delivery industry. We believe that the oral
route is the most "patient-friendly" option, in that it offers convenience, is a
familiar method of administration, provides increased compliance, and, for some
therapies, is considered the best physiological route of administration.
THE ELIGEN(TM) TECHNOLOGY
Our oral drug delivery technology, the eligen(TM) technology, is based upon
proprietary, synthetic chemical compounds known as EMISPHERE delivery agents
that facilitate the transport of therapeutic macromolecules and other compounds
across biological membranes, such as the membranes of the small intestine. Using
this technology, we have demonstrated oral delivery of heparin, insulin, PTH
1-34, rhGH, cromolyn sodium and salmon calcitonin in humans, and over 40 other
compounds in animal models.
4
We believe that the EMISPHERE delivery agents use passive transcellular
transport (a natural transport process in the body), enabling macromolecules to
cross membranes and yet remain therapeutically active. Also, we believe that the
eligen(TM) technology does not chemically change the molecule being delivered
and only changes the physical nature of the molecule. Under physiological
conditions, protein molecules naturally exist in many different shapes, or
conformations. Some of these conformations can be transported across the cell
membranes. Our hypothesis is that once the drug crosses the membrane, the
delivery agent separates from the drug and the drug reestablishes its natural
distribution of conformations, ensuring that the delivered drug molecules are in
their therapeutically active state.
We have designed and synthesized a library of over 2,000 delivery agents
and continue to evaluate our delivery agents for their ability to facilitate the
delivery of therapeutic macromolecules and other compounds across biological
membranes.
Key Characteristics of the eligen(TM) Technology
We believe that our oral drug delivery technology has competitive
advantages, including:
Broad applicability: EMISPHERE delivery agents are applicable across a
diverse group of molecules such as proteins, carbohydrates, peptides and other
compounds;
Stand-alone delivery: Oral drug delivery using EMISPHERE delivery agents
does not rely upon the addition of other agents that can have adverse effects on
the intestinal membranes or digestion;
Versatility: We have created various types of oral formulations, including
solutions, suspensions, tablets and capsules. We believe our eligen(TM)
technology is applicable to controlled release dosage forms;
Ease of manufacture: We believe that the technology and manufacturing
equipment required to produce EMISPHERE delivery agent material in commercial
quantities is readily available.
THERAPEUTIC INDICATIONS
Diabetes
According to published reports, approximately 177 million people worldwide
are afflicted by diabetes, with approximately 18 million of those afflicted
residing in the United States; nearly one-third of all individuals in the United
States suffering from diabetes are unaware that they have this chronic disease;
and in the United States, diabetes accounts for approximately $132 billion in
direct and indirect healthcare related costs. There are two principal types of
diabetes:
. Type 1 - An autoimmune disease in which the body does not produce any
insulin. Type 1 diabetes appears most often in children and young
adults. Type 1 diabetics must receive multiple daily insulin
injections to stay alive. Type 1 diabetes accounts for approximately
5-10% of total diabetes cases.
. Type 2 - A metabolic disorder resulting from the body's inability to
properly utilize or produce adequate amounts of insulin. Type 2
diabetics account for approximately 90-95% of diabetes cases.
Reportedly, the incidence of Type 2 diabetes is rising rapidly as a
result of an aging population, greater prevalence of obesity, and a
more sedentary lifestyle.
Recent estimates indicate that worldwide sales of insulin exceeded $4
billion in 2002 and are projected to grow to over $7 billion in 2006.
Approximately 40% of all Type 2 diabetics use insulin to control the disease,
accounting for approximately 50% of total insulin use. Although many Type 2
diabetics could benefit from insulin therapy, they may not use the drug because
it is administered by injection. We believe that a successful oral insulin
therapy would facilitate compliance for diabetic patients who are not diligent
with their prescribed injection regimens, and enable those patients adverse to
injections to adopt therapy at an earlier stage of the disease.
Based on previously published research, we believe that oral insulin
delivery is consistent with the physiology of a non-diabetic's natural secretion
of insulin from the pancreas, which travels to the liver prior to being
distributed to the peripheral circulation. We believe that orally delivered
insulin likewise travels to the liver prior to being distributed to the
peripheral circulation. In comparison, also based on previously published
research, we believe that injected insulin, like other non-oral insulin
therapies, is administered into the general (systemic) circulatory system first
and then to the liver. We believe that as a result, injectable insulin results
in higher circulating insulin levels than oral insulin. Chronic excess insulin
in the general circulation (known as hyperinsulinemia) is known to cause
diabetic patient complications.
5
Furthermore, we believe that the pharmacological profile of our oral
insulin to date, namely, the onset and duration of action, has been consistent
with the physiological profile of naturally secreted insulin from the pancreas,
under both fed and certain fasted conditions. For the foregoing reasons, we
believe that, aside from the convenience benefits, orally delivered insulin,
with the appropriate clinical attributes, may provide an alternative therapy
with fewer complications when compared to existing medical diabetes treatments.
Oral Insulin Program.
In June 2001, we entered an oral unformulated dosage of insulin using an
EMISPHERE carrier into proof-of-concept clinical testing. In October 2001, we
completed a Phase I study using the most promising EMISPHERE carrier selected
for insulin. The resulting data were used to support the testing of this
unformulated dosage in early-stage Type 2 diabetic patients. In November 2001,
we completed preliminary testing in Type 2 diabetic patients upon completing a
"euglycemic clamp study" (a study in which insulin and glucose is infused
intravenously at different doses to see what levels of insulin control different
levels of glucose).
In June 2002, in an oral presentation and media briefing at the Annual
Meeting of the American Diabetes Association ("ADA") in San Francisco, we
presented proof-of-concept preliminary clinical results from a study conducted
in Europe, which showed that an early capsule prototype of oral insulin using
the eligen(TM) technology resulted in absorption from the gastrointestinal
tract. The data also demonstrated significant reductions in blood glucose
levels. Although not directly compared in this trial, the reductions in blood
glucose levels were consistent with reductions in glucose seen with injectable
insulin. The study demonstrated that there were no serious adverse events.
The double-blind, placebo-controlled study consisted of the administration
of insulin with an EMISPHERE delivery agent in capsule form to a total of 20
healthy human volunteers in the fasted state who received five different dose
regimens, ranging from 100 to 150 units of insulin and 100 mg to 600 mg of
delivery agent, and a subcutaneous control, with another two subjects who
received placebo. Nine subjects received only the delivery agent. The study
demonstrated that the orally delivered insulin had favorable pharmacokinetic and
pharmacodynamic profiles, in that systemic blood insulin levels peaked within 25
minutes. Such favorable profiles are considered to be significant by physicians,
in general, because the primary potential use of oral insulin would be before
meals, and the more rapid the delivery, the better patients can time their
medication to their meal. We believe that this data and the data from the 2001
studies provide proof-of-concept for our oral drug delivery technology with
insulin as evaluated in healthy, fasted volunteers.
In March 2003, we announced completion of a study in early-stage Type 2
diabetic patients designed to demonstrate the pharmacokinetics and absorption of
insulin, and subsequent effects on blood glucose of this product candidate
following a standardized meal. The placebo controlled, crossover study evaluated
two oral doses of insulin. Patients received one capsule containing 5.6 mg (150
units) of insulin and 200 mg of EMISPHERE delivery agent or two capsules
containing a total of 11mg (300 units) of insulin and 400 mg of EMISPHERE
delivery agent. The study compared the two oral unformulated dosages to a
fast-acting injectable insulin in fourteen patients with Type 2 diabetes who had
received a standardized solid meal (722 kcal). The study also included a placebo
group. For the 11 mg dose, the data demonstrated that unformulated oral insulin
dosages, when administered 30 minutes prior to the standardized meal, reduced
post-prandial glucose excursion (the rise in blood sugar following a meal) and
produced a marked increase in systemic insulin levels and a concomitant
reduction in C-peptide (a marker of endogenous insulin production) as compared
to the placebo. In addition, plasma insulin concentrations peaked faster using
our oral unformulated dosage as compared to fast acting injectable insulin (30
minutes with oral versus approximately 45 minutes typically seen with injectable
formulations). Similar results were observed in certain patients given the 5.6
mg dose, who received the same standardized meal. The study produced evidence
that one or two capsules could impact post-prandial blood glucose in certain
early-stage Type 2 diabetic patients and demonstrated favorable
pharmacokinetics. No serious adverse events were reported.
In June of 2003, we presented preliminary data at the Annual Meeting of the
ADA in New Orleans, LA from two EMISPHERE oral insulin capsule studies. The
first study ("the overnight study"), presented in a poster session, was
conducted to determine if the administration of the EMISPHERE oral insulin
prototype capsules at bedtime could exert effects on overnight-fasting glucose
homeostasis and insulin secretion in early-stage Type 2 diabetics. The overnight
study summary conclusion was that the amount of oral insulin delivered reduced
fasting glucose levels the following morning. The prototype of oral insulin was
well-tolerated and no serious adverse events were reported. The second study
("the glucose clamp study"), presented in a plenary session, was a
proof-of-concept study conducted in early-stage Type 2 diabetics to assess
insulin secretion and resistance following the administration of two oral
insulin prototype capsules containing a total of 11 mg insulin (300 units) when
a simultaneous infusion of glucose was administered. The data demonstrated that
relative biopotency of oral insulin was 32% (mean) in the first hour after
administration, which is the most critical time period when the first-phase
insulin response should be replicated in a Type 2 diabetic. No serious adverse
events were reported.
6
In November 2003, we announced preliminary data from a study evaluating a
tablet prototype of EMISPHERE oral insulin. These data were presented at the 5th
Annual Diabetes Technology Meeting in San Francisco. Data from the study
demonstrated that a practical tablet dosage form totaling 10 mg (300 units) of
insulin and 160 mg of EMISPHERE delivery agent could reduce post-prandial
glucose excursion when administered in the pre-prandial state ten minutes prior
to a standard, American Diabetes Association breakfast.
In the fourth quarter of 2003, we completed the clinical dosing portion of
our first multiple dosing with the EMISPHERE oral insulin tablet prototype when
dosed in Type 2 diabetics. The 13-patient study, consisting of seven treated
patients and six control patients, evaluated the safety, effect and tolerability
of the oral insulin tablets when administered four times daily (10 minutes
before meals and at bedtime) over a two-week period. In January 2004, we
announced preliminary results from the study. The preliminary data indicated
that repeated administration of our oral insulin was not associated with
hypoglycemic events, an adverse complication that is often associated with
injected insulin and other anti-diabetic treatments.
We will continue to develop the oral insulin candidate while seeking a
partner for this program. We have engaged the services of an investment bank to
assist in the preliminary negotiation process with potential partners for our
oral insulin product candidate.
Cardiovascular (Anticoagulation)
Unfractionated heparin ("UFH") and low molecular weight heparin ("LMWH") are
widely used anticoagulants. These anticoagulants are primarily indicated for
treating and preventing post-surgical deep vein thrombosis (blood clots
following major surgery) ("DVT") and more severe sequelae e.g. pulmonary
embolism. Also, these drugs are frequently prescribed for acute myocardial
infarction, coronary angioplasty, coronary artery bypass graft surgery, stroke
and unstable angina. The most common indications for heparin therapy are the
prevention of venous thrombosis (blood clots) following surgical procedures
lasting longer than 30 minutes (especially orthopedic, pelvic, abdominal,
trauma, angioplasty or heart surgery). According to published sources, in the
United States, it is estimated that more than 3 million such surgical procedures
are performed each year and more than 250,000 cases of DVT are reported. DVT
treatment generally includes about one to two weeks of injectable LMWH, followed
by 90 to 180 days of warfarin. Currently, all forms of heparin are administered
as either a continuous intravenous infusion or a subcutaneous injection.
Recent studies indicate that a longer prophylaxis (extending the duration of
heparin preventative therapy from the current standard of practice) would
benefit patients following major surgery. We believe that compliance would be
improved if a commercially viable oral form of UFH or LMWH was available because
patients would be more inclined to comply with this type of dosage compared to
injectable forms. Preventative therapy is typically recommended for at least 10
to 14 days post-surgery. However, several studies indicate that longer heparin
prophylaxis (preferably for 30 days) is optimal because the risk of DVT remains
high throughout this period. Without DVT prophylaxis, the incidence of DVT is
often greater than 50% based on previously published research.
Heparin is often considered the anticoagulant of choice for the prevention
and treatment of cardiovascular complications, such as DVT or blood clots and
pulmonary embolism in high-risk, hospitalized patients. Typically, heparin is
favored by clinicians over warfarin because heparin is more effective, produces
a rapid onset of anticoagulation activity, has a shorter physiological
half-life, and is indicated in fewer drug-drug interactions than many U.S. Food
and Drug Administration ("FDA") approved drugs. In addition, warfarin requires
constant patient monitoring. A major disadvantage of heparin therapy is the
requirement for subcutaneous administration.
Worldwide heparin sales, including the LMWHs, are estimated to be over $2.5
billion, with a projected 15% annual growth rate. We believe that our solid oral
heparin and LMWH candidates could substantially penetrate and expand existing
markets. We anticipate that large new markets for the heparins will be created
based on studies indicating that UFH may have utility for indications other than
anticoagulation. These indications include: unstable angina, arterial
fibrillation, acute myocardial infarction, coronary angioplasty, stent
placement, coronary artery bypass graft, pulmonary embolism and stroke. In
addition, a large and growing body of pre-clinical and clinical data indicates
that heparin has potent anti-inflammatory and anti-cancer properties and
recently reported studies indicate that heparin has been shown to be beneficial
as a treatment for inflammatory bowel disease, rheumatoid arthritis, asthma,
psoriasis, transplant rejection and proteinurias.
We believe that oral heparin would be considered a more convenient and
"patient-friendly" therapy than injectable heparin by both patients and
physicians, and could open the at-home market to heparin by replacing warfarin
and injectable LMWH use. Also, we believe that our oral heparin product
candidates ultimately could enable an extended dosing regimen and be applicable
for a wide range of anti-coagulant/antithrombotic uses.
7
Oral Heparin Program (Solid Form).
We are evaluating solid oral heparin prototypes, including capsule and
tablet forms of UFH and LMWH, using our delivery agent, SNAC. SNAC was
administered as Heparin/SNAC Oral solution in a Phase III study of over 2,000
patients, known as "The PROTECT Trial". (For more information on the PROTECT
Trial, see "Discontinued Oral Heparin Program (Liquid Form) below).
Heparin, a polysaccharide, represents a significant formulation challenge
for our eligen(TM) technology because the potency of heparin is significantly
lower than many macromolecules, requiring a large dose which combined with SNAC
results in both a large solid dosage form and a large number of tablets or
capsules per dose. Since 2002, we have significantly reduced the necessary dose
by using both traditional formulation techniques and eligen(TM)
technology-specific techniques. We believe that reducing the size of the dosage
form and the number of tablets or capsules per dose would provide the most
patient preferred and commercially viable solid dosage form. We are continuing
our efforts to optimize a solid oral UFH dosage form and have produced improved
solid formulations with additional performance enhancements.
In December 2002, at the American Society of Hematology ("ASH") Annual
Meeting, we presented positive outcomes from a Phase I clinical study evaluating
two solid oral UFH formulations, in tablet and capsule forms. For each solid
dosage form which made use of our eligen(TM) technology, the data demonstrated
that an effect on blood coagulation was achieved consistent with therapeutic
levels that are acceptable in known heparin indications,, without any
tolerability issues. In addition, the total quantity of material was
significantly reduced in both formulations from the oral liquid formulation and
the physical blend in a capsule used in previous studies.
In the second half of 2003, we completed a multiple arm Phase I clinical
study in Europe to evaluate additional solid dosage forms of UFH in tablet and
capsule form in humans and data from such studies are currently being evaluated.
An additional study is planned for the first half of 2004.
Discontinued Oral Heparin Program (Liquid Form).
We initially set out to develop a solution formulation of oral heparin. At
the end of 1999, we initiated a Phase III study of our oral heparin solution
formulation. The multi-center, double-blind, double-dummy Phase III trial was
referred to as the "PROTECT" (PRophylaxis with Oral SNAC/heparin against
ThromboEmbolic Complications following Total hip replacement surgery) trial.
The PROTECT Trial enrolled 2,288 patients to evaluate the safety and
efficacy of a solution oral heparin formulation using our eligen(TM) oral drug
delivery technology for the prevention of DVT in total hip replacement surgery
patients (a surgical patient population that historically has had the highest
rate of DVT). The goal of the PROTECT Trial was to demonstrate the superior
efficacy and comparable safety of our oral heparin when dosed postoperatively
for a 30-day regimen, as compared to injectable enoxaparin, when dosed
postoperatively for a 10-day regimen. (A 10-day regimen of injectable
enoxaparin, marketed by Aventis Pharma SA under the LOVENOX trademark, is the
standard of care in the prevention of DVT, as determined by the American College
of Chest Physicians' Sixth Consensus Conference.)
The endpoint of PROTECT was DVT occurrence in the 30 days following
surgery, or pulmonary embolism or death. Investigators at more than 120
international sites evaluated a liquid form of heparin, consisting of the
EMISPHERE delivery agent, SNAC (Sodium N-[8-(2 hydroxybenzoyl) Amino Caprylate),
in combination with unfractionated heparin, when dosed orally in a 30-day
regimen, compared to enoxaparin, when dosed subcutaneously (by injection) in a
10-day regimen. Total DVTs were determined by bilateral venogram, the FDA
standard for measurement, measured at 30 days following surgery. A team of
radiologists at Boston's Massachusetts General Hospital read all the
venographies produced to determine the presence of a blood clot (thrombus).
On May 14, 2002, we announced initial results from the PROTECT study. Those
initial results did not demonstrate the superiority of oral heparin, when dosed
in a 30-day treatment regimen, compared to enoxaparin administered by injection
in a 10-day dosing regimen in preventing DVTs. However, the data from the study
suggested that the lower than expected efficacy net result may have been due to
patient acceptance of and compliance with the liquid dosage form, and that a
more acceptable (solid) dosage form would result in higher patient compliance.
The study design of PROTECT was rigorous. The trial sought at least an
absolute 10% reduction in DVT events, so that it could claim clinical
superiority.
In December 2002, we presented the complete analysis at the 44th annual
meeting of the American Society of Hematology. The fully analyzed data
demonstrated for the first time that the macromolecule heparin could be
delivered into the bloodstream of
8
a patient following dosing in an oral form. However, a liquid formulation of
oral heparin in a 30-day treatment regimen was deemed to have poor tolerability
due to its taste, which in turn led to poor patient compliance in the PROTECT
study.
We hope to leverage the extensive safety database that we now have for
SNAC, the EMISPHERE delivery agent that was used in the PROTECT study, and are
evaluating the application of that safety database to the solid form of oral
heparin for potential utility toward future development efforts with the FDA. In
2003, we conducted studies with various solid oral dosage forms of SNAC/UFH to
examine different forms of the solid heparin and to optimize further the
prototypes that were announced at the ASH conference in 2002.
Osteoporosis
Osteoporosis is a disease characterized by low bone mass and structural
deterioration of bone tissue, leading to bone fragility and an increased
susceptibility to fractures. It is a common condition among the elderly--both
men and women. The most common consequence of osteoporosis is greatly increased
risk of broken bones, especially in the hip region. Osteoporosis is estimated to
affect over 10 million Americans and to be responsible for more than 1.5 million
hip, vertebral, wrist and other fractures annually in the U.S. The disease is
relatively expensive to treat. It is reported that worldwide revenue for
osteoporosis therapeutics was $7.5 billion in 2002 and it is estimated that
sales will reach $12 billion by 2006. Several medicines are available to either
delay the onset of, or reverse, bone loss. We believe that new therapies
currently under development should foster greater patient compliance, and
ultimately improve the market penetration rate.
We and our collaborators, Novartis Pharma AG ("Novartis") and Eli Lilly and
Company ("Lilly"), are seeking to commercialize oral forms of the existing nasal
and injectable therapies. We believe that oral forms of therapy would be
considered more patient-friendly, and would ensure better compliance, especially
among the elderly, for the treatment and prevention of osteoporosis.
For information on our product candidates addressing the osteoporosis
patient population, see "Ongoing Collaborative Agreements" below.
Growth Disorders
Growth hormone is necessary to stimulate growth in children by promoting
the growth of muscle and bone. In adults, growth hormone maintains muscle and
bone quality. Many children and adults suffer from growth hormone deficiency, in
which growth rate is decreased, appearance is less mature, and adult height
falls below the normal range.
Recombinant human growth hormone ("rhGH") has been available for many
years. rhGH must be administered by injection, and therefore, compliance is
particularly difficult in pediatric patients. rhGH therapy requires a long-term
commitment by the patient and his or her family to achieve the best results. The
prescribed dosing ranges between three and seven injections per week. Treatment
continues for several years until the child has completed puberty or has stopped
responding.
rhGH is approved for pediatric growth hormone deficiency, adult growth
hormone deficiency, pre-kidney transplantation, and short stature due to chronic
kidney disease and Turner's syndrome. The injectable rhGH worldwide market is
estimated to be over $1.7 billion.
Oral Recombinant Human Growth Hormone Program.
From 1998 through August 2003, we developed oral rhGH in collaboration with
Lilly. In August 2002, Emisphere and Lilly advanced an oral form of rhGH, the
largest protein ever evaluated with the eligen(TM) technology, into human
testing. In 2003, an early stage clinical study was successfully completed.
Results from the study indicated that the oral prototype achieved the desired
physiological profile of growth hormone. With this study, we demonstrated the
utility and safety profile of our sixth EMISPHERE delivery agent to be tested in
humans.
As of August 2003, we reacquired all rights to the oral rhGH program from
Lilly.
Asthma/Allergies
An allergy is an immune response by the body to certain stimuli in the
environment. One of the most common forms of allergy is hay fever, which is
estimated to affect as many as 35.9 million people in the United States. Asthma
is a chronic inflammatory disorder of the body's airways caused by allergens and
viral respiratory infections leading to bronchial hyper responsiveness and
obstruction of airways. According to published sources, more than 20.3 million
Americans report having asthma.
9
Oral Cromolyn Sodium Program.
Cromolyn sodium mitigates allergic reactions by the inhibition of the
release of histamine and other chemical mediators from the mast cells. Cromolyn
sodium is marketed as an aerosol formulation, eye solution and nasal spray for
the treatment of asthma and allergies. It has been reported that annual sales of
cromolyn sodium are estimated to be approximately $300 million in the United
States.
Cromolyn sodium is a charged organic molecule that has not otherwise been
developed in an oral form due to its low bioavailability. As such, there is no
proof that an oral version would have the same effect as non-oral forms
delivered via the nasal, pulmonary, or ocular routes to the systemic
circulation. As a generic pharmaceutical, cromolyn sodium is considered by
physicians to be safer than the most common medications used to control
allergies and inflammation, principally antihistamines and corticosteroids. As
an asthma treatment, cromolyn sodium can decrease airway hyper responsiveness in
patients and has virtually no systemic toxicity.
In November 2001, we announced proof-of-concept Phase I data for this
product candidate using an EMISPHERE delivery agent. The data demonstrated that
the drug was absorbed in less than 30 minutes in healthy human subjects. We have
conducted additional Phase I dose-ranging studies since 2001 and have found the
data to be consistent. In 2002, oral cromolyn sodium entered into
proof-of-concept patient testing. We continue to develop this program.
Obesity
Obesity is a major health problem in all developed countries. The
prevalence of obesity in the United States has increased substantially during
the past decade. Nearly two-thirds of adults in the United States are
overweight, and nearly one-third are obese, according to data from the 1999-2000
National Health and Nutrition Examination Survey. A 1998 National Institutes of
Health report confirmed that obesity significantly increases a number of health
risks, including Type II diabetes. The most recent reports available estimate
that total costs related to overweight and obesity conditions total $117 billion
in the United States; of this, $61 billion is estimated to account for direct
costs. Obesity-related conditions such as stroke and myocardial infarction are
estimated to contribute to hundreds of thousands of deaths annually. Current
treatment of obesity consists of diet, exercise and other life-style changes,
and a limited number of drugs.
Oral PYY//3-36// Program.
PYY//3-36//, an experimental substance, is a peptide with 34 amino acids.
Specifically, as a gut hormone, it is postulated that PYY//3-36//
physiologically inhibits food intake [Bloom, et al., New England Journal of
Medicine, v. 349:941-948 no. 10; September 4, 2003]. Clinical research
experiments are currently underway by academic institutions to evaluate PYY3-36
relative to the condition of obesity. A factor that would limit the adoption of
this therapy, even if proven successful, is the venous delivery of this
compound, which must be continuously administered for long periods of time.
We have demonstrated that PYY3-36 can be delivered orally at
pharmacologically relevant levels in non-human primate animal models and are
considering developing a solid dosage prototype for testing in humans.
For information on our other product candidate addressing the obese patient
population, see "Ongoing Collaborative Agreements" below.
Infectious Disease (Anthrax)
Anthrax is an acute infectious disease caused by the spore-forming
bacterium Bacillus anthracis. Anthrax most commonly occurs in wild and domestic
lower vertebrates (cattle, sheep, goats, camels, antelope, and other
herbivores), but it can also occur in humans when they are exposed to infected
animals or tissue from infected animals. When anthrax affects humans, it is
usually due to an occupational exposure to infected animals or their products.
The currently available anthrax vaccine immunization consists of three
subcutaneous injections given 2 weeks apart followed by three additional
subcutaneous injections given at 6, 12, and 18 months. Annual booster injections
of the vaccine are recommended thereafter. Mild local reactions occur in 30% of
recipients and consist of slight tenderness and redness at the injection site.
Severe local reactions are infrequent and consist of extensive swelling of the
forearm in addition to the local reaction. Systemic reactions occur in a very
small percentage of recipients.
For information on our product candidate addressing the patient population
with infectious diseases, including anthrax, see "Ongoing Collaborative
Agreements" below.
10
ONGOING COLLABORATIVE AGREEMENTS
We are a party to collaborative agreements with corporate partners to
provide development and commercialization services relating to the products
under collaboration. These agreements are in the form of research and
development collaborations and licensing agreements. Under these agreements, we
have granted licenses or the rights to obtain licenses to our oral drug delivery
technology. In return, we are entitled to receive certain payments upon the
achievement of milestones and royalties on the sales of the products should a
product ultimately be commercialized. We also are entitled to be reimbursed for
research and development costs that we incur.
All of our collaborative agreements are subject to termination by our
corporate partners without significant financial penalty to them.
Eli Lilly and Company - Oral PTH 1-34 Program
In February 1997, we formed a strategic alliance with Lilly for the
development of an oral recombinant parathyroid hormone ("PTH 1-34", or
teraparatide) for the treatment of osteoporosis and a second product candidate,
recombinant human growth hormone ("rhGH", or somatropin), for treatment of
growth disorders. PTH 1-34 is a bone anabolic/formation compound currently
marketed by Lilly as a once daily injectable for the treatment of osteoporosis.
In contrast to sCT that reduces bone loss, PTH 1-34 stimulates new bone
formation.
In March 1998, Lilly and Emisphere entered into license agreements for PTH
1-34 and rhGH and Lilly paid us a $4 million milestone payment. In June 2000,
the parties executed a follow-on agreement for both proteins and Lilly paid
Emisphere a $2 million milestone payment in connection with the selection of the
EMISPHERE delivery agent to be used with PTH 1-34.
In August 2001, Emisphere and Lilly issued a joint publication on the oral
delivery of PTH 1-34 in the American Association of Pharmaceutical Scientists'
July issue of Pharmaceutical Research (Vol. 18, No. 7, 2001), setting forth the
first reproducible, oral delivery of biologically active PTH 1-34 in a
preclinical model of osteoporosis. In late 2001, Emisphere and Lilly entered an
oral unformulated solid dosage of parathyroid hormone into the clinic.
The Emisphere/Lilly oral PTH 1-34 program is currently in Phase I testing,
and Lilly is responsible for managing the trials and for all related costs. Any
future clinical development efforts also will be managed and funded by Lilly.
We are currently in litigation with Lilly related to the contract agreement
for the oral PTH 1-34 program (See Item 3, "Legal Proceedings", below).
In August of 2003, Emisphere and Lilly announced that Lilly would return
all rights and data generated on an oral form of rhGH to Emisphere, and would
continue to develop the oral PTH 1-34 program. For more information on rhGH, see
"Previous Collaborations", below.
Novartis Pharma AG - Oral Salmon Calcitonin Program
In December 1997, we entered into a collaboration agreement with Novartis
to develop an oral salmon calcitonin , currently used to treat osteoporosis. sCT
is a hormone that inhibits the bone-tissue resorbing activity of specialized
bone cells called osteoclasts, enabling the bone to retain more of its mass and
functionality. sCT is involved in the regulation of calcium and the decrease of
bone loss and fractures. Salmon calcitonin is estimated to be about 30 times
more potent than the human version. Synthetic sCT, which is identical to the
naturally occurring one, currently is available only as a nasal spray or
injectable therapy. Novartis markets synthetic sCT in the United States as
MIACALCIN(R) nasal spray, which is indicated for the treatment of postmenopausal
osteoporosis in women greater than five years postmenopause with low bone mass.
Treatment with sCT has been shown to maintain bone mineral density in the
spine and reduce the risk of new vertebral fractures in post-menopausal women
with osteoporosis. It is also used to treat the bone pain associated with
Paget's disease. sCT is currently available as an injection or nasal spray. In
its nasal spray forms, it is believed that sCT's major advantages are its lack
of serious side effects, excellent long-term safety profile and ease of
administration. Some studies even suggest that sCT produces an analgesic effect.
Annual worldwide sales of sCT marketed in nasal spray form were approximately
$389 million in 2003, of which the U.S. accounts for an estimated $240 million.
In October 1999, Novartis completed a Phase I clinical study in the United
Kingdom, testing a capsule form of sCT utilizing the eligen(TM) technology. The
study results, released in January 2000, indicated that Novartis achieved its
targeted endpoint of therapeutic sCT blood levels, following oral administration
of capsules containing sCT and an EMISPHERE delivery agent. We
11
believe that these results demonstrate the successful oral delivery of a protein
macromolecule from a solid oral dosage form without chemical modification of the
molecule or damage to the biological membrane.
In February 2000, Novartis exercised its option to acquire an exclusive
license to develop and commercialize oral sCT and in that connection, made a
$2.0 million milestone payment to us. In March 2000, Novartis paid us $2.5
million to obtain the license to our technology for calcitonin, and to obtain an
option to use the eligen(TM) technology for a second compound. Novartis' rights
to certain financial terms concerning the second compound have since expired.
In February 2003, we announced favorable results of a Phase IIa study
conducted by Novartis evaluating the performance in post-menopausal women of an
oral tablet form of sCT. The purpose of the study was to assess the efficacy and
safety of various doses of an oral tablet of sCT in post-menopausal women and to
confirm the activity of calcitonin when given orally, as reflected by changes in
markers of bone formation or resorption. Oral sCT was dosed for 90 days in the
study, the longest time period that the eligen(TM) technology has been dosed in
human testing. The study demonstrated activity on bone markers over a three
month dosing period when the peptide was delivered in combination with the
EMISPHERE delivery agent. Only two serious adverse events were reported, neither
of which were related to the EMISPHERE delivery agent or to sCT. The side
effects (mainly gastrointestinal in nature) seen with the highest doses of sCT
were consistent with those normally seen with high plasma levels of sCT when
administered by injection. These results were presented by Novartis at the
American Society of Bone and Mineral Research in September of 2003.
We are entitled to receive an additional milestone payment for oral sCT
upon the initiation of Phase III studies by Novartis.
Regeneron Pharmaceuticals, Inc. - Oral CNTF Program
During 2000, we established a research and development collaboration and
entered into an option agreement with Regeneron for the development of an oral
version of a derivative of ciliary neutrophic factor ("CNTF"), which is under
development by Regeneron as an injectable drug, to be marketed as AXOKINE(R),
for use in the treatment of obesity.
Emisphere and Regeneron have conducted pre-clinical testing of an oral
version of CNTF. Further development of the oral program will be guided by
Regeneron.
U.S. Army Medical Research Institute of Infectious Diseases ("USAMRIID") -
Oral Anthrax Antigen Program
In June 2003, we announced that we entered into a cooperative research and
development agreement ("CRADA") with the USAMRIID, the U.S. Department of
Defense's lead medical research laboratory for the U.S. Biological Defense
Research Program. USAMRIID is evaluating the use of our eligen(TM) technology to
create oral vaccines against anthrax using a new recombinant protein antigen.
The Institute plays a key role in infectious disease research, and its mission
is to conduct basic and applied research on biological threats resulting in
medical solutions (such as vaccines, drugs and diagnostics) to protect the war
fighter. USAMRIID is a subordinate laboratory of the U.S. Army Medical Research
and Materiel Command. USAMRIID has agreed to grant us an exclusive license to
each U.S. patent application or issued patent as a result of the work performed
under the CRADA. We will be eligible to receive royalties under a license
agreement with the ultimate vaccine developer should an oral anthrax vaccine
ultimately be developed.
PREVIOUS COLLABORATIONS
Elan Pharmaceuticals, Inc. ("Elan")
In 1996, we formed a joint venture with Elan for the development of an oral
heparin. In July 1999, we reacquired all product, marketing and technology
rights for these heparin product candidates from Elan.
Eli Lilly and Company
In February 1997, we formed a strategic alliance with Lilly for the
development of an oral recombinant parathyroid hormone ("PTH 1-34", or
teraparatide) for the treatment of osteoporosis and a second product candidate,
recombinant human growth hormone ("rhGH", or somatropin), for treatment of
growth disorders.
In August of 2003, Emisphere and Lilly announced that Lilly would return
all rights and data generated on an oral form of rhGH to us, and Emisphere and
Lilly would continue to develop the oral PTH 1-34 program.
12
Cubist Pharmaceuticals, Inc. ("Cubist")
In November 2000, we established a collaboration agreement with Cubist
Pharmaceuticals, Inc. for the development of an oral form of daptomycin, under
development by Cubist (being developed as CUBICIN(R)), for use in the treatment
of serious or life-threatening soft skin tissue infections. The agreement
expired in 2003, and the parties are no longer collaborating.
CONTRACT RESEARCH REVENUE RECEIVED FROM COLLABORATORS SINCE 2001 (in thousands)
COLLABORATOR 2003 2002 2001
- ----------------------------------------- ---------- ---------- ----------
Eli Lilly and Company (rhGH and PTH 1-34) $ 237 $ 2,923 $ 3,828
Novartis Pharma AG - - -
Regeneron Pharmaceuticals, Inc. - 28 206
Cubist Pharmaceuticals, Inc. - 267 401
U.S. AMRIID - N/A N/A
PATENTS AND OTHER FORMS OF INTELLECTUAL PROPERTY
Our patent strategy is designed to maximize our patent portfolio,
proprietary rights and any future licensing opportunities we might pursue. We
seek patent protection on various aspects of our proprietary chemical and
pharmaceutical delivery technologies, including, but not limited to, the
delivery agent compounds themselves, the combination of our compounds with a
pharmaceutical or chemical agent and for generic structures that encompass
EMISPHERE delivery agents. We also seek to patent the processes utilized in
manufacturing EMISPHERE delivery agents and the methods of use of EMISPHERE
delivery agents. We concentrate our efforts in the key pharmaceutical markets of
the United States, Europe, and Japan, and file in additional countries on a
case-by-case basis.
We have patents, or patent applications pending, for delivery agents that we
currently use in conjunction with insulin, heparin, calcitonin, PTH 1-34 and
cromolyn sodium. As of December 31, 2003, we had 74 issued patents in the United
States and had other patents issued or applications pending in various countries
around the world. Of our 74 U.S. issued patents, 9 were issued by the U.S.
Patent and Trademark Office during fiscal 2003. Our patents issued in the United
States will begin to expire in 2012, except for the earliest, which will expire
in 2007. As of December 31, 2003, we had 56 patent applications relating to our
drug delivery technology pending in the United States and over 250 patents or
applications pending in about 30 countries, including Canada, Mexico, Japan and
Australia, and in the European Patent Office.
In 2003, we registered the trademark, TECHNOLOGY FOR HUMANITY(R), with the
U.S. Patent and Trademark Office for use with technical consulting, research and
development in drug delivery systems.
For information concerning a pending litigation with Lilly relating, in
part, to its infringement of our patent rights, see Item 3 "Legal Proceedings",
below.
MANUFACTURING
The primary raw materials used in making the delivery agents for our product
candidates are readily available in large quantities from multiple sources. We
internally manufacture carriers on a small scale for research purposes and for
early stage clinical supplies. We believe that our manufacturing capabilities
comply with FDA good manufacturing practices ("GMPs"). In 2003, we manufactured
early stage clinical supplies under GMP conditions for the oral insulin tablet
prototype studies and heparin multiple arm studies.
Currently, we have arrangements with third parties to produce EMISPHERE
delivery agents in accordance with GMP regulations in batch sizes greater than
30 kilograms. We have identified other commercial manufacturers meeting the
FDA's GMP regulations that have the capability of producing EMISPHERE delivery
agents.
COMPETITION
Our success depends in part upon maintaining a competitive position in the
development of product candidates and technologies in an evolving field in which
developments are expected to continue at a rapid pace. We compete with other
drug delivery, biotechnology and pharmaceutical companies, research
organizations, individual scientists and non-profit organizations engaged in the
development of alternative drug delivery technologies or new drug research and
testing, and with entities developing new drugs that may be orally active. Our
product candidates compete against alternative therapies or alternative delivery
systems for each of the medical conditions our product candidates address,
independent of the means of delivery. Many
13
of our competitors have substantially greater research and development
capabilities, experience, and marketing, financial and managerial resources than
we have, and could represent significant competition.
Our competitors may succeed in developing competing technologies and
obtaining governmental approval for products before we can do so, alone or with
partners. We cannot assure you that developments by other drug delivery
innovators will not render our product candidates, or the therapeutic compounds
used in combination with our product candidates, noncompetitive or obsolete.
Oral Insulin Competition
Other private and public companies, as well as academic institutions are
developing oral insulin analogues. One such company is Nobex Corp. We believe
these analogues differ from our product, in that insulin is chemically modified,
creating a new chemical entity. In May 2002, Nobex entered into a partnership
agreement with GlaxoSmithKline ("GSK") for the development and potential
marketing of their product candidate. In November 2003, Nobex announced that GSK
would return the product candidate rights to Nobex, and that GSK would no longer
collaborate to develop the candidate. Other alternative insulin delivery systems
include Aventis/Pfizer/Nektar's EXUBERA(R). We believe our oral insulin delivery
technology is distinguished from other announced technologies as it demonstrates
the preservation of both the biological effects of the drug and the integrity of
the intestinal membrane.
Oral Heparin Competition
AstraZeneca PLC has reported European approval for EXANTA(TM), a pro-drug
form of melagatran that is a direct thrombin inhibitor. This product would
compete with our oral heparin product candidates. Organon Sanofi-Synthelabo LLC
has reported approval of an injectable pentasaccharide product, ARIXTRA(R), a
synthetic anti-clotting agent which is indicated for the prevention of DVT in
patients undergoing surgery for hip fracture, hip replacement or knee
replacement and was recently approved for an extended dosing regimen.
Other technologies use micro-encapsulation to orally deliver heparin. We
believe our oral heparin delivery technology is distinguished from other
announced technologies, in that it demonstrates the preservation of the chemical
integrity of the drug and the integrity of the intestinal membrane.
Oral Osteoporosis Candidate Competition
An injectable form of PTH 1-34, a bone anabolic, is manufactured by our
partner, Lilly, as FORTEO. PTH 1-34 is a bone anabolic that decreases bone loss
and builds new bone. Unigene Laboratories, Inc. has reported that, in
collaboration with GSK, it is developing an oral form of PTH 1-34. Unigene also
reported that it is developing an oral salmon calcitonin. Both candidates are in
early stage clinical testing.
Novartis currently offers a nasal dosage form of sCT, MIACALCIN. Other
osteoporosis therapies include estrogen replacement therapy, bisphosphonates,
selective estrogen receptor modulators and several new biologics that are under
development.
Competition Summary
Although we believe that our oral formulations, if successful, will likely
compete with well established injectable versions of the same drugs, we believe
that (i) physicians and patients prefer orally delivered forms of products over
injectable forms, (ii) oral forms of products enable improved compliance, and
(iii) for many programs, the oral form of products enable improved therapeutic
regimens. We expect to be the leader in oral drug delivery, because, among other
reasons, we believe that our eligen(TM) technology preserves the biological
effects of the drug and the integrity of the intestinal membrane.
GOVERNMENT REGULATION
Our operations and product candidates under development are subject to
extensive regulation by the FDA, other governmental authorities in the United
States and governmental authorities in other countries.
The duration of the governmental approval process for marketing new
pharmaceutical substances, from the commencement of preclinical testing to
receipt of governmental approval for marketing a new product, varies with the
nature of the product and with the country in which such approval is sought. For
new chemical entities, the approval process could take eight to ten years or
more. For reformulations of existing drugs, typically the process is shorter. In
either case, the procedures required to obtain
14
governmental approval to market new drug products are costly and time-consuming,
requiring rigorous testing of the new drug product. Even after such time and
effort, regulatory approval may not be obtained for a product.
The steps required before a new human pharmaceutical product can be
marketed or shipped commercially in the United States include, in part,
preclinical testing, the filing of an Investigational New Drug ("IND"), the
conduct of clinical trials and the filing with the FDA of either a New Drug
Application ("NDA") for drugs or a Biologic License Application ("BLA") for
biologics.
In order to conduct the clinical investigations necessary to obtain
regulatory approval in the US, an applicant must file an IND with the FDA to
permit the shipment and use of the drug for investigational purposes. The IND
sets forth, in part, the results of preclinical (laboratory and animal)
toxicology testing and the applicant's initial Phase I plans for clinical
(human) testing. Once an IND is approved, the clinical testing may commence
within 30 days.
Under FDA regulations, the clinical testing program required for marketing
approval of a new drug typically involves three clinical phases. In Phase I,
safety studies are generally conducted on normal, healthy human volunteers to
determine the maximum dosages and side effects associated with increasing doses
of the substance being tested. In Phase II, studies are conducted on small
groups of patients afflicted with a specific disease to gain preliminary
evidence of efficacy and to determine the common short-term side effects and
risks associated with the substance being tested. Phase III involves large-scale
trials conducted on disease-afflicted patients to provide statistical evidence
of efficacy and safety and to provide an adequate basis for product labeling.
Frequent reports are required in each phase and, if unwarranted hazards to
patients are found, the FDA may request modification or discontinuance of
clinical testing until further studies have been conducted. Phase IV testing is
sometimes conducted, either to meet FDA requirements for additional information
as a condition of approval, or to gain post-approval market acceptance of the
pharmaceutical product.
Once clinical testing has been completed pursuant to an IND, the applicant
files an NDA or BLA with the FDA seeking approval for marketing the drug
product. The FDA reviews the NDA or BLA to determine whether the drug is safe
and effective, and adequately labeled, and whether the applicant can demonstrate
proper and consistent manufacture of the drug. The time required for FDA action
on an NDA or BLA varies considerably, depending on the characteristics of the
drug, whether the FDA needs more information than is originally provided in the
NDA or BLA and whether the FDA has concerns with the evidence submitted.
The facilities of each company involved in the commercial manufacturing,
processing, testing, control and labeling of pharmaceutical products must be
registered with and approved by the FDA. Continued registration requires
compliance with GMP regulations and the FDA conducts periodic establishment
inspections to confirm continued compliance with its regulations.
We are subject to various federal, state and local laws, regulations and
recommendations relating to such matters as laboratory and manufacturing
practices and the use, handling and disposal of hazardous or potentially
hazardous substances used in connection with our research and development work.
We believe that we are in compliance with these laws and regulations in all
material respects.
EMPLOYEES
As of March 1, 2004, we had 120 employees, 81 of whom are engaged in
scientific research and technical functions and 39 of whom are performing
information technology, engineering, facilities maintenance and administrative
functions. Of the 120 employees, 30 hold Ph.D. or M.D. degrees. We believe our
relations with our employees are good.
AVAILABLE INFORMATION
Emisphere files annual, quarterly, and current reports, proxy statements,
and other documents with the Securities and Exchange Commission, (the "SEC"),
under the Securities Exchange Act of 1934 (the "Exchange Act"). The public may
read and copy any materials that the Company files with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that
contains reports, proxy and information statements, and other information
regarding issuers, including Emisphere, that file electronically with the SEC.
The public can obtain any documents that Emisphere files with the SEC at
http://www/sec/gov.
We also make available free of charge on or through our Internet website
(http://www.emisphere.com) our Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, Section 16 filings, and, if applicable,
amendments to those reports filed or furnished pursuant to Section 13(a) or
Section 16 of the Exchange Act as soon as reasonably practicable
15
after we or the reporting person electronically files such material with, or
furnishes it to, the SEC. Our Internet website and the information contained
therein or connected thereto are not intended to be incorporated into the Annual
Report or this Form 10-K.
ITEM 2. PROPERTIES
We currently lease approximately 86,000 square feet of office space at 765
Old Saw Mill River Road, Tarrytown, New York for use as executive offices and
laboratories. The current lease expires in September 2007 and has options for
two five-year extensions at then-current rates. In addition, we own a facility
of 100,000 square feet located on 29 acres of land in Farmington, Connecticut.
In the third quarter 2002, we announced our decision to cease operations at, and
sell the facility. In December 2003, we entered into a contract of sale for the
facility. The purchaser's obligations to close on the facility are contingent on
receiving certain governmental approvals, including but not limited to zoning
approvals in final form, wetlands approvals and state environmental approvals,
by August 12, 2004. In the event that the purchaser has not terminated the
contract by August 12, 2004 because of the failure to obtain governmental
approvals, the purchaser is obligated to close on the premises by the earlier
date of the thirtieth day after receipt of governmental approvals or November
12, 2004. The purchaser does have the right to adjourn the closing date for six
months after November 12, 2004 if governmental approvals have not been received
and provided the purchaser shall pay the sum of $35,000 per month to Emisphere.
ITEM 3. LEGAL PROCEEDINGS
On December 2, 2003, we were served with a complaint in an action brought
by Lilly in the United States District Court for the Southern District of
Indiana, Indianapolis Division, seeking (i) a declaratory judgment declaring
that Lilly is not in breach of its agreements with us concerning oral
formulations of recombinant parathyroid hormone, PTH 1-34, and (ii) an order
preliminarily and permanently enjoining us from terminating those agreements. On
January 21, 2004, we filed an answer in the action, asserting affirmative
defenses and counterclaims for patent infringement, unfair competition under the
Lanham Act and breach of contract. We alleged that Lilly filed certain patent
applications relating to the use of our proprietary technology in combination
with another drug, in violation of a License Agreement between the parties dated
April 7, 1998, and a Research Collaboration and Option Agreement between the
parties dated June 8, 2000, and that the activities disclosed in such
applications infringe upon our patents. We are also alleging that Lilly has
breached the agreements by failing to make a milestone payment, as required upon
the completion of oral PTH 1-34 product Phase I studies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Emisphere common stock is traded on The Nasdaq Stock Market under the
symbol "EMIS".
The following table sets forth the range of high and low intra-day sale
prices as reported by The Nasdaq Stock Market for each period indicated.
HIGH LOW
-------- --------
2002
First quarter........................................ $ 32.50 $ 14.77
Second quarter....................................... 18.15 3.57
Third quarter........................................ 4.70 2.78
Fourth quarter....................................... 4.63 2.55
2003
First quarter........................................ 6.32 2.35
Second quarter....................................... 5.50 2.28
Third quarter........................................ 9.20 3.32
Fourth quarter....................................... 8.15 4.88
2004
First quarter (through March 15, 2004)............... 8.66 5.43
As of March 15, 2004 there were approximately 7,517 stockholders of record,
including record owners holding shares on behalf of an indeterminate number of
beneficial owners, and 18,312,150 shares of common stock outstanding. The
closing price of our common stock on March 15, 2004 was $6.47.
We have never paid cash dividends and do not intend to pay cash dividends
in the foreseeable future. We intend to retain earnings, if any, to finance the
growth of our business.
Other information required by this item is incorporated by reference in the
Proxy Statement to be distributed in connection with our annual meeting of
stockholders.
17
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the years ended December 31,
2003, 2002, 2001, and 2000, the five months ended December 31, 2000, and the
fiscal years ended July 31, 2000 and 1999 have been derived from the financial
statements of Emisphere and notes thereto, which have been audited by our
independent accountants. The selected financial data for the year ended December
31, 2000 are unaudited.
FIVE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JULY 31,
------------------------------------------------------- ------------ ----------------------
2003 2002 2001 2000 2000 2000 1999
---------- -------------------------------------- ------------ ----------------------
(unaudited)
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenue (3)........................ $ 400 $ 3,378 $ 4,728 $ 7,211 $ 2,414 $ 5,889 $ 10,180
---------- ---------- ---------- ---------- ------------ ---------- ----------
Costs and expenses:
Research and development........... 21,026 49,719 53,301 24,820 10,386 27,448 21,217
General and administrative......... 9,727 11,242 9,692 6,699 3,039 5,878 6,051
Restructuring...................... (79)/(1)/ 1,417/(1)/ -- -- -- -- --
Loss on impairment of intangible
and fixed assets.................. 5,439/(2)/ 4,507/(2)/ -- -- -- -- --
Depreciation and amortization...... 5,806 6,185 4,014 2,605 1,167 2,434 1,633
Acquisition of in-process
research and development.......... -- -- -- -- -- -- 9,686
Loss in Ebbisham Ltd............... -- -- -- -- -- -- 3,092
---------- ---------- ---------- ---------- ------------ ---------- ----------
Total costs and expenses........... 41,919 73,070 67,007 34,124 14,592 35,760 41,679
---------- ---------- ---------- ---------- ------------ ---------- ----------
Operating loss..................... (41,519) (69,692) (62,279) (26,913) (12,178) (29,871) (31,499)
Other (expense) and income ........ (3,350) (1,650) 5,745 8,253 4,592 2,974 817
---------- ---------- ---------- ---------- ------------ ---------- ----------
Net loss........................... $ (44,869) $ (71,342) $ (56,534) $ (18,660) $ (7,586) $ (26,897) $ (30,682)
---------- ---------- ---------- ---------- ------------ ---------- ----------
Net loss per share--Basic and
diluted.......................... $ (2.48) $ (3.98) $ (3.18) $ (1.10) $ (0.43) $ (1.79) $ (2.63)
---------- ---------- ---------- ---------- ------------ ---------- ----------
DECEMBER 31, JULY 31,
--------------------------------------------------- -----------------------
2003 2002 2001 2000 2000 1999
---------- ---------- ---------- ---------- ---------- ----------
(in thousands)
BALANCE SHEET DATA:
Cash, cash equivalents and investments.......... $ 43,008 $ 73,701 $ 139,278 $ 196,809 $ 207,793 $ 17,805
Total assets.................................... 66,049 107,966 182,083 224,963 229,557 38,476
Long-term liabilities........................... 39,871 34,690 30,637 26,976 25,558 22,308
Accumulated deficit............................. (295,033) (250,164) (178,822) (122,288) (114,702) (87,805)
Stockholders' equity............................ 22,807 67,540 137,642 193,140 199,551 11,287
(1) In the second quarter of 2002, we announced a plan to restructure our
operations, which included the discontinuation of our liquid oral heparin
program and related initiatives, and a scale back of associated
infrastructure. In the third quarter of 2002, we announced plans to further
restructure operations by closing our Connecticut research facility and
consolidating operations in Tarrytown. Total restructuring charges in 2002
were $1,417 of which $79 of accrued restructuring charges were reversed
during 2003.
(2) In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", in
connection with the restructurings, we performed an evaluation of certain
intangible and fixed assets to determine if their carrying amount exceeded
their fair value. In 2002, we recorded an impairment charge of $4,507. In
2003, we recorded an additional impairment charge of $5,439.
(3) Emisphere adopted the Securities and Exchange Commission's Staff Accounting
Bulletin 101, "Revenue Recognition" ("SAB 101") on August 1, 2000. In
accordance with SAB 101, non-refundable upfront and research and
development milestone payments and payments for services ("non-refundable
fees") are recognized as revenue as the related services are performed over
the term of the collaboration. Prior to August 1, 2000, certain
non-refundable fees, including reimbursements from Ebbisham Ltd., were
recognized as revenue only when there were no additional contractual
services to be provided or costs to be incurred by Emisphere in connection
with the non-refundable fee.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (dollars in thousands, except per share amounts)
GENERAL
Emisphere Technologies, Inc. is a biopharmaceutical company specializing in
the oral delivery of therapeutic macromolecules and other compounds that are not
currently deliverable by oral means. Since our inception in 1986, we have
devoted substantially all of our efforts and resources to research and
development conducted on our own behalf and in collaborations with corporate
partners and academic research institutions. Our product pipeline includes
product candidates for the treatment of cardiovascular diseases, osteoporosis,
growth disorders, diabetes, asthma/allergies, obesity and infectious diseases.
Development and commercialization of these product candidates entails risk and
significant expense. Since inception, we have had no product sales from these
product candidates.
BUSINESS OVERVIEW
We have developed and continue to enhance the human resource and physical
infrastructure necessary to achieve our goal of becoming the premier oral drug
delivery company. We have a significant and growing patent estate to protect our
discoveries, proprietary technologies and carrier library. We continue to invest
resources in research capabilities that:
. improve our understanding of the mechanisms of action of the carriers
in order to select the appropriate carriers to deliver the drug
candidate in the most efficient manner;
. redesign and update our computer modeling and in vitro testing
capabilities to optimize carrier/drug selection;
. systematically study oral, buccal, transdermal, sublingual and topical
approaches to drug delivery;
. select animal models that best mimic the human response; and
. explore the formulation of drug and carrier to optimize delivery.
We utilize resources to, among other things, conduct feasibility studies to
determine if an EMISPHERE carrier can deliver a given drug. A feasibility study
is a pre-clinical or clinical study with a duration of approximately six months.
We conduct feasibility studies when we believe that significant opportunities
exist, or when requested by:
. pharmaceutical companies who seek our assistance to deliver an
injectable drug or less than optimally delivered drug via an EMISPHERE
carrier. The costs of these studies typically are reimbursed. From
these feasibility studies, further collaborations may develop
including larger clinical studies and partnerships.
. government, universities and other biotech companies. The costs of
these studies may or may not be reimbursed.
As a result of our strategy, our partners Lilly and Novartis are, at their
own expense, actively developing PTH 1-34 and sCT, respectively, using EMISPHERE
carriers. In 2003, our primary focus was on developing oral insulin and heparin,
which are self funded projects. We also continue to conduct feasibility studies.
In 2002, we completed a clinical trial for Lilly related to rhGH, for which we
were fully reimbursed. In understanding the results of operations below, it is
important to keep in mind that in 2002 and 2001 our primary focus was
self-developing liquid oral heparin in a large Phase III trial which was
completed in early 2002. After the results of the Phase III trial were reported,
we reduced our work force and infrastructure related to the trial.
RESULTS OF OPERATIONS
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Contract research revenue was $400 in 2003, representing a decrease of
$2,978 or 88% compared to the year ended December 31, 2002. Revenue for 2003
primarily related to research and development expense reimbursements under
collaborative agreements with Lilly. The decrease primarily was attributable to
the winding down of rhGH Phase I clinical studies in collaboration with Lilly.
Costs associated with contract research revenue approximate such revenue and are
included in research and development expenses.
Total operating expenses were $41,919 for 2003, a decrease of $31,151, or
43%, compared to the year ended December 31, 2002. Total operating expenses
included restructuring costs and loss on asset impairment of $5,360. The total
operating expenses for 2003, excluding the restructuring costs and loss on asset
impairment, were $36,559, a decrease of $30,587, or 46% compared to the year
ended December 31, 2002. The details of this decrease are outlined below. The
impact of the discontinuation of our
19
liquid oral heparin project and the subsequent restructuring and impairment
charges are outlined in "Restructuring" and "Loss on impairment of intangible
and fixed assets" below.
Research and development costs were $21,026 for 2003, a decrease of $28,693
or 58%, compared to the year ended December 31, 2002. The decrease consisted of
a $13,928 decrease in clinical trial expenses and a $14,765 decrease in all
other research costs. The decrease in clinical trial expenses primarily was due
to (i) a $11,680 decrease in PROTECT related clinical trial expenses resulting
from the completion of the trial and (ii) a $2,248 decrease in Phase I
proof-of-concept clinical trial expenses resulting from the completion of the
trials for rhGH, oral insulin, solid oral heparin, and cromolyn sodium. The
decrease in all other research costs of $14,765 consisted of (i) $3,755 in
reduced compensation and related expenses, (ii) $7,158 in reduced lab/clinical
supplies costs, (iii) $2,724 in lower consulting and professional fees and (iv)
$1,128 in lower operating costs. Overall, a majority of the decrease in other
research costs was due to (i) the completion of the PROTECT trial and (ii) the
subsequent reduction in work force and closing of our Connecticut research
facility ("FarmTech"), both of which were initiated in 2002. The impact in 2003
of the closing of our FarmTech operations was a $3,552 decrease in other
research costs, which is included in the $14,765 total decrease in other
research costs.
During 2003, we did not incur any significant project costs related to the
liquid oral heparin program and related initiatives other than certain close-out
expenses. As a result, the liquid oral heparin project expense for 2003
excluding restructuring and impairment costs decreased by a total of $15,788
compared to the year ended December 31, 2002, consisting of a decrease of
$11,680 in clinical trial expenses, $858 in compensation and travel costs, $462
in consulting, $996 in lab/clinical supplies, $1,091 in production facility
design work and $701 in all other expenses.
General and administrative expenses for 2003 were $9,727, a decrease of
$1,515, or 13%, compared to the year ended December 31, 2002. The decrease
primarily was the result of a decrease of $1,209 in compensation and related
expenses due to the elimination of the chief operating officer's position in
2002, a decline in severance costs, lower headcount and lower relocation
expenses. The remaining decrease of $306 primarily was related to the closing of
our FarmTech operations and the reduction of research and development support
activity.
Restructuring. In 2002, we announced a plan for restructuring our
operations, which included the discontinuation of our liquid oral heparin
program and related initiatives, and a reduction of associated infrastructure.
Additionally, in the third quarter of 2002, we evaluated several alternatives to
consolidate our two research facilities located in Tarrytown, New York and
Farmington, Connecticut in order to eliminate excess capacity, reduce spending,
and raise cash. We decided to dispose of the Farmington research facility. As a
result of the restructuring plan, we announced a reduction in force, which was
implemented during May and June 2002 at the Tarrytown facility and November and
December 2002 at the Farmington facility. Restructuring charges were adjusted by
$(79) and $(77) in 2003 and 2002, respectively, to reflect actual expenditures.
The reduction in force in 2002 included the termination of 91 full-time and
26 temporary employees, including 14 administrative personnel and 103 scientists
and research assistants. Four additional employees at the Farmington research
facility were terminated in 2003. We paid $178 in stay bonuses to certain
FarmTech employees who were asked to remain at the facility for an extended
period of time during the phase out of the facility. The restructuring plan
resulted in the reduction of the Company's full-time work force by approximately
50%.
The following table presents the original restructuring accruals for
Tarrytown and Farmington, the adjustments to these accruals, and the amounts
paid through December 31, 2003:
ESTIMATED RESTRUCTURING
RESTRUCTURING ACTUAL RESERVE AS OF
EXPENSES DISBURSEMENTS ADJUSTMENTS DECEMBER 31, 2003
--------------- --------------- ------------- -------------------
Severance and accrued vacation..... $ 1,003 $ (978) $ (1) $ 24
Outplacement services.............. 69 (54) (15) -
Employee benefits.................. 90 (58) (31) 1
Contract exit costs................ 267 (194) (73) -
Other.............................. 65 (29) (36) -
--------------- --------------- ------------ -------------------
Total $ 1,494 $ (1,313) $ (156) $ 25
=============== =============== ============ ===================
Loss on impairment of intangible and fixed assets. We recorded asset
impairments in 2002 and 2003 resulting from our decision to refocus operations
and reduce costs and to surrender 27% of our leased space in Tarrytown, New York
to the landlord and to lease some of the equipment in that space to the
subsequent tenant (see Tarrytown facility transaction below). Management
assessed the recoverability of certain intangible and fixed assets related to
the oral liquid heparin program and the associated infrastructure. A loss on
impairment was recorded in 2003 of $5,439, an increase of $932 or 21% over the
prior year,
20
which includes an impairment charge of $4,436 related to furniture and equipment
situated at the Tarrytown facility. The remaining $1,003 represents a write-down
of certain FarmTech assets to fair value, which was assessed based on the age
and condition of the equipment, potential offers from third parties, quotes from
scientific equipment resellers, and recent sales of similar equipment at auction
or by us. Also in 2002, we concluded that a total impairment was required with
respect to the portion of the purchased technology representing patents related
to the discontinued liquid oral heparin program. We recorded an impairment
charge of $4,507, comprised of $3,910 for purchased technology and $597 for
fixed assets which were to be used for the liquid oral heparin development
program.
Tarrytown facility transaction: During 2003, in order to streamline
operations and reduce expenditures, we entered into a transaction to surrender
to the landlord approximately 27% of our leased space (the "surrendered space")
at the Tarrytown facility. The surrendered space primarily consists of office
space, which was subsequently leased to another tenant (the "subsequent tenant")
at the Tarrytown facility. Annual cost savings from the transaction are expected
to be approximately $1,540 for the remainder of the lease term, which extends
through August 2007. In the event that the subsequent tenant vacates the space
before August 31, 2005, we are contingently liable for the rent payments and
will be required to re-let the space through August 31, 2007. Completion of the
lease amendment and related agreements took place in October 2003. The agreement
describes four distinct areas to be surrendered, three of which were vacated and
surrendered to the subsequent tenant as of December 31, 2003. The fourth space
was vacated in March 2004.
In connection with this transaction, we agreed to sell most of the
furniture and equipment in the surrendered space to the subsequent tenant. The
subsequent tenant has agreed to make certain payments ("furniture payments")
which will be made directly to the landlord on a monthly basis. A rental credit
equal to the furniture payment will be applied against our rent payment to the
landlord on a monthly basis. Total payments under the agreement are $1,023 and
extend through August 2012. The transaction between Emisphere and the subsequent
tenant has been accounted for as an operating lease, with all furniture payments
recorded as rental income. We retain a security interest in the furniture and
equipment until all required payments have been made. We retained assets from
the surrendered space with a net book value of $353 for use elsewhere in the
Tarrytown facility.
We compared the net book value of the furniture and equipment to be leased
to the fair value, which was determined to be the net present value of the
furniture payments, or $737, and determined that the assets were impaired. Based
on this evaluation, we recorded an impairment charge of $4,327 during the year
ended December 31, 2003, which has been included in loss on impairment of
intangible and fixed assets on the consolidated statements of operations. The
lease of these assets will result in a reduction of depreciation expense of
$1,195, $1,194, $1,193 and $418 in 2004, 2005, 2006, and 2007 through 2009,
respectively.
Farmington facility transaction: In December 2003, we entered into a
contract of sale for the Farmington facility with a real estate developer. The
purchaser's obligations to close on the facility are contingent on receiving
certain governmental approvals, including but not limited to zoning approvals in
final form, wetlands approvals and state environmental approvals, by August 12,
2004. In the event that the purchaser has not terminated the contract by August
12, 2004 because of the failure to obtain governmental approvals, the purchaser
is obligated to close on the premises by the earlier date of the thirtieth day
after receipt of governmental approvals or November 12, 2004. The purchaser does
have the right to adjourn the closing date for six months after November 12,
2004 if governmental approvals have not been received and provided the purchaser
shall pay the sum of $35 per month to Emisphere. As of December 31, 2003, we
performed an evaluation of the land, building and equipment available for sale
at the Farmington facility, which has a carrying value of $3,591. We evaluated
the following two components of the facility: (i) land, building and equipment
that would most likely be transferred to the buyer when the sale is consummated
(such as equipment which is attached to the structure and expensive to remove),
and (ii) equipment that is portable and available for sale and would most likely
be retained by us. We evaluated the land, building and attached equipment based
on the sale price in the contract and determined that an impairment loss of the
carrying value of the land, building and attached equipment had not been
triggered as of December 31, 2003. In the event we are not successful in closing
the sale of the Farmington facility, we may need to write down the carrying
value of the land, building and equipment further. Because the sale is
conditioned in part on local town zoning approval, we cannot predict with
certainty when, or if, the closing will take place.
Subsequent to the decision to sell the Farmington facility, we transferred
equipment with a net book value of $435 for use at the Tarrytown facility and
equipment with a net book value of $314 was sold. The remaining items of
equipment were then evaluated for potential impairment. The evaluations were
based on the age and condition of the equipment, potential offers from third
parties, quotes from scientific equipment resellers, and recent sales of similar
equipment at auction or by us. Based on this evaluation, we recorded an
impairment charge of $1,003 during the year ended December 31, 2003, which has
been included in loss on impairment of intangible and fixed assets on the
consolidated statement of operations.
The land, building, and equipment at the Farmington facility that are
available for sale are included at their carrying value in land, building and
equipment held for sale, net on the condensed consolidated balance sheet as of
December 31, 2003. The $435
21
of equipment transferred out of the Farmington facility is included in equipment
and leasehold improvements, net on the consolidated balance sheets.
Purchased technology impairment: At December 31, 2003, we performed an
evaluation of the recoverability of the remaining purchased technology related
to the solid forms of oral heparin. We are proceeding with planned studies
related to this formulation and we estimate that future undiscounted cash flows
from programs related to the solid form of oral heparin are still valid.
Therefore, an impairment of the remaining purchased technology has not been
triggered as of December 31, 2003. The net carrying value of the remaining
purchased technology is $2,512. A negative outcome in the development of solid
oral heparin may trigger a write-down of related patents, currently valued at
$2,512, in the future. Estimated amortization expense for the purchased
technology is $239 for each of the next five years.
Depreciation and amortization costs were $5,806 for the year ended December
31, 2003, a decrease of $379, or 6%, as compared to the year ended December 31,
2002. This decrease is primarily the result of depreciation expense related to
the Farmington research facility, which was classified as held for sale as of
December 31, 2002 and therefore was not depreciated during 2003, offset by
increases in depreciation for assets put into service at the Tarrytown facility
in 2002.
Overall, our operating loss was $41,519 including the restructuring and
impairment charges in the year ended December 31, 2003, a decrease of $28,173 as
compared to a $69,692 operating loss for the year ended December 31, 2002.
Excluding the restructuring and asset impairment charges the operating loss was
$36,159 in the year ended December 31, 2003 or a decrease of $27,609 compared to
2002.
Other expense and income was $3,350 for the year ended December 31, 2003, a
decrease of $1,700, or 103%, as compared to 2002. The change is primarily the
result of a decrease in investment income of $1,162, plus an increase in
interest expense of $693 related to the note due to Elan. See "Liquidity and
Capital Resources" for further information concerning the Elan note. The
decrease in investment income resulted from lower cash and investment balances
and lower interest rates.
As a result of the above factors, we sustained a net loss of $44,869,
including restructuring and impairment charges, for the year ended December 31,
2003, compared to a net loss of $71,342 for the year ended December 31, 2002, a
decrease of $26,473 or 37%. Excluding the restructuring and impairment charges
the net loss was $39,509 in the year ended December 31, 2003, a decrease of
$25,687 or 39% compared to 2002.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Contract research revenue was $3,378 in 2002, representing a decrease of
$1,350 or 29% compared to the year ended December 31, 2001. Revenue for 2002
related to research and development expense reimbursement primarily under
collaboration agreements with Lilly, Cubist, and Regeneron. The decrease
primarily was attributable to (i) the winding down of certain Phase I clinical
studies in collaboration with Lilly ($905 decrease), and (ii) the near
completion of our screening phase research, primarily related to our efforts on
behalf of Cubist, Regeneron, and other parties ($445 decrease). Costs associated
with contract research revenue approximate such revenue and are included in
research and development expenses.
Total operating expenses were $73,070 for 2002, an increase of $6,063, or
9%, compared to the year ended December 31, 2001. Total operating expenses
included restructuring costs and loss on asset impairment of $5,924. Total
operating expenses for 2002, excluding the restructuring costs and loss on asset
impairment, was $67,146, an increase of $139, or 0.2% over the year ended
December 31, 2001.
Research and development costs were $49,719 for the year ended December 31,
2002, a decrease of $3,582 or 7%, compared to the year ended December 31, 2001.
The decrease consisted of a $6,889 decrease in clinical trial expenses,
partially offset by a $3,307 increase in other research costs. The decrease in
clinical trial expenses primarily was due to a $9,181 decrease in
PROTECT-related clinical trial expenses resulting from the completion of the
trial, partially offset by a $2,292 increase in Phase I proof-of-concept
clinical expenses, primarily for solid oral heparin, oral insulin and rhGH. The
$3,307 increase in other research cost consisted of (i) increased compensation
expense of $1,218 due to increased headcount that was partially related to the
first full year of the operations at FarmTech, (ii) one time production plant
design expenses of $974 for the oral liquid heparin/delivery agent, (iii)
increased lease and utility costs of $444, and (iv) an increase of $1,049 in
consulting expenses. These increased expenses were offset by a $378 decrease in
overall research and development expenses resulting from the restructuring
announced in May of 2002.
Overall the liquid oral heparin project expense for 2002, excluding
restructuring and impairment costs, was $15,357, consisting of $11,236 in
clinical trial expenses, $399 in consulting, $1,273 in clinical supplies, $974
in production facility design work and $1,475 in all other expenses. These
program costs did not recur in 2003 because of the discontinuation of the liquid
oral heparin program and related initiatives.
22
General and administrative expenses for 2002 were $11,242, an increase of
$1,550, or 16%, compared to the year ended December 31, 2001. The increase was
primarily the result of $523 in bonus payouts, $825 in increased compensation
expense, $194 in relocation expenses, $93 in recruiting expense, primarily
associated with the addition of a chief operating officer, and $118 in overall
occupancy and utility fees. These increased expenses were partially offset by a
$203 reduction in legal and professional fees and other expenses.
Restructuring. As noted above, on May 22, 2002, we announced a plan for
restructuring our operations, which included the discontinuation of our liquid
oral heparin program and related initiatives, and a reduction of associated
infrastructure. Additionally, in the third quarter of 2002, we evaluated several
alternatives to consolidate our two research facilities located in Tarrytown,
New York and Farmington, Connecticut in order to eliminate excess capacity,
reduce spending, and raise cash. We decided to dispose of the Farmington
research facility. As a result of the restructuring plan, we announced a
reduction in force, which was implemented during May and June 2002 at the
Tarrytown facility and November and December 2002 at the Farmington facility.
The restructuring plan resulted in the reduction of our full-time work force by
approximately 50%.
The following table presents the original restructuring accruals for
Tarrytown and Farmington, the adjustments to these accruals, and the amounts
paid through December 31, 2002:
ESTIMATED RESTRUCTURING
RESTRUCTURING ACTUAL RESERVE AS OF
EXPENSES DISBURSEMENTS ADJUSTMENTS DECEMBER 31, 2002
-------------- ------------- ----------- -----------------
Severance and accrued vacation..... $ 1,003 $ (960) $ 5 $ 48
Outplacement Services.............. 69 (54) (15) -
Employee Benefits.................. 90 (58) (31) 1
Contract exit Costs................ 267 (194) - 73
Other.............................. 65 (29) (36) -
-------------- ------------- ----------- -----------------
Total $ 1,494 $ (1,295) $ (77) $ 122
============== ============= =========== =================
In addition, we forgave loans to certain terminated employees and
recognized compensation expense of $21. The reserve is included in accounts
payable and accrued expenses in the consolidated balance sheet as of December
31, 2002.
Loss on impairment of intangible and fixed assets. In connection with the
results of the liquid oral heparin clinical trials, we performed an evaluation
of the recoverability of certain intangible and fixed assets related to that
program and related initiatives. We concluded that a total impairment of the
portion of the purchased technology representing patents related to the liquid
form of oral heparin was required because we do not anticipate realization of
the carrying value of this asset. We recorded a $3,910 impairment charge.
In addition, we determined that an impairment had occurred with respect to
a reactor and associated accessories, which was to be used only for manufacture
of oral liquid heparin, and a gene chip array system and related accessories.
During the year, we recorded a $597 impairment charge, representing the
reduction of the carrying value of the reactor and gene chip array system and
associated accessories to their fair value, based on the sale of the equipment
to third parties.
In connection with the decision to dispose of the Farmington facility, we
performed an evaluation of the recoverability of land, building and equipment at
the facility. The evaluation was based on the weighted-average probability of
estimated undiscounted future cash flows from five expressions of interest from
third parties. Based on this evaluation, an impairment loss of the carrying
value of the land, building and equipment had not been triggered as of December
31, 2002. The carrying value of land, building, and equipment as of December 31,
2002 was $4,520. In the event that we are not successful in closing on the sale
of the Farmington facility, we may need to write down the carrying value of the
land, building and equipment further.
Depreciation and amortization expenses were $6,185 for the year ended
December 31, 2002, an increase of $2,171, or 54%, as compared to the same period
in 2001. The increase was primarily the result of depreciation expense related
to the Farmington research facility, which was acquired in April 2001, along
with amortization expense for leasehold improvements related to additional
laboratory and office space placed into service at the Tarrytown facility in
2002.
Overall, our operating loss was $69,692 including the restructuring and
impairment charges, for the year ended December 31, 2002, an increase of $7,413
compared to a $62,279 operating loss for the year ended December 31, 2001.
Excluding the restructuring and asset impairment charges, the operating loss was
$63,768 in the year ended December 31, 2002, an increase of $1,489 compared to
2001.
23
Other expense and income was $1,650 of expense for the year ended December
31, 2002 as compared to $5,745 of income for the year ended December 31, 2001.
The change was primarily the result of a decrease in investment income of
$6,568, plus an increase in interest expense of $605 related to the note due to
Elan. The decrease in investment income resulted from a reduction in cash and
investment balances and prevailing interest rates. We also recorded a $222 other
than temporary impairment charge to write-down to fair value our $310 investment
in the preferred stock of a biotech company with products that could potentially
use our oral delivery technology. We considered the following factors to be
primary indicators of impairment: (i) the biotech company's need to raise
sufficient capital to ensure funding of its research and development projects,
(ii) the biotech company's inability to meet payment obligations as they become
due and (iii) the possibility that the biotech company may not be able to
continue as a going concern unless additional financing is obtained. Fair value
was estimated based on the price of the biotech company's publicly-traded common
stock.
As a result of the above factors, we sustained a net loss of $71,342
including restructuring and impairment charges for the year ended December 31,
2002 compared to a net loss of $56,534 for the year ended December 31, 2001, an
increase of $14,808 or 26%. Excluding the restructuring and impairment charges,
the net loss was $65,196 in the year ended December 31, 2002, an increase of
$8,662 or 15% compared to 2001.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2003, we had cash, cash equivalents and investments
totaling $43,008, a decrease of $30,693, compared to December 31, 2002.
Net cash used in operations was $30,663 in 2003, as compared to $64,062 in
the year ended December 31, 2002, a decrease of $33,399 resulting from the
restructuring efforts initiated during the second half of 2002.
Capital expenditures were $1,168 in 2003 compared to $3,439 for the year
ended December 31, 2002, a decrease of $2,271. The decrease in capital
expenditures was primarily due to the termination of most capital projects
following the restructuring described above.
Net cash provided by financing activities was $1,232 in 2003, compared to
$1,335 during the year ended December 31, 2002, a decrease of $103. The proceeds
from the exercise of stock options decreased by $784 from 2002, due to lower
prices of our common stock and fewer employee exercises. This decrease was
partially offset by the proceeds from a financing lease of $681.
Since our inception in 1986, we have generated significant losses from
operations and we anticipate that we will continue to generate significant
losses from operations for the foreseeable future. On December 31, 2003, our
accumulated deficit was approximately $295 million. Operations to date have been
funded with the proceeds from collaborative research agreements, public and
private equity and debt financings and income earned on investments.
We expect our cash, cash equivalent and investment balances to decrease by
approximately $27,000 in 2004. Absent additional financing, new collaborations,
milestone payments and/or closing of the sale of the Farmington facility, we
would expect to end 2004 with approximately $16,000 in cash, cash equivalents
and investments. Reduced cash expenditures as a result of the surrender of a
portion of the leased premises at the Tarrytown facility and closing on the sale
of the Farmington facility, should it occur, will be partially offset by higher
costs due to inflation and increases in employee compensation. We expect capital
expenditures to be in the range of $400 to $600 in 2004. Capital purchases may
be financed by lease arrangements.
This projection of cash usage and year end cash, cash equivalent and
investment balances assumes that during 2004, we will not (i) enter into a
partnership agreement for oral insulin, solid oral heparin or any other
non-partnered program, (ii) receive any milestone payments on currently
partnered programs, or (iii) close on the sale of the Farmington facility. We
have enough funds to continue our development programs, as presented to the
Board of Directors, beyond 2004. We cannot assure you that we will be able to
raise sufficient funds to continue operations and if we fail to generate
sufficient revenue, raise additional funds or undergo further restructuring, the
resultant reduction of our available cash resources would have a material
adverse effect on our ability to continue as a going concern. If we are
successful in securing a partner for either oral insulin or solid oral heparin,
we may receive milestone payments, upfront fees, expense reimbursements and/or
cash infusions. Such cash inflows could delay our need to raise additional funds
to maintain operations beyond 2004. In the event that we are unable to achieve
long-term profitability and/or obtain additional capital, future operations will
need to be scaled back or discontinued.
Off-Balance Sheet Arrangements
As of December 31, 2003, the company had no material off-balance sheet
arrangements, other than operating leases.
Our bylaws provide for the indemnification of officers and directors for
certain events or occurrences while the officer or director is, or was, serving
at our request in such capacity. The maximum potential amount of future payments
that we could be
24
required to make under the bylaws is unlimited; however, we have Director and
Officer insurance policies that, in most cases, would limit our exposure and
enable us to recover a portion of any future amounts paid. As a result of the
insurance policy coverage, the estimated fair value of these indemnification
provisions is minimal. All of these indemnification provisions were
grandfathered under the provisions of FIN 45 as they were in effect prior to
December 31, 2002. Accordingly, we have no liabilities recorded for these
provisions as of December 31, 2003.
In the ordinary course of business, we enter into agreements with third
parties that include indemnification provisions which, in our judgment, are
normal and customary for companies in our industry sector. These agreements are
typically with business partners, clinical sites, and suppliers. Pursuant to
these agreements, we generally agree to indemnify, hold harmless, and reimburse
indemnified parties for losses suffered or incurred by the indemnified parties
with respect to our product candidates, use of such product candidates, or other
actions taken or omitted by Emisphere. The maximum potential amount of future
payments we could be required to make under these indemnification provisions is
unlimited. We have not incurred material costs to defend lawsuits or settle
claims related to these indemnification provisions. As a result, the estimated
fair value of liabilities relating to these provisions is minimal. Accordingly,
we have no liabilities recorded for these provisions as of December 31, 2003.
In the normal course of business, we may be confronted with issues or
events that may result in a contingent liability. These generally relate to
lawsuits, claims, environmental actions or the actions of various regulatory
agencies. We consult with counsel and other appropriate experts to assess the
claim. If, in our opinion, we have incurred a probable loss as set forth by
accounting principles generally accepted in the United States, an estimate is
made of the loss and the appropriate accounting entries are reflected in our
consolidated financial statements. We, after consultation with legal counsel, do
not anticipate that liabilities arising out of currently pending or threatened
lawsuits and claims, including the pending litigation described in Part I, Item
3 "Legal Proceedings", will have a material adverse effect on our consolidated
financial position, results of operations or cash flows.
Significant contractual obligations as of December 31, 2003 are as follows:
AMOUNT DUE IN
------------ ---------------------------------------------------------
TOTAL LESS THAN 1 MORE THAN 5
OBLIGATION YEAR 1 TO 3 YEARS 4 TO 5 YEARS YEARS
------------ ------------- -------------- -------------- -------------
TYPE OF OBLIGATION
Long-term debt (1).................................... $ 55,000 $ - $ 55,000 $ - $ -
Capital lease obligations............................. 768 256 512 - -
Operating lease obligations (2)....................... 6,451 1,746 3,510 1,195 -
Clinical research organizations (3)................... 514 514 - - -
------------ ------------- -------------- -------------- -------------
Total............................................. $ 62,733 $ 2,516 $ 59,022 $ 1,195 $ -
============ ============= ============== ============== =============
(1) In July 1999, we acquired from Elan our ownership interest in Ebbisham (a
jointly owned entity created by the Company and Elan), in exchange for a
seven year, $20,000 zero coupon note due July 2006 carrying a 15% interest
rate, compounding semi-annually (the "Note"), plus royalties on oral
heparin product sales, subject to an annual maximum and certain milestone
payments. In connection with any payment on the Note made by the Emisphere,
we have the right to require Elan to purchase our common stock at the
market price at an aggregate price equal to such payment made, subject to
the following conditions: (i) the acceptance by the FDA of a new drug
application from Emisphere involving any heparin product, (ii) our closing
stock price remaining at or above $25.00 per share for the 20 consecutive
trading days prior to the date we exercise this right and (iii) the
exercise of this right would not require the application of the equity
accounting method by Elan. At December 31, 2003, the balance on the Elan
Note was $38,345.
(2) The operating lease is related to the Tarrytown facility. Under the terms
of the agreement with the landlord to surrender a portion of this space in
2003, we are contingently liable for the rent payments and will be required
to re-let the space through August 31, 2007 if the subsequent tenant
vacates the surrendered space before August 31, 2005. We have excluded such
payments from the above table because we believe that the possibility of
such an event occurring is remote. In the event that the subsequent tenant
vacates the space, the maximum amount which we would be obligated to pay
would be $3,751 ($1,023 in less than one year, $2,046 in one to three years
and $682 in four to five years) for rent, real estate taxes and operating
expenses.
(3) We are obligated to make payments under certain contracts with third
parties who provide clinical research services to support our ongoing
research and development.
RESEARCH AND DEVELOPMENT COSTS
We have devoted substantially all of our efforts and resources to research
and development conducted on our own behalf (self-funded) and in collaborations
with corporate partners (partnered). Generally, research and development
expenditures are allocated to specific research projects. Due to various
uncertainties and risks, including those described in "Risk Factors" below,
relating to the progress of our product candidates through development stages,
clinical trials, regulatory approval, commercialization and market acceptance,
it is not possible to accurately predict future spending or time to completion
by project or project category.
25
The following table summarizes research and development spending to date by
project category:
YEAR ENDED DECEMBER 31, CUMULATIVE
------------------------------------------------ SPENDING TO DATE(1)
2003 2002 2001 2003
-------------- -------------- -------------- -------------------
Research (2) $ 3,314 $ 3,671 $ 2,687 $ 41,265
Feasibility projects
Self-funded.................................... 496 3,394 2,017 6,570
Partnered...................................... 422 429 831 2,449
Development projects
Oral heparin (self-funded)..................... 1,722 19,851 29,277 89,188
Oral insulin (self-funded)..................... 2,940 5,436 4,050 12,878
Partnered...................................... 315 2,286 2,535 10,854
All other (self-funded)........................ - - - 141
Other............................................. 11,817 14,849 11,904 47,501
-------------- -------------- -------------- -------------------
Total all projects........................ $ 21,026 $ 49,916(3) $ 53,301 $ 210,846
============== ============== ============== ===================
- ----------
(1) Cumulative spending from August 1, 1995 through December 31, 2003
(2) Research is classified as resources expended to expand the ability to
create new carriers, to ascertain the mechanisms of action of carriers, and
to establish computer based modeling capabilities, prototype formulations,
animal models, and in vitro testing capabilities.
(3) During the year ended December 31, 2002, $197 of research and development
expenses, related to certain projects, was reclassified as restructuring
for severance charges in the consolidated statement of operations.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in accordance with
accounting principles generally accepted in the United States involves the use
of estimates and assumptions that affect the recorded amounts of assets and
liabilities as of the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Certain of these estimates
and assumptions are considered to be Critical Accounting Policies, due to their
complexity, subjectivity, and uncertainty, along with their relevance to our
financial performance. Actual results may differ substantially from these
estimates. These policies and their key characteristics are outlined below.
Investments. We invest excess cash in accordance with a policy objective
seeking to preserve both liquidity and safety of principal. We consider all
highly liquid, interest-bearing debt instruments with a maturity of three months
or less when purchased to be cash equivalents. Cash and cash equivalents may
include demand deposits held in banks and interest bearing money market funds.
Investments are carried at fair value and are considered to be available for
sale. Accordingly, unrealized holding gains and losses are reported in
stockholders' equity. We generally invest our excess funds in obligations of the
U.S. government and its agencies, bank deposits, mortgage-backed securities, and
investment grade debt securities issued by corporations and financial
institutions at ratings of A-1 or A (Standard and Poor's). Although our
investments carry high ratings when purchased, a lowering of the rating of the
corporate debt securities in our portfolio could result in an impairment.
Purchased Technology. Purchased technology represents the value assigned to
patents underlying research and development projects of Ebbisham Ltd, related to
oral heparin, that were commenced but not yet completed as of the date of our
acquisition of full ownership and which, if unsuccessful, have no alternative
future use. In accordance with Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), the fair value of purchased technology is reviewed for impairment on a
quarterly basis or whenever events and circumstances indicate that the carrying
value might not be recoverable. An impairment loss, measured as the amount by
which the carrying value exceeds the fair value, is triggered if the carrying
amount exceeds estimated undiscounted future cash flows. At December 31, 2003,
purchased technology had a carrying value of $2,512, net of amortization. We
amortize purchased technology on a straight-line basis over a period of 15
years, the average life of the related patents. Estimated amortization expense
for the purchased technology is $239 for each of the next five fiscal years.
Equipment and Leasehold Improvements. Equipment and leasehold improvements
are stated at cost. Depreciation and amortization are provided for on a
straight-line basis over the estimated useful life of the asset. Leasehold
improvements are amortized over the life of the lease or of the improvements
whichever is shorter. Expenditures for maintenance and repairs that do not
materially extend the useful lives of the respective assets are charged to
expense as incurred. The cost and accumulated depreciation or amortization of
assets retired or sold are removed from the respective accounts and any gain or
loss is recognized in operations.
26
Impairment of Long-Lived Assets. In accordance with SFAS 144, we review our
long-lived assets for impairment on a quarterly basis or whenever events and
circumstances indicate that the carrying value of an asset might not be
recoverable. An impairment loss, measured as the amount by which the carrying
value exceeds the fair value, is triggered if the carrying amount exceeds
estimated undiscounted future cash flows. We recognized impairments on
long-lived assets of $5,439 and $4,507 during the years ended December 31, 2003
and 2002, respectively. These impairments were based on estimates of future cash
flows, including potential offers from third parties, quotes from scientific
equipment resellers, and recent sales of similar equipment at auction or by us.
Actual results could differ significantly from these estimates, which would
result in additional impairment losses or losses on disposal of the assets.
Clinical Trial Accrual Methodology. Clinical trial expenses represent
obligations resulting from our contracts with various research organizations in
connection with conducting clinical trials for our product candidates. We
account for those expenses on an accrual basis according to the progress of the
trial as measured by patient enrollment and the timing of the various aspects of
the trial. Accruals are recorded in accordance with the following methodology:
(i) the costs for period expenses, such as investigator meetings and initial
start-up costs, are expensed as incurred based on management's estimates, which
are impacted by any change in the number of sites, number of patients and
patient start dates; (ii) direct service costs, which are primarily on-going
monitoring costs, are recognized on a straight-line basis over the life of the
contract; and (iii) principal investigator expenses that are directly associated
with recruitment are recognized based on actual patient recruitment. All changes
to the contract amounts due to change orders are analyzed and recognized in
accordance with the above methodology. Change orders are triggered by changes in
the scope, time to completion and the number of sites. During the course of a
trial, we adjust our rate of clinical expense recognition if actual results
differ from our estimates.
Revenue Recognition. We recognize revenue from contract research and
development and research progress payments in accordance with Staff Accounting
Bulletin No. 104, "Revenue Recognition" ("SAB104"), and Financial Accounting
Standards Board ("FASB") Emerging Issues Task Force Issue No. 00-21, "Accounting
for Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"). SAB 104
superseded Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101") in December 2003. Contract research revenue includes
revenue from collaborative agreements and feasibility studies and is comprised
of reimbursed research and development costs, as well as upfront and research
and development milestone payments. Deferred revenue represents payments
received which are related to future performance. Non-refundable upfront and
research and development milestone payments and payments for services are
recognized as revenue as the related services are performed over the term of the
collaboration. Revenue recognized is the lower of (i) the percentage complete,
measured by incurred costs, applied to expected contractual payments or (ii) the
total non-refundable cash received to date. With regards to revenue from
non-refundable fees, changes in assumptions of estimated costs to complete could
have a material impact on the revenue recognized. Contract research revenue is
expected to fluctuate from year to year and is dependent upon the timing of work
plans mutually agreed to with collaborators and to the allocation of efforts
between us and our collaborators.
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"). SFAS 146 nullifies Emerging Issues Task Force ("EITF") Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)"
("EITF 94-3"). SFAS 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred, rather
than on the date of an entity's commitment to an exit plan and establishes fair
value as the objective for initial measurement of the liability. The provisions
of SFAS 146 are effective for exit or disposal activities initiated after
December 31, 2002. The provisions of EITF 94-3 shall continue to apply for an
exit activity initiated under an exit plan that met the criteria of EITF 94-3
prior to SFAS 146's initial application. The adoption of the provisions of SFAS
146 did not have a material effect on our financial statements.
In December 2003, the Staff of the Securities and Exchange Commission
issued SAB 104, which supercedes SAB 101. SAB 104's primary purpose is to
rescind accounting guidance contained in SAB 101 related to multiple element
revenue arrangements, superceded as a result of the issuance of EITF 00-21.
Additionally, SAB 104 rescinds the SEC's "Revenue Recognition in Financial
Statements Frequently Asked Questions and Answers" (the "FAQ") issued with SAB
101 that had been codified in SEC Topic 13, "Revenue Recognition". Selected
portions of the FAQ have been incorporated into SAB 104. While the wording of
SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue
recognition principles of SAB 101 remain largely unchanged by the issuance of
SAB 104. Adoption of SAB 104 was required immediately and did not have a
material effect on our financial statements.
In December 2003, the FASB issued a revision to Interpretation No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51"
("FIN 46R"), which was issued in January 2003. FIN 46R clarifies the application
of ARB No. 51, "Consolidated Financial Statements," to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated
27
financial support. FIN 46R requires the consolidation of these entities, known
as variable interest entities ("VIEs"), by the primary beneficiary of the
entity. The primary beneficiary is the entity, if any, that will absorb a
majority of the entity's expected losses, receive a majority of the entity's
expected residual returns, or both. Among other changes, the revisions of FIN
46R (a) clarified some requirements of the original FIN 46, which had been
issued in January 2003, (b) eased some implementation problems, and (c) added
new scope exceptions. FIN 46R deferred the effective date of the Interpretation
for public companies, to the end of the first reporting period ending after
March 15, 2004, except that all public companies must at a minimum apply the
provisions of the Interpretation to entities that were previously considered
"special-purpose entities" under the FASB literature prior to the issuance of
FIN 46R by the end of the first reporting period ending after December 15, 2003.
Adoption of FIN 46R did not have a material impact on our financial statements.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
("SFAS 150"). SFAS 150 specifies that instruments within its scope embody
obligations of the issuer and that the issuer must classify them as liabilities.
SFAS 150 requires issuers to classify as liabilities the following three types
of freestanding financial instruments: (1) mandatorily redeemable financial
instruments, (2) obligations to repurchase the issuer's equity shares by
transferring assets, and (3) certain obligations to issue a variable number of
shares. SFAS 150 defines a "freestanding financial instrument" as a financial
instrument that (1) is entered into separately and apart from any of the
entity's other financial instruments or equity transactions or (2) is entered
into in conjunction with some other transaction and can be legally detached and
exercised on a separate basis. For all financial instruments entered into or
modified after May 31, 2003, SFAS 150 is effective immediately. For all other
instruments of public companies, SFAS150 went into effect at the beginning of
the first interim period beginning after June 15, 2003. The adoption of SFAS 150
did not have a material impact on the Company's financial statements. In
November 2003, the Financial Accounting Standards Board deferred the effective
date for selected provisions of SFAS 150, limited to mandatorily redeemable
noncontrolling interests associated with finite-lived subsidiaries. The deferral
of those selected provisions is not expected to have a material impact on our
financial statements.
On November 25, 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". FIN 45 elaborates on
the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions of
this Interpretation are applicable to guarantees issued or modified after
December 31, 2002. The adoption of the disclosure and recognition provisions of
FIN 45 did not have a material effect on our financial statements.
TRANSACTIONS WITH RELATED PARTIES
The Company was introduced to the purchaser of the Farmington facility by
Rob Beyer, the son-in-law of Howard Pack, a Director of the Company. The Company
is unaware as to the nature of Mr. Beyer's interest in the transaction, if this
transaction is successfully completed. However, neither Mr. Beyer nor Mr. Pack
will receive any fee from Emisphere. This relationship was disclosed to the
Board of Directors at the time that this contract was presented to the Board for
approval, and Mr. Pack abstained from the related discussion and vote. The sale
price in the sale contract is higher than any other offer that was received.
During 2003, two former members of the Board of Directors resigned their
Board positions and have become consultants to Emisphere.
RISK FACTORS
The following risk factors should be read carefully in connection with
evaluating our business and the forward-looking statements that we make in this
Report and elsewhere (including oral statements) from time to time. Any of the
following risks could materially adversely affect our business, our operating
results, our financial condition and the actual outcome of matters as to which
forward-looking statements are made in this Report.
We are highly dependent on the clinical success of our oral insulin and
oral heparin product candidates.
Oral Insulin: Insulin is currently available in injectable form for Type 1
and Type 2 diabetic patients. We believe that an oral form of insulin would gain
significant market share and have therefore focused significant resources on
developing oral insulin. We intend to secure a partner to fund further
development of this product candidate. We are aware that other companies
currently are developing spray (buccal) or aerosol (pulmonary) forms (e.g.
Aventis/Pfizer/Nektar's EXUBERA) of insulin, and that insulin delivery is a
highly competitive area. Our product candidate has demonstrated favorable data
in early patient studies in both Type 1 and Type 2 diabetics and we believe that
oral insulin has the potential to be an improved therapy for diabetics. However,
we cannot assure you that these data, or future data will demonstrate that our
oral form of insulin will be better than existing therapy nor can we assure you
that we will secure a partner to develop this product candidate.
28
In 2002, we announced that we achieved a near-term milestone as a result of
late stage negotiations with an unnamed partner regarding an oral insulin
partnership. In March 2003, those negotiations terminated without an agreement
being reached. We intend to continue to fund any clinical trials and further
development of our oral insulin product candidate until we secure a partner, and
we will continue to seek a partner for this product candidate to conduct later
stage development and fund commercialization efforts.
Oral Heparin: Heparin currently is not available in oral form. We believe
that an oral form of heparin would gain significant market share and therefore
have focused significant resources on developing oral heparin. Other companies
are currently developing spray (buccal) or alternate forms of heparin, and other
forms of heparin have recently received European approval (e.g. AstraZeneca's
EXANTA). Heparin delivery is a highly competitive area.
We are developing solid dosage forms of oral heparin and have commenced
Phase I testing. We earlier attempted to develop a liquid form of oral heparin.
We commenced Phase III clinical trials ("PROTECT") for this solution form of
product in 1999 and began dosing patients in January 2000. The trial was
completed in early 2002 and did not meet its endpoint of superiority to LOVENOX.
All further development of liquid oral heparin was terminated. We cannot assure
you that future data related to solid oral heparin will demonstrate superiority,
equivalence, or non-inferiority of solid oral heparin to alternative heparin
forms.
In July 1999, we reacquired all product, marketing and technology rights
for our heparin products from Elan, which had been our joint venture partner
since 1996. In accordance with the termination agreement with Elan, we will be
required to pay Elan royalties on Emisphere sales of oral heparin, subject to an
annual cap. Unless we enter into a new partnership agreement related to oral
heparin, we will continue to fund clinical trials and further development
activities related to this product candidate.
In addition, the manufacture, marketing and distribution of pharmaceuticals
is a formidable undertaking. Our competitors may have more resources and/or
experience in bringing their product candidates to market.
We are dependent upon collaborative partners to develop and commercialize
compounds using our delivery agents.
A key part of our strategy is to form collaborations with pharmaceutical
companies that will assist us in developing, testing, obtaining government
approval for and commercializing oral forms of therapeutic compounds using the
eligen(TM) technology. We currently have collaboration agreements with Novartis,
Lilly, and Regeneron.
We cannot assure you that:
. we will be able to enter into additional collaborative arrangements
to develop products utilizing our drug delivery technology;
. any existing or future collaborative arrangements will be
sustainable or successful;
. the product candidates in collaborative arrangements will be
further developed by partners in a timely fashion;
. any collaborative partner will not infringe upon our intellectual
property position; or
. milestones in collaborative agreements will be met and milestone
payments will be received.
If we are unable to obtain development assistance and funds from other
pharmaceutical companies to fund a portion of our product development costs and
to commercialize our product candidates, we may have to delay, scale back or
curtail one or more of our projects. Thus we may be at a substantial competitive
disadvantage.
Our product candidates are in various stages of development, and we cannot
be certain that any will be suitable for commercial purposes.
To be profitable, we must successfully research, develop, obtain regulatory
approval for, manufacture, introduce, market and distribute our products under
development, or secure a partner to provide financial and other assistance with
these steps. The time necessary to achieve these goals for any individual
product is long and uncertain. Before we or a potential partner can sell any of
our products under development, we must demonstrate through preclinical (animal)
studies and clinical (human) trials that each product is safe and effective for
human use for each targeted indication. We cannot be certain that we or our
current or future partners will be able to begin, or continue, planned clinical
trials for our product candidates, or if we are able, that the product
candidates will prove to be safe and will produce their intended effects.
A number of companies in the drug delivery, biotechnology and
pharmaceutical industries have suffered significant setbacks in clinical trials,
even after showing promising results in earlier studies or trials. We cannot
assure you that favorable results in any preclinical study or early clinical
trial will mean that favorable results will ultimately be obtained in future
clinical trials. Nor
29
can we assure you that results of limited animal and human studies are
indicative of results that would be achieved in future animal studies or human
clinical studies, all or some of which will be required in order to have our
product candidates obtain regulatory approval. Similarly, we cannot assure you
that any of our product candidates will be approved by the FDA.
Our future business success depends heavily upon regulatory approvals,
which can be difficult to obtain for a variety of reasons, including cost.
Our preclinical studies and clinical trials, as well as the manufacturing
and marketing of our product candidates, are subject to extensive, costly and
rigorous regulation by various governmental authorities in the United States and
other countries. The process of obtaining required approvals from the FDA and
other regulatory authorities often takes many years, is expensive and can vary
significantly based on the type, complexity and novelty of the product
candidates. We cannot assure you that we, either independently or in
collaboration with others, will meet the applicable regulatory criteria in order
to receive the required approvals for manufacturing and marketing. Delays in
obtaining United States or foreign approvals for our self-developed projects
could result in substantial additional costs to us, and, therefore, could
adversely affect our ability to compete with other companies. Additionally,
delays in obtaining regulatory approvals encountered by others with whom the
Company collaborates also could adversely affect our business and prospects.
Even if regulatory approval of a product is obtained, the approval may
place limitations on the intended uses of the product, and may restrict the way
in which we or our partner may market the product.
Our current and future prospects could be affected by competitive news.
If a competitor announces (i) a successful clinical study involving a
product that may be competitive with one of our product candidates or (ii) an
approval by a regulatory agency of the marketing of a competitive product, such
announcement may have a material adverse effect on our operations or future
prospects, the price of our common stock, or our ability to obtain regulatory
approvals for our products.
We have incurred substantial losses since inception and are likely to
require additional capital.
Since our inception in 1986, we have generated significant losses from
operations and we anticipate that we will continue to generate significant
losses from operations for the foreseeable future. On December 31, 2003, our
accumulated deficit was approximately $295 million. Operations to date have been
funded with the proceeds from collaborative research agreements, public and
private equity and debt financings and income earned on investments.
We expect to continue to incur clinical development expenses for
self-funded programs and for programs for which we are attempting to secure a
partner. We expect no further significant liquid oral heparin solution clinical
development expenses as the program was discontinued in May 2002.
We anticipate that our existing capital resources will enable us to
continue operations through the end of 2004 and for a period of time beyond
without raising additional capital. However, this expectation is based on the
current operating plan that could change as a result of many factors, and we may
require additional funding sooner than anticipated. To the extent operating and
capital resources are insufficient to meet future requirements, we will have to
raise additional funds to continue the development and commercialization of our
products or reduce spending. The ability to raise funds in the future may not be
available on favorable terms, or at all. If additional capital is raised through
the sale of equity or convertible debt securities, the issuance of such
securities could result in dilution to our existing stockholders. In addition,
our outstanding debt to Elan, in the form of a zero-coupon note with a 15%
interest rate, compounded semi-annually, matures on July 6, 2006. We may not
have sufficient capital or the ability to raise capital to repay the note at its
time of maturity.
Actual savings and improvements in operations from current restructurings
may be lower than expected.
The obligation of the proposed buyer of the Farmington facility to
consummate the purchase is contingent on receiving certain governmental
approvals. We can not assure when or if the sale to this particular buyer will
be consummated. The closing of the sale of the Farmington facility may not occur
in the near future and the costs associated with the facility (e.g., utilities,
insurance, maintenance, lawn care and real estate taxes) may require cash
outlays. If the sale of the facility to the proposed buyer is not consummated,
we may sell the facility for less than the current contract price and may be
required to record an impairment charge.
30
If we cannot adequately protect our patent and proprietary rights, our
business will suffer.
Although we have patents for some of our product candidates and have
applied for additional patents, there can be no assurance that patents applied
for will be granted, that patents granted to or acquired by us now or in the
future will be valid and enforceable and provide us with meaningful protection
from competition or that we will possess the financial resources necessary to
enforce any of our patents. Also, we cannot assure that any products that we (or
a licensee) develop will not infringe upon any patent or other intellectual
property right of a third party.
We also rely upon trade secrets, know-how and continuing technological
advances to develop and maintain our competitive position. We maintain a policy
of requiring employees, scientific advisors, consultants and collaborators to
execute confidentiality and invention assignment agreements upon commencement of
a relationship with us. We cannot assure you that these agreements will provide
meaningful protection for our trade secrets in the event of unauthorized use or
disclosure of such information.
Part of our strategy involves collaborative arrangements with other
pharmaceutical companies for the development of new formulations of drugs
developed by others and, ultimately, the receipt of royalties on sales of the
new formulations of those drugs. These drugs are generally the property of the
pharmaceutical companies and may be the subject of patents or patent
applications and other rights of protection owned by the pharmaceutical
companies. To the extent those patents or other forms of rights expire, become
invalid or otherwise ineffective, or to the extent those drugs are covered by
patents or other forms of protection owned by third parties, sales of those
drugs by the collaborating pharmaceutical company may be restricted, limited,
enjoined, or may cease. Accordingly, the potential for royalty revenues to us
may be adversely affected.
We may be at risk of having to obtain a license from third parties making
proprietary improvements to our technology.
There is a risk that third parties may make improvements or innovations to
our technology in a more expeditious manner than Emisphere. Should such
circumstances arise, we may need to obtain a license from such third party to
obtain the benefit of the improvement or innovation. Royalties payable under
such a license would reduce our share of total revenue.
We are dependent on third parties to manufacture and in some cases, test
our products.
As of 2003, we have a GMP compliant facility to manufacture a limited
number of clinical supplies related to EMISPHERE delivery agents. Currently, we
have no manufacturing facilities for large-scale clinical or commercial
production of any compounds under consideration as products. We have no research
facilities for later stage product candidate testing prior to first human
testing. The success of our partnerships is dependent on the proposed or current
partner's capacity and ability to adequately manufacture drug products to meet
the proposed demand of each respective market.
We may face product liability claims related to participation in clinical
trials or the use or misuse of any future products.
We have product liability insurance with a policy limit of $5 million per
occurrence and in the aggregate. The testing, manufacture and marketing of
products for humans utilizing our drug delivery technology may expose us to
potential product liability and other claims. These may be claims directly by
consumers or by pharmaceutical companies or others selling our products that may
be developed in the future. We seek to structure development programs with
pharmaceutical companies that would complete the development, manufacturing and
marketing of the finished product in a manner that would protect us from such
liability, but the indemnity undertakings for product liability claims that we
secure from the pharmaceutical companies may prove to be insufficient.
Our operations may involve hazardous materials and are subject to
environmental, health and safety taxes and regulations. We may incur substantial
liability arising from our activities involving the use of hazardous materials.
As a biopharmaceutical research and development company, we are subject to
various local, state and federal environmental, health and safety regulations
and laws involving the use of hazardous material. Our operations involve the
controlled use of chemicals, biologicals and radioactive materials. The cost of
compliance with these various regulations has the potential to be quite
substantial. Should we be held liable or face regulatory actions regarding an
accident involving personal injury or an environmental release, we potentially
could exceed our resources or insurance coverage.
31
We face rapid technological change and intense competition.
Our success depends, in part, upon maintaining a competitive position in
the development of products and technologies in an evolving field in which
developments are expected to continue at a rapid pace. We compete with other
drug delivery, biotechnology and pharmaceutical companies, research
organizations, individual scientists and non-profit organizations engaged in the
development of alternative drug delivery technologies or new drug research and
testing, as well as with entities developing new drugs that may be orally
active. Many of these competitors have greater research and development
capabilities, experience, and marketing, financial and managerial resources than
we have, and, therefore, represent significant competition.
Our products, when developed and marketed, may compete with existing
injectable versions of the same drug, some of which are well established in the
marketplace and manufactured by formidable competitors, as well as other
existing drugs. For example, our oral heparin product candidate, if successful,
would compete with injectable heparin, injectable low molecular weight heparin
and warfarin, an oral anti-coagulant, as well as the recently approved oral
pentasaccharide and oral melagatran products. These products are marketed
throughout the world by world renowned leading pharmaceutical companies such as
Aventis Pharma SA, Pfizer, Inc. and Bristol Myers Squibb Company. Similarly, our
salmon calcitonin product candidate, if developed and marketed, would compete
with a wide array of existing osteoporosis therapies, including a nasal dosage
form of salmon calcitonin, estrogen replacement therapy, bisphosphonates and
selective receptor modulators, or, potentially oral forms of these drugs.
Our competitors may succeed in developing competing technologies or
obtaining government approval for products before we do. Developments by others
may render our product candidates, or the therapeutic compounds used in
combination with our product candidates, noncompetitive or obsolete. For
example, AstraZeneca PLC has received U.S. and European approval of a pro-drug
form of melagantran, a direct thrombin inhibitor, which would compete with our
oral heparin products. Similarly, Nobex Corporation has an oral insulin
formulation being developed and that at least one competitor has notified the
FDA that it is developing a competing formulation of salmon calcitonin. We
cannot assure you that, if our products are marketed, they will be preferred to
existing drugs or that they will be preferred to or available before other
products in development. For a more detailed discussion of known competitors and
competing products candidates and technologies, see the discussion under the
heading: "Item 1. Business Competition."
We are dependent on our key personnel and if we cannot recruit and retain
leaders in our research, development, manufacturing, and commercial
organizations, our business will be harmed.
We are highly dependent on our executive officers. If we are not able to
retain any of these persons our business may suffer. There is intense
competition in the biotechnology industry for qualified scientists and
managerial personnel in the development, manufacture, and commercialization of
drugs. We may not be able to continue to attract and retain the qualified
personnel necessary for developing our business.
Anti-takeover provisions of our corporate charter documents, Delaware law
and our agreements with collaborators may affect the price of our common stock.
Our Board of Directors has the authority to issue up to 1,000,000 shares of
preferred stock and to determine the rights, preferences and privileges of those
shares without any further vote or action by our stockholders. Of these
1,000,000 shares, 200,000 are currently designated Series A Junior Participating
Cumulative Preferred Stock in connection with our stockholders' rights plan, and
the remaining 800,000 shares remain available for future issuance. Rights of
holders of common stock may be adversely affected by the rights of the holders
of any preferred stock that may be issued in the future. Additional provisions
of our certificate of incorporation and by-laws could have the effect of making
it more difficult for a third party to acquire a majority of our outstanding
voting common stock. These include provisions that classify our Board of
Directors, limit the ability of stockholders to take action by written consent,
call special meetings, remove a director for cause, amend the by-laws or approve
a merger with another company. We also have a stockholder's right's plan,
commonly referred to as a "poison pill," that makes it difficult, if not
impossible, for a person to acquire control of us without the consent of our
Board of Directors.
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law which prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. For purposes of Section 203, a "business combination"
includes a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an "interested stockholder" is a
person who, either alone or together with affiliates and associates, owns (or
within the past three years, did own) 15% or more of the corporation's voting
stock.
32
Our stock price has been and may continue to be volatile.
The trading price for our common stock has been and is likely to continue
to be highly volatile. The market prices for securities of drug delivery,
biotechnology and pharmaceutical companies have historically been highly
volatile. Factors that could adversely affect our stock price include:
. fluctuations in our operating results;
. announcements of partnerships or technological collaborations,
innovations or new products by us or our competitors;
. governmental regulation;
. developments in patent or other proprietary rights;
. public concern as to the safety of drugs developed by us or
others;
. the results of preclinical testing and clinical studies or trials
by us, our partners or our competitors;
. litigation;
. general stock market and economic conditions;
. number of shares available for trading (float);
. inclusion in or dropping from stock indexes.
Future sales of common stock, or the prospect of future sales, may depress
our stock price.
Sales of a substantial number of shares of common stock, or the perception
that sales could occur, could adversely affect the market price of our common
stock. As of December 31, 2003, we had outstanding options to purchase up to
4,276,958 shares of common stock which are currently exercisable and additional
options to purchase up to 1,558,883 shares of common stock are exercisable over
the next several years. In addition, an aggregate of 25,000 shares of common
stock have been reserved for issuance under our Directors' Deferred Compensation
Plan, of which 6,310 shares are available for future grants. The holders of
these options or rights have an opportunity to profit from a rise in the market
price of our common stock with a resulting dilution in the interests of the
other. The existence of these options or rights may adversely affect the terms
on which the Company may be able to obtain additional financing.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary investment objective is to preserve principal while maximizing
yield without significantly increasing risk. Our investments consist of U.S.
Treasuries, commercial paper and corporate notes. Our investments totaled
$40,899 at December 31, 2003. Of this total, $36,999 had fixed interest rates,
of which $29,178 were short-term and $7,821 were long-term investments, and
$3,900 had variable interest rates, all of which were long-term investments.
Due to the conservative nature of our short-term fixed interest rate
investments (maturities in less than one year), we do not believe that it has a
material exposure to interest rate risk. The value of our fixed interest rate
long-term investments is sensitive to changes in interest rates. Interest rate
changes would result in a change in the fair value of these investments due to
differences between the current market interest rate and the rate prevailing at
the date of original purchase of the investment. Reasonably expected changes in
prevailing interest rates would not materially impact the value of our long term
investments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedules begin on page
F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
33
ITEM 9A. CONTROLS AND PROCEDURES
We conducted an evaluation of the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this Annual Report on Form
10-K. The evaluation was conducted under the supervision and with the
participation of the Chief Executive Officer and Chief Financial Officer. Based
upon this evaluation, each concluded that our disclosure controls and procedures
are effective in alerting them on a timely basis to material information
required to be included in our filings under the Securities Exchange Act of
1934. There has been no significant change in our internal controls over
financial reporting during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures or internal
controls over financial reporting will prevent all errors and all fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the system are met
and cannot detect all deviations. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud or deviations, if any, within the
Company have been detected. While we believe that our disclosure controls and
procedures have been effective, in light of the foregoing, we intend to continue
to examine and refine our disclosure controls and procedures and monitor ongoing
developments in this area.
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is incorporated by reference to the Proxy
Statement to be distributed in connection with our next annual meeting of
stockholders. We have adopted a code of ethics applicable to our directors,
chief executive officer, chief financial officer, controller and senior
financial management. Our code of ethics is filed herewith as Exhibit 14.1.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the Proxy
Statement to be distributed in connection with our next annual meeting of
stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the Proxy
Statement to be distributed in connection with our next annual meeting of
stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to the Proxy
Statement to be distributed in connection with our next annual meeting of
stockholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this item is incorporated by reference to the Proxy
Statement to be distributed in connection with our next annual meeting of
stockholders.
35
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
A list of the financial statements filed as a part of this report
appears on page F-1.
(2) Financial Statement Schedules
Schedules have been omitted because the information required is not
applicable or is shown in the Financial Statements or the corresponding
Notes to the Consolidated Financial Statements.
(3) Exhibits
A list of the exhibits filed as a part of this report appears on pages
E-1 and E-2, which follow immediately after the financial statements.
(b) Reports on Form 8-K
On November 18, 2003, we furnished a Current Report on Form 8-K
containing a copy of a press release announcing our financial results
for the quarterly period ended September 30, 2003 pursuant to Item 12
Results of Operations and Financial Condition.
On January 27, 2004, we filed a Current Report on Form 8-K pursuant to
Item 5 Other Events announcing an action brought against us by Eli Lilly
and Company.
On February 3, 2004, we filed a Current Report on Form 8-K pursuant to
Item 5 Other Events announcing preliminary results from the first
multiple-dose clinical study of an oral insulin tablet using our
eligen(TM) technology.
On February 25, 2004, we furnished a Current Report on Form 8-K pursuant
to Item 12 Results of Operations and Financial Condition containing a
copy of a press release announcing our financial results for the quarter
and year ended December 31, 2003.
(c) See Exhibits listed under the heading "Exhibit Index" set forth on
page E-1.
(d) Not applicable.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 29, 2004
Emisphere Technologies, Inc.
By: /s/ Michael M. Goldberg
-----------------------------
Michael M. Goldberg, M.D.
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME AND SIGNATURE TITLE DATE
- ------------------ ----- ----
/s/ Michael M. Goldberg Director, Chairman of the Board March 29, 2004
- ---------------------------- and Chief Executive Officer
Michael M. Goldberg, M.D. (principal executive officer)
/s/ Howard M. Pack Director March 29, 2004
- ----------------------------
Howard M. Pack
/s/ Mark I. Greene Director March 29, 2004
- ----------------------------
Mark I. Greene, M.D., Ph.D.
/s/ Robert J. Levenson Director March 29, 2004
- ----------------------------
Robert J. Levenson
/s/ Arthur Dubroff Director March 29, 2004
- ----------------------------
Arthur Dubroff
/s/ Stephen K. Carter Director March 29, 2004
- ----------------------------
Stephen K. Carter, M.D.
/s/ Michael Black Director March 29, 2004
- ----------------------------
Michael Black
/s/ Elliot M. Maza Chief Financial Officer March 29, 2004
- ---------------------------- (principal financial officer)
Elliot M. Maza, J.D., C.P.A.
37
EMISPHERE TECHNOLOGIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
EMISPHERE TECHNOLOGIES, INC. PAGE(s)
-------
Report of Independent Auditors................................................................................. F-2
Consolidated Balance Sheets as of December 31, 2003 and 2002................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001..................... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001..................... F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2003, 2002 and 2001........... F-6
Notes to the Consolidated Financial Statements................................................................. F-7
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Emisphere Technologies, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Emisphere Technologies, Inc. and subsidiary, at December 31, 2003 and 2002, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America. 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 of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 11, 2004
F-2
EMISPHERE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31,
------------------------
2003 2002
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents ..................................................................... $ 31,287 $ 22,784
Investments ................................................................................... 3,900 37,676
Prepaid expenses and other current assets ..................................................... 1,424 2,285
---------- ----------
Total current assets ...................................................................... 36,611 62,745
Equipment and leasehold improvements, net .......................................................... 14,005 23,282
Land, building and equipment held for sale, net .................................................... 3,618 4,520
Purchased technology, net .......................................................................... 2,512 2,752
Investments ........................................................................................ 7,821 13,241
Other assets ....................................................................................... 1,482 1,426
---------- ----------
Total assets .................................................................................. $ 66,049 $ 107,966
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ......................................................... $ 2,638 $ 5,324
Deferred revenue .............................................................................. 125 -
Current portion of capital lease obligation ................................................... 211 -
Current portion of deferred lease liability ................................................... 397 412
---------- ----------
Total current liabilities ................................................................. 3,371 5,736
Note payable, including accrued interest ........................................................... 38,345 33,181
Capital lease obligation, net of current portion ................................................... 469 -
Deferred lease liability, net of current portion ................................................... 1,057 1,509
---------- ----------
Total liabilities ............................................................................. 43,242 40,426
---------- ----------
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred stock, $.01 par value; authorized 1,000,000 shares; issued and outstanding-none ..... - -
Common stock, $.01 par value; authorized 40,000,000 shares; issued 18,447,000
shares (18,203,000 outstanding) in 2003 and 18,253,000 shares (18,009,000 outstanding)
in 2002 ...................................................................................... 184 182
Additional paid-in capital .................................................................... 322,257 321,292
Note receivable from officer and director ..................................................... (804) (804)
Accumulated deficit ........................................................................... (295,033) (250,164)
Accumulated other comprehensive (loss) income ................................................. (10) 821
Common stock held in treasury, at cost; 244,000 shares in 2003 and 2002 ...................... (3,787) (3,787)
---------- ----------
Total stockholders' equity ................................................................ 22,807 67,540
---------- ----------
Total liabilities and stockholders' equity ................................................ $ 66,049 $ 107,966
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements
F-3
EMISPHERE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2003 2002 2001
------------- ------------- -------------
Revenue .............................................................. $ 400 $ 3,378 $ 4,728
------------- ------------- -------------
Costs and expenses:
Research and development ......................................... 21,026 49,719 53,301
General and administrative ....................................... 9,727 11,242 9,692
Restructuring .................................................... (79) 1,417 -
Loss on impairment of intangible and fixed assets ................ 5,439 4,507 -
Depreciation and amortization .................................... 5,806 6,185 4,014
------------- ------------- -------------
Total costs and expenses ..................................... 41,919 73,070 67,007
------------- ------------- -------------
Operating loss ............................................... (41,519) (69,692) (62,279)
------------- ------------- -------------
Other (expense) and income:
Investment and other income ...................................... 1,882 3,044 9,612
Loss on impairment of investment ................................. - (222) -
Loss on sale of fixed assets ..................................... (67) - -
Interest expense ................................................. (5,165) (4,472) (3,867)
------------- ------------- -------------
Total other (expense) and income ............................. (3,350) (1,650) 5,745
------------- ------------- -------------
Net loss ............................................................. $ (44,869) $ (71,342) $ (56,534)
============= ============= =============
Net loss per share, basic and diluted ................................ $ (2.48) $ (3.98) $ (3.18)
============= ============= =============
Weighted average shares outstanding, basic and diluted ............... 18,077,000 17,919,000 17,755,000
============= ============= =============
The accompanying notes are an integral part of the consolidated financial
statements
F-4
EMISPHERE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2003 2002 2001
------------- ------------- -------------
Cash flows from operating activities:
Net loss ......................................................... $ (44,869) $ (71,342) $ (56,534)
------------- ------------- -------------
Adjustments to reconcile net loss to net cash used in operating
activities:
Non-cash interest expense ..................................... 5,165 4,468 3,867
Depreciation and amortization of leasehold improvements ....... 5,567 5,811 3,451
Amortization of purchased technology .......................... 239 374 563
Impairment of intangible and fixed assets ..................... 5,439 4,507 -
Amortization/deferral of deferred lease liability ............. (467) (219) -
Non-cash compensation and other non-cash charges .............. 395 (15) 195
Amortization of discount (premium) on investments ............. (92) (9) 334
Impairment of investment ...................................... - 222 -
Net realized gain on sale of investment ....................... (493) (387) (274)
Loss on sale of fixed assets .................................. 67 - -
Changes in assets and liabilities excluding non-cash charges:
Decrease in prepaid expenses and other current assets ......... 952 1,280 779
(Increase) in other assets .................................... (5) (473) -
Increase (decrease) increase in deferred revenue .............. 125 (8) (1,355)
(Decrease) increase in accounts payable and accrued expenses .. (2,686) (8,271) 9,415
------------- ------------- -------------
Total adjustments .......................................... 14,206 7,280 16,975
------------- ------------- -------------
Net cash used in operating activities ...................... (30,663) (64,062) (39,559)
------------- ------------- -------------
Cash flows from investing activities:
Proceeds from sales of investments ............................... 56,193 97,076 223,590
Purchases of investments ......................................... (17,243) (51,311) (144,588)
Proceeds from sale of fixed assets ............................... 152 332 -
Capital expenditures ............................................. (1,168) (3,439) (18,656)
------------- ------------- -------------
Net cash provided by (used in) investing activities ........... 37,934 42,658 60,346
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from exercise of stock options .......................... 551 1,335 4,034
Repurchase of common stock ....................................... - - (3,594)
Proceeds from capital lease obligation ........................... 681 - -
------------- ------------- -------------
Net cash provided by financing activities ............................ 1,232 1,335 440
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents ................. 8,503 (20,069) 21,227
Cash and cash equivalents, beginning of year ......................... 22,784 42,853 21,626
------------- ------------- -------------
Cash and cash equivalents, end of year ............................... $ 31,287 $ 22,784 $ 42,853
============= ============= =============
Supplemental disclosure of cash flow information:
Tax refund ....................................................... $ 119
Non-cash investing and financing activities:
Capital expenditures in accounts payable ......................... $ 15 $ 690
Sale of equipment under a barter arrangement ..................... $ 122
Equipment donation ............................................... $ 4
Other non-cash charges to equipment .............................. $ 70 $ 425 $ 117
The accompanying notes are an integral part of the consolidated financial
statements
F-5
EMISPHERE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 2003, 2002 and 2001
(in thousands, except share data)
ACCUMULATED COMMON STOCK
COMMON STOCK ADDITIONAL OTHER HELD IN TREASURY
-------------------- PAID-IN NOTE ACCUMULATED COMPREHENSIVE ------------------
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT (LOSS) INCOME SHARES AMOUNT TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000..... 17,703,000 $ 177 $ 315,591 $ (804) $ (122,288) $ 657 44,000 $ (193) $ 193,140
Net Loss....................... (56,534) (56,534)
Unrealized gain on investments. 302 302
---------
Comprehensive loss............. (56,232)
---------
Sale of common stock under
employee stock purchase plans
and exercise of options....... 338,000 3 4,031 4,034
Repurchase of common stock..... 200,000 (3,594) (3,594)
Issuance of stock options for
services rendered............. 294 294
---------- -------- --------- ------- ---------- ------- ------- --------- ---------
Balance, December 31, 2001..... 18,041,000 180 319,916 (804) (178,822) 959 244,000 (3,787) 137,642
Net Loss....................... (71,342) (71,342)
Unrealized loss on investments. (138) (138)
---------
Comprehensive loss............. (71,480)
---------
Sale of common stock under
employee stock purchase
plans and exercise of options. 212,000 2 1,333 1,335
Issuance of stock options for
services rendered.............. 43 43
---------- -------- --------- ------- ---------- ------- ------- --------- ---------
Balance, December 31, 2002..... 18,253,000 182 321,292 (804) (250,164) 821 244,000 (3,787) 67,540
Net Loss....................... (44,869) (44,869)
Unrealized loss on investments. (831) (831)
---------
Comprehensive loss............. (45,700)
---------
Sale of common stock under
employee stock purchase
plans and exercise of
options....................... 194,000 2 549 551
Issuance of stock options for
services rendered............. 416 416
---------- -------- --------- ------- ---------- ------- ------- --------- ---------
Balance, December 31, 2003..... 18,447,000 $ 184 $ 322,257 $ (804) $ (295,033) $ (10) 244,000 $ (3,787) $ 22,807
========== ======== ========= ======= ========== ======= ======= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements
F-6
EMISPHERE TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations. Emisphere Technologies, Inc. (the "Company" or
"Emisphere") is a biopharmaceutical company specializing in the oral delivery of
therapeutic macromolecules and other compounds that are not currently
deliverable by oral means. Since its inception in 1986, the Company has devoted
substantially all of its efforts and resources to research and development
conducted on its own behalf as well as through collaborations with corporate
partners and academic research institutions. The Company has no product sales to
date. The Company operates under a single segment.
In 2002 the Company experienced a substantial increase in clinical
development expenses for self-funded projects, including liquid oral heparin
clinical development expenses for Phase III clinical trials. On May 14, 2002
Emisphere announced the initial results from its Phase III study with a liquid
oral heparin solution (formulation) for the prevention of Deep Vein Thrombosis
("DVT", or blood clots) in total hip replacement surgery patients. The results
did not demonstrate the superiority of liquid oral heparin solution, when dosed
in a 30-day treatment regimen, compared to Aventis SA's LOVENOX (enoxaparin)
administered by injection in a 10-day dosing regimen in preventing DVTs. On May
22, 2002, the Company announced a plan for restructuring its operations, which
included the discontinuation of its liquid oral heparin program and related
initiatives, and a scale back of any associated infrastructure. In September
2002, the decision was made to dispose of its Connecticut research facility in
order to eliminate excess capacity, reduce spending and raise cash. Operations
at that facility were terminated by the end of 2002 and the land, building and
equipment are currently held for sale (see Note 3 for further discussion of the
Farmington facility).
Emisphere's core business strategy is to develop oral forms of injectable
drugs, either alone or with partners, by applying the eligen(TM) technology to
those drugs. Typically, Emisphere conducts proof-of-concept Phase I and II
clinical trials with the objective of attracting a partner to commercialize its
product candidates without significant further funding. The Company also pursues
development of certain product candidates on its own. The Company expects to
continue to incur operating losses.
Liquidity. Since its inception in 1986, the Company has generated
significant losses from operations and it anticipates that it will continue to
generate significant losses from operations for the foreseeable future. On
December 31, 2003, the Company's accumulated deficit was approximately $295
million. Operations to date have been funded with the proceeds from
collaborative research agreements, public and private equity and debt financings
and income earned on investments.
Emisphere expects its cash, cash equivalent and investment balances to
decrease by approximately $27,000 in 2004. Absent additional financing, new
collaborations, milestone payments and/or closing of the sale of the Farmington
facility, the Company would expect to end 2004 with approximately $16,000 in
cash, cash equivalents and investments. Reduced cash expenditures as a result of
the surrender of a portion of the leased premises at the Tarrytown facility and
closing on the sale of the Farmington facility, should it occur, will be
partially offset by higher costs due to inflation and increases in employee
compensation. The Company expects capital expenditures to be in the range of
$400 to $600 in 2004. Capital purchases may be financed by lease arrangements.
This projection of cash usage and year end cash, cash equivalent and
investment balances assumes that during 2004, the Company will not (i) enter
into a partnership agreement for oral insulin, solid oral heparin or any other
non-partnered program, (ii) receive any milestone payments on currently
partnered programs, or (iii) close on the sale of the Farmington facility. The
Company does have enough funds to continue its development programs, as
presented to the Board of Directors, beyond 2004. There can be no assurance that
the Company will be able to raise sufficient funds to continue operations and if
the Company fails to generate sufficient revenue, raise additional funds or
undergo further restructuring, the resultant reduction of its available cash
resources would have a material adverse effect on its ability to continue as a
going concern. If the Company is successful in securing a partner for either
oral insulin or solid oral heparin, it may receive milestone payments, upfront
fees, expense reimbursements and/or cash infusions. Such cash inflows could
delay the Company's need to raise additional funds to maintain operations beyond
2004. In the event that the Company is unable to achieve long-term profitability
and/or obtain additional capital, future operations will need to be scaled back
or discontinued.
Risks and Uncertainties. The Company has no products approved for sale by
the U.S. Food and Drug Administration. There can be no assurance that the
Company's research and development will be successfully completed, that any
products developed will obtain necessary government regulatory approval or that
any approved products will be commercially viable. In addition, the Company
operates in an environment of rapid change in technology and is dependent upon
the continued services of its current employees, consultants and subcontractors.
Use of Estimates. The preparation of consolidated financial statements in
accordance with accounting principles generally accepted in the United States
involves the use of estimates and assumptions that affect the recorded amounts
of assets and liabilities as of the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual
results may differ substantially from these estimates. Significant estimates
include the fair value and recoverability of the
F-7
carrying value of purchased technology, the fair value and recoverability of the
Farmington research facility, recognition of on-going clinical trial costs,
estimated costs to complete research collaboration projects and deferred taxes.
Principles of Consolidation. The consolidated financial statements include
the accounts of one subsidiary. All inter-company transactions have been
eliminated in consolidation.
Concentration of Credit Risk. Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist of cash, cash
equivalents and investments. The Company invests excess funds in accordance with
a policy objective seeking to preserve both liquidity and safety of principal.
The Company generally invests its excess funds in obligations of the U.S.
government and its agencies, bank deposits, money market funds, mortgage-backed
securities, and investment grade debt securities issued by corporations and
financial institutions. The Company holds no collateral for these financial
instruments.
Cash, Cash Equivalents, and Investments. The Company considers all highly
liquid, interest-bearing instruments with maturity of three months or less when
purchased to be cash equivalents. Cash and cash equivalents may include demand
deposits held in banks and interest bearing money market funds.
The Company considers its short- and long-term investments to be available
for sale. Investments are carried at fair value, with unrealized holding gains
and losses reported in stockholders' equity. The fair value of the investments
has been estimated based on quoted market prices.
Realized gains and losses are included as a component of investment income.
In computing realized gains and losses, the Company determines the cost of its
investments on a specific identification basis. Such cost includes the direct
costs to acquire the investments, adjusted for the amortization of any discount
or premium. During 2003, the Company recognized a gain of $493 related to the
call of a corporate bond. For the years ended December 31, 2002 and 2001, gross
realized gains and losses were not significant.
The following is a summary of the fair value of available for sale
investments:
DECEMBER 31, 2003
---------------------------------------------------------------------
UNREALIZED HOLDING
AMORTIZED -----------------------------------------
COST BASIS FAIR VALUE GAINS LOSSES NET
----------- ----------- ----------- ----------- -----------
Maturities less than one year:
Corporate debt securities .................... $ 3,900 $ 3,900 $ - $ - $ -
Maturities between one and three years:
U.S. government securities ................... 7,831 7,821 - (10) (10)
----------- ----------- ----------- ----------- -----------
$ 11,731 $ 11,721 $ - $ (10) $ (10)
=========== =========== =========== =========== ===========
DECEMBER 31, 2002
---------------------------------------------------------------------
UNREALIZED HOLDING
AMORTIZED -----------------------------------------
COST BASIS FAIR VALUE GAINS LOSSES NET
----------- ----------- ----------- ----------- -----------
Maturities less than one year:
U.S government securities .................... $ 20,054 $ 20,236 $ 187 $ (5) $ 182
Corporate debt securities .................... 17,290 17,440 159 (9) 150
Maturities between one and three years:
U.S. government securities ................... 9,516 9,524 17 (9) 8
Corporate debt securities ................... 1,099 1,099 - - -
Maturities between five and ten years:
Corporate debt securities .................... 2,137 2,618 481 - 481
----------- ----------- ----------- ----------- -----------
$ 50,096 $ 50,917 $ 844 $ (23) $ 821
=========== =========== =========== =========== ===========
Interest income, which is included in investment income, is recognized as
earned.
Equipment and Leasehold Improvements. Equipment and leasehold improvements
are stated at cost. Depreciation and amortization are provided for on a
straight-line basis over the estimated useful life of the asset. Leasehold
improvements are amortized over the life of the lease or of the improvements
whichever is shorter. Expenditures for maintenance and repairs that do not
materially extend the useful lives of the respective assets are charged to
expense as incurred. The cost and accumulated depreciation or amortization of
assets retired or sold are removed from the respective accounts and any gain or
loss is recognized in operations.
F-8
Purchased Technology. Purchased technology represents the value assigned to
patents underlying research and development projects of Ebbisham Ltd, related to
oral heparin, that were commenced but not yet completed as of the date of the
Company's acquisition of full ownership and which, if unsuccessful, have no
alternative future use. In accordance with SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", the fair value of purchased
technology is reviewed for impairment on a quarterly basis or whenever events
and circumstances indicate that the carrying value might not be recoverable. An
impairment loss, measured as the amount by which the carrying value exceeds the
fair value, is triggered if the carrying amount exceeds estimated undiscounted
future cash flows. See Note 5 for a further discussion of purchased technology.
Impairment of Long-Lived Assets. In accordance with SFAS 144, the Company
reviews its long-lived assets for impairment on a quarterly basis or whenever
events and circumstances indicate that the carrying value of an asset might not
be recoverable. An impairment loss, measured as the amount by which the carrying
value exceeds the fair value, is recognized if the carrying amount exceeds
estimated undiscounted future cash flows. See Notes 3 and 5 for further
discussion of impairments recognized under SFAS 144.
Deferred Lease Liability. Various leases entered into by the Company
provide for rental holidays and escalations of the minimum rent during the lease
term, as well as additional rent based upon increases in real estate taxes and
common maintenance charges. The Company records rent expense from leases with
rental holidays and escalations using the straight-line method, thereby
prorating the total rental commitment over the term of the lease. Under this
method, the deferred lease liability represents the difference between the
minimum cash rental payments and the rent expense computed on a straight-line
basis.
Repurchase of Common Stock. From time to time, the Company has repurchased
shares of its common stock. Such stock, which is deemed to be treasury stock, is
recorded at cost.
Revenue Recognition. The Company recognizes revenue from contract research
and development and research progress payments in accordance with Staff
Accounting Bulletin No. 104, "Revenue Recognition" ("SAB104"), and Financial
Accounting Standards Board ("FASB") Emerging Issues Task Force Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables" ("EITF 00-21").
SAB 104 superseded Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101") in December 2003. The Company's revenue
consists of contract research revenue. Contract research revenue includes
revenue from collaborative agreements and feasibility studies and is comprised
of reimbursed research and development costs, as well as upfront and research
and development milestone payments. Deferred revenue represents payments
received which are related to future performance. Non-refundable upfront and
research and development milestone payments and payments for services are
recognized as revenue as the related services are performed over the term of the
collaboration. Revenue recognized is the lower of (i) the percentage complete,
measured by incurred costs, applied to expected contractual payments or (ii) the
total non-refundable cash received to date.
Research and Development and Clinical Trial Expenses. Research and
development expenses include costs directly attributable to the conduct of
research and development programs, including the cost of salaries, payroll
taxes, employee benefits, materials, supplies, maintenance of research
equipment, costs related to research collaboration and licensing agreements, the
cost of services provided by outside contractors, including services related to
the Company's clinical trials, clinical trial expenses, the full cost of
manufacturing drug for use in research, preclinical development, and clinical
trials. All costs associated with research and development are expensed as
incurred.
Clinical research expenses represent obligations resulting from the
Company's contracts with various research organizations in connection with
conducting clinical trials for the Company's product candidates. The Company
accounts for those expenses on an accrual basis according to the progress of the
trial as measured by patient enrollment and the timing of the various aspects of
the trial. Accruals are recorded in accordance with the following methodology:
(i) the costs for period expenses, such as investigator meetings and initial
start-up costs, are expensed as incurred based on management's estimates, which
are impacted by any change in the number of sites, number of patients and
patient start dates; (ii) direct service costs, which are primarily on-going
monitoring costs, are recognized on a straight-line basis over the life of the
contract; and (iii) principal investigator expenses that are directly associated
with recruitment are recognized based on actual patient recruitment. All changes
to the contract amounts due to change orders are analyzed and recognized in
accordance with the above methodology. Change orders are triggered by changes in
the scope, time to completion and the number of sites. During the course of a
trial, we adjust our rate of clinical expense recognition if actual results
differ from our estimates.
Income Taxes. Deferred tax liabilities and assets are recognized for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. These liabilities and assets are determined
based on differences between the financial reporting and tax basis of assets and
liabilities measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. A valuation allowance is
recognized to reduce deferred tax assets to the amount that
F-9
is more likely than not to be realized. In assessing the likelihood of
realization, management considered estimates of future taxable income.
Stock-Based Employee Compensation. The accompanying financial position and
results of operations of the Company have been prepared in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Under
APB No. 25, compensation expense is generally not recognized in connection with
the awarding of stock option grants to employees, provided that, as of the grant
date, all terms associated with the award are fixed and the quoted market price
of the Company's stock as of the grant date is equal to or less than the option
exercise price.
The Company has several stock-based compensation plans, which are described
in Note 10. In accordance with Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as amended by
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation Transition and Disclosure, an amendment of SFAS 123" ("SFAS 148"),
pro forma operating results have been determined as if the Company had prepared
its financial statements in accordance with the fair value based method. The
following table illustrates the effect on net loss and net loss per share based
upon the fair value based method of accounting for stock based compensation.
Since option grants awarded during 2003, 2002, and 2001 vest over several years
and additional awards are expected to be issued in the future, the pro forma
results shown below are not likely to be representative of the effects on future
years of the application of the fair value based method.
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2003 2002 2001
------------- ------------- -------------
Net loss, as reported ................................................ $ (44,869) $ (71,342) $ (56,534)
Add: Stock-based employee compensation expense included in
reported net loss ................................................... 211 43 294
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards ............. (7,847) (7,378) (9,032)
------------- ------------- -------------
Pro forma net loss ................................................... $ (52,505) $ (78,677) $ (65,272)
============= ============= =============
Net loss per share amounts, basic and diluted:
As reported ...................................................... $ (2.48) $ (3.98) $ (3.18)
Pro forma ........................................................ $ (2.90) $ (4.39) $ (3.68)
For the purpose of the above pro forma calculation, the fair value of each
option granted was estimated on the date of grant using the Black-Scholes option
pricing model. The following assumptions were used in computing the fair value
of options granted: expected volatility of 95% in 2003 and 85% in 2002 and 2001,
expected lives of five years (except for the Employee Stock Purchase Plans,
where the expected lives are six months), zero dividend yield, and
weighted-average risk-free interest rate of 3.3% in 2003, 3.9% in 2002 and 3.0%
in 2001.
The fair value of options granted to non-employees for goods or services is
expensed as the goods are utilized or the services performed.
Other disclosures required by SFAS 123 have been included in Note 10.
Net Loss Per Share. Net loss per share, basic and diluted, is computed
using the weighted average number of shares of the Company's common stock
outstanding during the period. For all periods presented, the Company reported
net losses and, therefore, no common stock equivalents were included in the
computation of diluted net loss per share, since such inclusion would have been
anti-dilutive. Stock options that have been excluded from diluted loss per share
amounted to 5,529,507, 4,850,552 and 4,794,148, for the years ended December 31,
2003, 2002 and 2001, respectively.
Fair Value of Financial Instruments. The carrying amounts for cash, cash
equivalents, accounts payable, and accrued expenses approximate fair value
because of their short-term nature. The Company has determined that it is not
practical to estimate the fair value of its note payable because of its unique
nature and the costs that would be incurred to obtain an independent valuation.
The Company does not have comparable outstanding debt on which to base an
estimated current borrowing rate or other discount rate for purposes of
estimating the fair value of the note payable and the Company has not yet
obtained or developed a valuation model. Additionally, the Company is engaged in
research and development activities and has not yet developed products for sale.
Accordingly, at this stage of the Company's development, a credit risk
assessment is highly judgmental. These factors all contribute to the
impracticability of estimating the fair value of the note payable. At December
31,
F-10
2003, the carrying value of the note payable and accrued interest was $38,345.
See Note 7 for further discussion of the note payable.
Comprehensive Loss. Comprehensive loss represents the change in net assets
of a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. Comprehensive loss of the Company includes
net loss adjusted for the change in net unrealized gain or loss on marketable
securities. The disclosures required by Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" for the years ended December
31, 2003, 2002 and 2001 have been included in the consolidated statements of
stockholders' equity.
Reclassification of Prior Year Balances. Certain balances in prior years'
consolidated financial statements have been reclassified to conform with current
year presentation. Reclassification had no effect on the consolidated statement
of operations.
Future Impact of Recently Issued Accounting Standards. In June 2002, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" ("SFAS 146"). SFAS 146 nullifies Emerging Issues Task Force
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)" ("EITF 94-3"). FAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred, rather than on the date of an entity's commitment to an exit plan and
establishes fair value as the objective for initial measurement of the
liability. The provisions of SFAS 146 are effective for exit or disposal
activities initiated after December 31, 2002. The provisions of EITF 94-3 shall
continue to apply for an exit activity initiated under an exit plan that met the
criteria of EITF 94-3 prior to SFAS 146's initial application. The adoption of
the provisions of SFAS 146 did not have a material effect on the Company's
results of operations or financial position.
In December 2003, the Staff of the Securities and Exchange Commission
issued SAB 104, "Revenue Recognition" ("SAB 104"), which supercedes SAB 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 104's primary
purpose is to rescind accounting guidance contained in SAB 101 related to
multiple element revenue arrangements, superceded as a result of the issuance of
EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables"
(EITF 00-21"). Additionally, SAB 104 rescinds the SEC's "Revenue Recognition in
Financial Statements Frequently Asked Questions and Answers" (the "FAQ") issued
with SAB 101 that had been codified in SEC Topic 13, "Revenue Recognition".
Selected portions of the FAQ have been incorporated into SAB 104. While the
wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the
revenue recognition principles of SAB 101 remain largely unchanged by the
issuance of SAB 104. Adoption of SAB 104 was required immediately and did not
have a material effect on the Company's financial statements.
In December 2003, the FASB issued a revision to Interpretation No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51"
("FIN 46R"), which was issued in January 2003. FIN 46R clarifies the application
of ARB No. 51, "Consolidated Financial Statements," to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support. FIN 46R requires
the consolidation of these entities, known as variable interest entities
("VIEs"), by the primary beneficiary of the entity. The primary beneficiary is
the entity, if any, that will absorb a majority of the entity's expected losses,
receive a majority of the entity's expected residual returns, or both. Among
other changes, the revisions of FIN 46R (a) clarified some requirements of the
original FIN 46, which had been issued in January 2003, (b) eased some
implementation problems, and (c) added new scope exceptions. FIN 46R deferred
the effective date of the Interpretation for public companies, to the end of the
first reporting period ending after March 15, 2004, except that all public
companies must at a minimum apply the provisions of the Interpretation to
entities that were previously considered "special-purpose entities" under the
FASB literature prior to the issuance of FIN 46R by the end of the first
reporting period ending after December 15, 2003. Adoption of FIN 46R did not
have a material impact on the Company's financial statements.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
("SFAS 150"). SFAS 150 specifies that instruments within its scope embody
obligations of the issuer and that the issuer must classify them as liabilities.
SFAS 150 requires issuers to classify as liabilities the following three types
of freestanding financial instruments: (1) mandatorily redeemable financial
instruments, (2) obligations to repurchase the issuer's equity shares by
transferring assets, and (3) certain obligations to issue a variable number of
shares. SFAS 150 defines a "freestanding financial instrument" as a financial
instrument that (1) is entered into separately and apart from any of the
entity's other financial instruments or equity transactions or (2) is entered
into in conjunction with some other transaction and can be legally detached and
exercised on a separate basis. For all financial instruments entered into or
modified after May 31, 2003, SFAS 150 is effective immediately. For all other
instruments of public companies, SFAS 150 went into effect at the beginning of
the first interim period beginning after June 15, 2003. The adoption of SFAS 150
did not have a material impact on the Company's financial statements. In
November 2003, the Financial Accounting Standards Board deferred the effective
date for selected provisions of SFAS 150, limited to mandatorily redeemable
noncontrolling interests associated with finite-lived
F-11
subsidiaries. The deferral of those selected provisions is not expected to have
a material impact on the Company's financial statements.
On November 25, 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". FIN 45 elaborates on
the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions of
this Interpretation are applicable to guarantees issued or modified after
December 31, 2002. The adoption of the disclosure and recognition provisions of
FIN 45 did not have a material effect on the Company's results of operations or
financial position.
2. RESTRUCTURING
In May 2002, the Company announced a plan for restructuring its operations,
which included the discontinuation of its liquid oral heparin program and any
related initiatives, and a reduction of associated infrastructure. Additionally,
in the third quarter of 2002, the Company evaluated several alternatives to
consolidate its two research facilities in Tarrytown, New York and Farmington,
Connecticut in order to eliminate excess capacity, reduce spending, and raise
cash. The decision was made to dispose of the Farmington research facility. As a
result of the restructuring plan, the Company announced a reduction in force,
which was implemented in the second quarter of 2002 at the Tarrytown facility
and in the fourth quarter at the Farmington facility. The restructuring plan
resulted in the reduction of the Company's full-time work force by approximately
50%.
In 2002, the Company terminated 91 full-time and 26 temporary employees,
including 14 administrative personnel and 103 scientists and research
assistants. In 2002 the Company paid approximately $178 in stay bonuses to the
severed employees during the phase out of operations at Farmington. At the end
of 2002, five administrative personnel remained at the Farmington facility. In
2003 four of the remaining five personnel at the Farmington facility were
terminated. One employee will remain until the sale is complete. As further
discussed in Note 3, in December 2003 the Company accepted an offer from a real
estate developer to purchase the Farmington facility and entered into a contract
of sale.
The following tables present the original restructuring accruals for
Tarrytown and Farmington, the adjustments to these accruals, and the amounts
paid through December 31, 2003:
NET ADJUSTMENTS RESTRUCTURING
RESTRUCTURING FOR THE YEAR PAYMENTS DURING RESERVE AS OF
RESERVE AS OF ENDED DECEMBER THE YEAR ENDED DECEMBER 31,
JANUARY 1, 2003 31, 2003 DECEMBER 31, 2003 2003
--------------- --------------- ----------------- -------------
Severance and accrued vacation.............. $ 48 $ (6) $ (18) $ 24
Outplacement services....................... - - - -
Employee benefits........................... 1 - - 1
Contract exit costs......................... 73 (73) - -
Other....................................... - - - -
--------------- --------------- ----------------- -------------
Total restructuring $ 122 $ (79) $ (18) $ 25
=============== =============== ================= =============
NET CHARGES FOR RESTRUCTURING
RESTRUCTURING THE YEAR ENDED PAYMENTS DURING RESERVE AS OF
RESERVE AS OF DECEMBER 31, THE YEAR ENDED DECEMBER 31,
JANUARY 1, 2002 2002 DECEMBER 31, 2002 2002
--------------- --------------- ----------------- -------------
Severance and accrued vacation.............. $ - $ 1,008 $ (960) $ 48
Outplacement services....................... - 54 (54) -
Employee benefits........................... - 59 (58) 1
Contract exit costs......................... - 267 (194) 73
Other (1) .................................. - 29 (29) -
--------------- --------------- ----------------- -------------
Total restructuring $ - $ 1,417 $ (1,295) $ 122
=============== =============== ================= =============
(1) Payments include $21 in non-cash charges related to the forgiveness of
certain employee loans.
As of December 31, 2003 and 2002, the remaining reserve is included in
accounts payable and accrued expenses on the consolidated balance sheets. The
reserve remaining at December 31, 2003 is expected to be paid in the first
quarter of 2005.
3. FIXED ASSETS
Tarrytown Facility Transaction. During 2003, in order to streamline
operations and reduce expenditures, the Company entered into a transaction to
surrender to the landlord approximately 27% of its leased space (the
"surrendered space") at the Tarrytown facility. The surrendered space primarily
consists of office space which was subsequently leased to another tenant (the
F-12
"subsequent tenant") at the Tarrytown facility. In the event that the subsequent
tenant vacates the space before August 31, 2005, the Company will be
contingently liable for the rent payments and will be required to re-let the
space through August 31, 2007. Completion of the lease amendment and related
agreements took place in October 2003. The agreement describes four distinct
areas to be surrendered, three of which were vacated and surrendered to the
subsequent tenant as of December 31, 2003. The fourth space was vacated in March
2004.
In connection with this transaction, Emisphere agreed to sell most of the
furniture and equipment in the surrendered space to the subsequent tenant.
Through a contractual agreement with Emisphere, the subsequent tenant has agreed
to make certain payments ("furniture payments") which will be made directly to
the landlord on a monthly basis. A rental credit equal to the furniture payment
will be applied against Emisphere's rent payment to the landlord on a monthly
basis. Total payments under the agreement are $1,023 and extend through August
2012. The transaction between Emisphere and the subsequent tenant has been
accounted for as an operating lease, with all furniture payments recorded as
rental income. The Company retains a security interest in the furniture and
equipment until all required payments have been made. The Company removed assets
with a net book value of $353 for use elsewhere in the Tarrytown facility.
Emisphere compared the net book value of the furniture and equipment to be
leased to the fair value, which was determined to be the net present value of
the furniture payments of $737, and determined that the assets were impaired.
Based on this evaluation, the Company recorded an impairment charge of $4,327
during the year ended December 31, 2003 which has been included in loss on
impairment of intangible and fixed assets on the consolidated statements of
operations.
In connection with this restructuring, the Company identified equipment
that had no future use. This equipment was segregated and classified as
available for sale as of December 31, 2003. This equipment was evaluated for
potential impairment based on quotes from scientific equipment resellers. These
evaluations resulted in an impairment charge of $69 for the year ended December
31, 2003, which has been included in loss on impairment of intangible and fixed
assets on the consolidated statements of operations. The remaining net book
value of the equipment of $27 is included in land, building and equipment held
for sale, net on the consolidated balance sheets.
Farmington Facility Transaction. In December 2003, the Company entered into
a contract of sale for the Farmington facility with a real estate developer. The
purchaser's obligations to close on the facility are contingent on receiving
certain governmental approvals, including but not limited to zoning approvals in
final form, wetlands approvals and state environmental approvals, by August 12,
2004. In the event that the purchaser has not terminated the contract by August
12, 2004 because of the failure to obtain governmental approvals, the purchaser
is obligated to close on the premises by the earlier date of the thirtieth day
after receipt of governmental approvals or November 12, 2004. The purchaser does
have the right to adjourn the closing date for six months after November 12,
2004 if governmental approvals have not been received and provided the purchaser
shall pay the sum of $35 per month to Emisphere. As of December 31, 2003, the
Company performed an evaluation of the land, building and equipment available
for sale at the Farmington facility, which has a carrying value of $3,591. The
Company evaluated the following two components of the facility: (i) land,
building and equipment that would most likely be transferred to the buyer when
the sale is consummated (such as equipment which is attached to the structure
and expensive to remove), and (ii) equipment that is portable and available for
sale and would most likely be retained by the Company. The Company evaluated the
land, building and attached equipment based on the sale price in the contract
and determined that an impairment loss of the carrying value of the land,
building and attached equipment had not been triggered as of December 31, 2003.
In the event that the Company is not successful in closing the sale of the
Farmington facility, the Company may need to write down the carrying value of
the land, building and equipment further. Because the sale is contingent in part
on certain governmental approvals, the Company cannot predict with certainty
when, or if, the closing will take place.
Equipment Impairment. Subsequent to the decision to sell the Farmington
facility, equipment with a net book value of $435 was transferred for use at the
Tarrytown facility and equipment with a net book value of $314 was sold. The
remaining items of equipment were then evaluated for potential impairment. The
evaluations were based on the age and condition of the equipment, potential
offers from third parties, quotes from scientific equipment resellers, and
recent sales of similar equipment at auction or by the Company. Based on this
evaluation, the Company recorded an impairment charge of $1,003 during the year
ended December 31, 2003, which has been included in loss on impairment of
intangible and fixed assets on the consolidated statement of operations.
The land, building, and equipment that are available for sale are included
at their carrying value in land, building and equipment held for sale, net on
the condensed consolidated balance sheet as of December 31, 2003. The $435 of
equipment transferred out of the Farmington facility is included in equipment
and leasehold improvements, net on the consolidated balance sheets.
F-13
In accordance with SFAS No. 144, during 2003, the Company evaluated certain
assets for use at the Tarrytown facility for impairment. As a result, the
Company recorded an impairment charge of $40 which is included in loss on
impairment of intangible and fixed assets on the consolidated statement of
operations.
In connection with the discontinuation of the liquid oral heparin
development program in the second quarter of 2002, management performed an
evaluation of the recoverability of certain fixed assets and determined that an
impairment of a reactor and associated accessories, which were to be used only
for the manufacture of liquid oral heparin, had occurred. The Company recorded a
$494 charge representing the difference between the carrying value of the
reactor and associated accessories and the selling price of the equipment. The
Company also performed an evaluation of the recoverability of certain equipment
at the Tarrytown facility. The Company determined that there was no future use
for a gene chip array system and its related accessories. The Company recorded a
$103 charge representing the difference between the carrying value of the gene
chip array system and its related accessories and the selling price of the
equipment. These charges are included in impairment of intangible and fixed
assets on the consolidated statements of operations for the year ended December
31, 2002.
Fixed Assets. Equipment and leasehold improvements, net, including assets
held under capital lease, consists of the following:
DECEMBER 31,
USEFUL LIVES -------------------
IN YEARS 2003 2002
------------- -------- --------
Equipment................................................ 3-7 $ 13,685 $ 14,003
Leasehold improvements................................... Life of lease 18,852 26,502
-------- --------
32,537 40,505
Less, accumulated depreciation and amortization.......... 18,532 17,223
-------- --------
$ 14,005 $ 23,282
======== ========
Depreciation expense for the years ended December 31, 2003, 2002 and 2001,
was $5,567, $5,811 and $3,451, respectively. Included in equipment and leasehold
improvements are assets which were acquired under capital leases in the amount
of $681 at December 31, 2003 (see Note 11).
Land, building and equipment held for sale, net consists of the following:
DECEMBER 31,
USEFUL LIVES -------------------
IN YEARS 2003 2002
------------- --------- --------
Land..................................................... -- $ 1,170 $ 1,170
Building................................................. 13 1,983 1,940
Equipment................................................ 3-7 1,088 2,057
-------- --------
4,241 5,167
Less, accumulated depreciation and amortization.......... 623 647
-------- --------
$ 3,618 $ 4,520
======== ========
Land, building and equipment held for sale of $3,591 is related to the
Farmington facility, while $27 represents excess equipment held for sale at the
Tarrytown facility. Land, building and equipment held for sale were classified
as such on December 31, 2002 and therefore no depreciation was recorded for
those assets during 2003.
4. OTHER THAN TEMPORARY IMPAIRMENT OF INVESTMENTS
In 2002, the Company recorded a charge of $222 related to the write-down to
fair value of its $310 investment in the preferred stock of a biotech company
which has products that could potentially use Emisphere's oral delivery
technology. The Company considered the following factors to be primary
indicators of impairment: (i) the biotech company's need to raise sufficient
capital to ensure funding of its research and development projects, (ii) its
inability to meet its obligations as they become due and (iii) the possibility
that the company may not be able to continue as a going concern unless
additional financing is obtained. Fair value was estimated based on the price of
the biotech company's publicly-traded common stock. No further impairment was
recorded at December 31, 2003 as the fair value of the investment exceeds the
carrying value.
5. PURCHASED TECHNOLOGY
Purchased technology represents the value assigned to patents underlying
research and development projects related to oral heparin which, if
unsuccessful, have no alternative future use. Purchased technology is amortized
over a period of 15 years, which represents the average life of the patents.
F-14
In connection with the discontinuation of the liquid oral heparin
development program in the second quarter of 2002, management performed an
evaluation of the recoverability of purchased technology related to the program
and related initiatives. Management concluded that a total impairment of the
portion of the purchased technology representing patents for the liquid form of
oral heparin was required because the Company does not anticipate realization of
the carrying value of this asset. Accordingly the Company recorded a $3,910
impairment charge which is included in loss on impairment of intangible and
fixed assets on the consolidated statements of operations.
At December 31, 2003 and 2002, management performed an evaluation of the
recoverability of the remaining purchased technology related to the solid forms
of oral heparin. The Company is proceeding with planned studies related to this
formulation and management estimates that future undiscounted cash flows from
programs related to the solid forms of oral heparin are sufficient to realize
the carrying value of the asset and, therefore, no impairment of the remaining
purchased technology has been recorded.
The carrying value of the purchased technology is comprised as follows:
DECEMBER 31,
-------------------
2003 2002
-------- --------
Gross carrying amount ............................ $ 4,533 $ 4,533
Accumulated amortization ......................... 2,021 1,781
-------- --------
Net book value $ 2,512 $ 2,752
======== ========
Estimated amortization expense for the purchased technology is $239 for
each of the next five years.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
DECEMBER 31,
-------------------
2003 2002
-------- --------
Accounts payable ................................. $ 1,321 $ 2,044
Clinical trial expenses and contract research .... 514 2,332
Compensation ..................................... 489 441
Professional fees ................................ 314 434
Other ............................................ - 73
-------- --------
$ 2,638 $ 5,324
======== ========
7. NOTE PAYABLE
Ebbisham Limited ("Ebbisham") was an Irish corporation owned jointly by
Elan Pharmaceuticals, Inc. ("Elan") and the Company. Ebbisham was formed to
develop and market heparin products using technologies contributed by Elan and
the Company.
In July 1999, the Company acquired from Elan its ownership interest in
Ebbisham in exchange for a seven year, $20,000 zero coupon note due July 2006
carrying a 15% interest rate, compounding semi-annually (the "Note"), plus
royalties on oral heparin product sales, subject to an annual maximum and
certain milestone payments. In connection with any payment on the Note made by
the Company, the Company has the right to require Elan to purchase the Company's
common stock at the market price at an aggregate price equal to such payment
made, subject to the following conditions: (i) the acceptance by the FDA of a
new drug application from the Company involving any heparin product, (ii) the
Company's closing stock price remaining at or above $25.00 per share for the 20
consecutive trading days prior to the date the Company exercises this right and
(iii) the exercise of this right would not require the application of the equity
accounting method by Elan. At December 31, 2003, the balance on the Elan Note
was $38,345.
On February 28, 2002 Ebbisham was voluntarily liquidated.
8. INCOME TAXES
As of December 31, 2003, the Company has available unused net operating
loss carry-forwards of $260,469. If not utilized, $1,755, $3,902 and $6,023 of
the net operating loss carry-forwards will expire in 2004, 2005 and 2006,
respectively with the remainder expiring in various years from 2007 to 2023. The
Company's research and experimental tax credit carry-forwards expire in various
years from 2004 to 2023. Future ownership changes may limit the future
utilization of these net operating loss and research and development tax credit
carry-forwards as defined by the Internal Revenue Code. The tax effect of
temporary
F-15
differences, net operating loss carry-forwards, and research and experimental
tax credit carry-forwards as of December 31, 2003 and 2002 is as follows:
DECEMBER 31,
------------------------
2003 2002
---------- ----------
Deferred tax assets and valuation allowance:
Accrued liabilities .................................... $ 1,190 $ 1,144
Fixed and intangible assets ............................ 2,747 2,438
Fixed asset impairments ................................ 456 -
Net operating loss carry-forwards ...................... 106,691 86,850
Research and experimental tax credit carry-forwards .... 14,368 13,330
Valuation allowance .................................... (125,452) (103,762)
---------- ----------
Net deferred tax asset ................................. $ - $ -
========== ==========
9. STOCKHOLDERS' EQUITY
The Company's certificate of incorporation provides for the issuance of
1,000,000 shares of preferred stock with the rights, preferences,
qualifications, and terms to be determined by the Company's Board of Directors.
As of December 31, 2003 and 2002, there were no shares of preferred stock
outstanding.
The Company has a stockholder rights plan in which Preferred Stock Purchase
Rights (the "Rights") have been granted at the rate of one one-hundredth of a
share of Series A Junior Participating Cumulative Preferred Stock ("A Preferred
Stock") at an exercise price of $80 for each share of the Company's common
stock.
The Rights are not exercisable, or transferable apart from the common
stock, until the earlier of (i) ten days following a public announcement that a
person or group of affiliated or associated persons have acquired beneficial
ownership of 20% or more of the outstanding common stock of the Company or (ii)
ten business days (or such later date, as defined) following the commencement
of, or announcement of an intention to make a tender offer or exchange offer,
the consummation of which would result in the beneficial ownership by a person,
or group, of 20% or more of the outstanding common stock of the Company.
Furthermore, if the Company enters into consolidation, merger, or other
business combinations, as defined, each Right would entitle the holder upon
exercise to receive, in lieu of shares of A Preferred Stock, a number of shares
of common stock of the acquiring company having a value of two times the
exercise price of the Right, as defined. The Rights contain antidilutive
provisions, are redeemable at the Company's option, subject to certain defined
restrictions for $.01 per Right, and expire on February 23, 2006.
As a result of the Rights dividend, the Board designated 200,000 shares of
preferred stock as A Preferred Stock. A Preferred Stockholders will be entitled
to a preferential cumulative quarterly dividend of the greater of $1.00 per
share or 100 times the per share dividend declared on the Company's common
stock. Shares of A Preferred Stock have a liquidation preference, as defined,
and each share will have 100 votes and will vote together with the common
shares.
In addition to 44,000 shares of the Company's common stock which had been
purchased in prior years the Company repurchased an additional 200,000 shares of
its common stock for a total of $3,594 during 2001. Such repurchased stock is
held by the Company as treasury stock.
The note receivable from officer and director resulted from the July 31,
2000 exercise of stock options by an officer and director of the Company. The
exercise price and income taxes resulting from the exercise were loaned to the
officer by the Company. The loan is in the form of a full recourse promissory
note bearing a variable interest rate based upon LIBOR plus 1.00% (2.1% and 2.4%
at December 31, 2003 and 2002, respectively), and collateralized by the stock
issued upon exercise of the stock options. Interest is payable monthly and
principal is due the earlier of July 31, 2005 or upon the sale of stock held as
collateral.
10. STOCK PLANS
Stock Option Plans. Under the Company's 1991 and 2000 Stock Option Plans,
the 2002 Broad Based Plan and the 1995 Non-Qualified Stock Option Plan
(individually, the "91 Plan", "00 Plan", "02 Plan" and "95 Plan," respectively,
or collectively, the "Plans") a maximum of 2,500,000, 1,419,500, 160,000 and
2,550,000 shares of the Company's common stock, respectively, are available for
issuance under the Plans. The 91 Plan is available to employees and consultants;
the 00 Plan is available to employees, directors and consultants; and the 02
Plan is available to employees only. The 91, 00 and 02 Plans provide for the
grant of either incentive stock options ("ISOs"), as defined by the Internal
Revenue Code, or non-qualified stock options, which
F-16
do not qualify as ISOs. The 95 Plan provides for grants of non-qualified stock
options to officers and key employees. Generally, the options expire within a
five- to ten-year period, as determined by the Committee and as defined by the
Plans. As of December 31, 2003, shares available for future grants under the
Plans amounted to 191,189.
The following table summarizes stock option information for the Plans as of
December 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- -----------------------------
WEIGHTED AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF EXERCISE NUMBER CONTRACTUAL AVERAGE EXERCISE NUMBER AVERAGE
PRICE OUTSTANDING LIFE IN YEARS PRICE EXERCISABLE EXERCISE PRICE
- --------------------------------- ------------- ---------------- ---------------- ----------- --------------
$ 1.50.......................... 9,060 1.33 $ 1.50 9,060 $ 1.50
$ 2.63-$3.55.................... 507,038 8.91 $ 3.14 54,195 $ 3.27
$ 4.00-$5.95.................... 295,579 9.06 $ 5.49 158,399 $ 5.26
$ 6.13-$8.63.................... 1,522,680 2.63 $ 8.35 1,415,980 $ 8.45
$ 10.00-$14.88.................. 1,456,307 6.57 $ 12.81 1,112,237 $ 12.54
$ 15.13-$21.80.................. 259,828 5.41 $ 17.87 188,380 $ 17.55
$ 23.00-$28.48.................. 14,070 5.90 $ 25.61 11,628 $ 25.66
$ 38.50-$48.06.................. 733,000 6.39 $ 46.95 442,800 $ 46.90
------------- -----------
$ 1.50-$48.06................... 4,797,562 5.62 $ 15.43 3,392,679 $ 15.12
============= ===========
Transactions involving stock options awarded under the Plans during the
years ended December 31, 2001, 2002 and 2003 are summarized as follows:
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OUTSTANDING EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------ -------------- ------------ --------------
Balance outstanding December 31, 2000 ...................... 4,522,272 $ 16.72 3,126,606 $ 10.50
2001
Granted .................................................... 728,318 $ 15.59
Canceled ................................................... (88,366) $ 12.98
Exercised .................................................. (231,290) $ 10.46
------------
Balance outstanding December 31, 2001 ...................... 4,930,934 $ 16.91 3,280,919 $ 10.85
2002
Granted .................................................... 1,246,970 $ 11.37
Canceled ................................................... (1,820,470) $ 14.00
Exercised .................................................. (29,720) $ 5.81
------------
Balance outstanding December 31, 2002 ...................... 4,327,714 $ 16.86 2,927,003 $ 14.28
2003
Granted .................................................... 648,635 $ 4.78
Canceled ................................................... (160,627) $ 12.48
Exercised .................................................. (18,160) $ 4.27
------------
Balance outstanding December 31, 2003 ...................... 4,797,562 $ 15.43 3,392,679 $ 15.12
============
Outside Directors' Plan. The Company has adopted a stock option plan for
outside directors (the "Outside Directors' Plan"). As amended, a maximum of
725,000 shares of the Company's common stock is available for issuance under the
Outside Directors' Plan. Directors who are neither officers nor employees of the
Company nor holders of more than 5% of the Company's common stock are granted
options (i) to purchase 35,000 shares of the Company's common stock on the date
of initial election or appointment to the Board of Directors and (ii) to
purchase 21,000 shares on the fifth anniversary thereof and every three years
thereafter. The options have an exercise price equal to the fair market value of
the Company's common stock on the date of grant, vest at the rate of 7,000
shares per year, and expire ten years after the date of grant. As of December
31, 2003 shares available for future grants under the plan amounted to 184,000.
F-17
The following table summarizes stock option information for the Outside
Directors' Plan as of December 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- -----------------------------
WEIGHTED AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING LIFE IN YEARS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------------------------- ------------- ---------------- ---------------- ----------- --------------
$ 2.89........................... 21,000 9.32 $ 2.89 - -
$ 5.75-$8.63..................... 231,000 6.61 $ 6.75 105,000 $ 7.79
$ 13.00-$14.04................... 170,000 6.97 $ 13.31 163,000 $ 13.28
$ 22.55-$23.50................... 42,000 3.91 $ 23.34 42,000 $ 23.34
$ 41.06.......................... 42,000 6.32 $ 41.06 42,000 $ 41.06
------------- -----------
$ 2.89-$41.06.................... 506,000 6.59 $ 13.02 352,000 $ 16.16
============= ===========
Transactions involving stock options awarded under the Outside Directors'
Plan during the years ended December 31, 2001, 2002 and 2003 are summarized as
follows:
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OUTSTANDING EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------ -------------- ------------ --------------
Balance outstanding December 31, 2000 ...................... 476,000 $ 16.44 378,000 $ 12.64
2001
Granted .................................................... 21,000 $ 13.88
Exercised .................................................. (35,000) $ 13.00
------------
Balance outstanding December 31, 2001 ...................... 462,000 $ 16.58 378,000 $ 14.27
2002
Granted .................................................... 128,000 $ 14.58
Cancelled .................................................. (217,000) $ 15.79
------------
Balance outstanding December 31, 2002 ...................... 373,000 $ 16.36 317,000 $ 15.19
2003
Granted .................................................... 168,000 $ 5.13
Cancelled .................................................. (35,000) $ 10.75
------------
Balance outstanding December 31, 2003 ...................... 506,000 $ 13.02 352,000 $ 16.16
============
Directors' Deferred Compensation Stock Plan. Pursuant to the Directors'
Deferred Compensation Stock Plan (the "Directors' Deferred Plan"), as approved
at the annual stockholders' meeting in May 2003, an eligible independent
director has the option to elect to receive one half of his annual Board of
Directors' retainer compensation, paid for his services as a Director, in
deferred stocks. An aggregate of 25,000 shares of the Company's common stock has
been reserved for issuance under the Directors' Deferred Plan. During the years
ended December 31, 2003, 2002 and 2001, the outside directors earned the rights
to receive an aggregate of 2,144 shares, 3,358 shares and 948 shares,
respectively. Under the terms of the Directors' Deferred Plan, shares are to be
issued to a director within six months after he or she ceases to serve on the
Board of Directors. In accordance with the Directors' Deferred Plan, the Company
issued 923 shares of common stock to Mr. Hutt in January 2003. In December 2003,
Emisphere issued 1,602 shares to Dr. Goyan and 2,024 shares to Mr. Robinson. The
Company records as an expense the fair market value of the common stock issuable
under the plan. As of September 30, 2002 the compensation of Directors under
this plan was stopped and reinstated on October 1, 2003 subsequent to the
shareholders' approval of the 2003 Plan amendment. Prior to the amendment, an
independent director had the right to receive for each meeting of the Board of
Directors, or a committee thereof, attended a number of shares of the Company's
common stock equal to the amount determined by the Board of Directors as
compensation for the meeting divided by the fair market value of the Company's
common stock on the date of the meeting.
Non-Plan Options. The Company's Board of Directors has granted options
("Non-Plan Options") which are currently outstanding for the accounts of an
executive officer, a former executive officer, and two consultants. The Board of
Directors determines the number and terms of each grant (option exercise price,
vesting, and expiration date).
F-18
The following table summarizes stock option information for the Non-Plan
Options as of December 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- -----------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------------------------- ------------- ---------------- -------------- ----------- --------------
$ 3.15-$4.12.......................... 10,000 9.04 $ 3.64 10,000 $ 3.64
$ 4.88................................ 40,000 3.57 $ 4.88 40,000 $ 4.88
$ 8.00-$9.25.......................... 272,279 1.62 $ 8.83 272,279 $ 8.83
$ 12.38............................... 200,000 1.76 $ 12.38 200,000 $ 12.38
$ 26.05............................... 10,000 7.53 $ 26.05 10,000 $ 26.05
------------- -----------
$ 3.15-$26.05......................... 532,279 2.07 $ 10.09 532,279 $ 10.09
============= ===========
Transactions involving awards of Non-Plan Options during the years ended
December 31, 2001, 2002 and 2003 are summarized as follows:
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OUTSTANDING EXERCISE PRICE EXERCISABLE EXERCISE PRICE
Balance December 31, 2000 .................................. 287,279 $ 8.87 287,279 $ 8.87
2001 and 2002
Granted .................................................... 10,000 $ 26.05
Reissued .................................................. 200,000 $ 12.38
Exercised .................................................. (725) $ 9.75
------------
Balance outstanding December 31, 2001 and 2002 ............. 496,554 $ 10.63 496,554 $ 9.45
2003
Granted .................................................... 50,000 $ 4.63
Cancelled .................................................. (14,275) $ 9.75
------------
Balance outstanding December 31, 2003 ...................... 532,279 $ 10.09 532,279 $ 10.09
============
Employee Stock Purchase Plans. The Company has adopted two employee stock
purchase plans (the "Purchase Plans")--the 1994 Employee Stock Purchase Plan
(the "Qualified Plan") and the 1994 Non-Qualified Employee Stock Purchase Plan
(the "Non-Qualified Plan"). The Purchase Plans provide for the grant to
qualified employees of options to purchase the Company's common stock. These
options are granted for dollar amounts of up to 15% of an employee's quarterly
compensation. The exercise price per share is equal to the lesser of the fair
market value of the Company's common stock on the date of grant or 85% of the
fair market value on the date of exercise. Options are granted automatically on
February 1, May 1, August 1, and November 1 and expire six months after the date
of grant. The Qualified Plan is not available for employees owning more than 5%
of the Company's common stock and imposes certain other quarterly limitations on
the option grants. Options under the Non-Qualified Plan are granted to the
extent that the option grants are restricted under the Qualified Plan. The
Purchase Plans provide for the issuance of up to 1,200,000 shares of the
Company's common stock under the Qualified Plan and 200,000 shares under the
Non-Qualified Plan.
Purchases of common stock under the Purchase Plans during the year ended
December 31, 2003, 2002 and 2001 are summarized as follows:
QUALIFIED PLAN NON-QUALIFIED PLAN
--------------------------- --------------------------
SHARES SHARES
PURCHASED PRICE RANGE PURCHASED PRICE RANGE
---------- -------------- ---------- -------------
2001....................................... 68,109 $11.79-$25.48 2,640 $13.52-$23.43
2002....................................... 166,197 $2.62-$25.48 16,102 $2.47-$20.88
2003....................................... 140,764 $1.99-$4.38 30,484 $1.99-$4.38
As of December 31, 2003, there are 439,614 shares reserved for future
purchases under the Qualified Plan and 97,959 shares reserved under the
Non-Qualified Plan.
F-19
The weighted-average fair values and exercise prices for the options
granted during the years ended December 31, 2003, 2002 and 2001 are presented in
the table below.
YEAR ENDED DECEMBER 31,
---------------------------------------
2003 2002 2001
----------- ----------- -----------
Stock options granted in which the exercise price is equal to the market price
of the stock on the grant date:
Weighted average grant date fair market value ................................. $ 3.55 $ 6.60 $ 10.71
Number of options granted ..................................................... 826,635 593,051 759,318
Weighted average exercise price ............................................... $ 4.84 $ 19.56 $ 15.68
Stock options granted in which the exercise price is more than the market price
of the stock on the grant date:
Weighted average grant date fair market value ................................. $ 3.58 $ 9.16 N/A
Number of options granted ..................................................... 40,000 781,919
Weighted average exercise price ............................................... $ 4.88 $ 13.27
11. COMMITMENTS AND CONTINGENCIES
Commitments. The Company leases office and laboratory space under
non-cancelable operating leases expiring in 2007. As of December 31, 2003,
future minimum rental payments are as follows:
YEARS ENDING DECEMBER 31,
2004..................................................... $ 1,746
2005..................................................... 1,751
2006..................................................... 1,759
2007..................................................... 1,195
--------
$ 6,451
========
Future minimum lease payments under capital leases (see Note 3) are as
follows:
YEARS ENDING DECEMBER 31,
2004..................................................... $ 256
2005..................................................... 256
2006..................................................... 256
--------
768
Less: Amount representing interest at 8.5%.............. 88
--------
Present value of minimum lease payments.................. 680
Less: Current portion................................... 211
--------
Long-term obligations $ 469
========
Rent expense for the years ended December 31, 2003, 2002 and 2001 was
$1,811, $1,919 and $2,004, respectively. Additional charges for real estate
taxes and common maintenance charges for the years ended December 31, 2003, 2002
and 2001, were $1,127, $1,283 and $1,054, respectively.
The Company, for the years ended December 31, 2003, 2002 and 2001, made
payments totaling approximately $314, $1,963 and $1,166, respectively, to
universities and research organizations (the "Entities"), which is included in
research and development expenses. Certain members of the Company's Board of
Directors are affiliated with certain of these Entities.
Contingencies. The Company's bylaws provide for the indemnification of
officers and directors for certain events or occurrences while the officer or
director is, or was, serving at the Company's request in such capacity. The
maximum potential amount of future payments that the Company could be required
to make under the bylaws is unlimited; however, the Company has Director and
Officer insurance policies that, in most cases, would limit its exposure and
enable it to recover a portion of any future amounts paid. As a result of the
insurance policy coverage, the estimated fair value of these indemnification
provisions is minimal. All of these indemnification provisions were
grandfathered under the provisions of FIN 45 as they were in effect prior to
December 31, 2002. Accordingly, the Company has no liabilities recorded for
these provisions as of December 31, 2003.
Under the terms of the agreement with the landlord to surrender a portion
of the space at the Tarrytown facility in 2003, the Company is contingently
liable for the rent payments and will be required to re-let the space through
August 31, 2007 if the
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subsequent tenant vacates the surrendered space before August 31, 2005. At this
time, the Company believes that the possibility of such an event occurring is
very unlikely. In the event that the subsequent tenant vacates the space, the
maximum amount which the Company would be obligated to pay would be $3,751 for
rent, real estate taxes and operating expenses.
In the ordinary course of business, the Company enters into agreements with
third parties that include indemnification provisions which, in its judgment,
are normal and customary for companies in its industry sector. These agreements
are typically with business partners, clinical sites, and suppliers. Pursuant to
these agreements, the Company generally agrees to indemnify, hold harmless, and
reimburse indemnified parties for losses suffered or incurred by the indemnified
parties with respect to the Company's product candidates, use of such product
candidates, or other actions taken or omitted by the Company. The maximum
potential amount of future payments the Company could be required to make under
these indemnification provisions is unlimited. The Company has not incurred
material costs to defend lawsuits or settle claims related to these
indemnification provisions. As a result, the estimated fair value of liabilities
relating to these provisions is minimal. Accordingly, the Company has no
liabilities recorded for these provisions as of December 31, 2003.
In the normal course of business, the Company may be confronted with issues
or events that may result in a contingent liability. These generally relate to
lawsuits, claims, environmental actions or the action of various regulatory
agencies. Management consults with counsel and other appropriate experts to
assess the claim. If, in management's opinion, the Company has incurred a
probable loss as set forth by accounting principles generally accepted in the
United States, an estimate is made of the loss and the appropriate accounting
entries are reflected in the Company's consolidated financial statements.
Management, after consultation with legal counsel, does not anticipate that
liabilities arising out of currently pending or threatened lawsuits and claims
will have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
12. RETIREMENT PLAN
The Company has a defined contribution retirement plan (the "Retirement
Plan"), the terms of which, as amended, allow eligible employees who have met
certain age and service requirements to participate by electing to contribute a
percentage of their compensation to be set aside to pay their future retirement
benefits, as defined by the Retirement Plan. The Company has agreed to make
discretionary contributions to the Retirement Plan. For the years ended December
31, 2003, 2002 and 2001, the Company made contributions to the Retirement Plan
totaling approximately $318, $377 and $352, respectively.
13. COLLABORATIVE RESEARCH AGREEMENTS
Emisphere is a party to collaborative agreements with corporate partners to
provide development and commercialization services relating to the collaborative
products. These agreements are in the form of research and development
collaboration and licensing agreements. In connection with these agreements,
Emisphere has granted licenses or the rights to obtain licenses to our oral drug
delivery technology. In return, Emisphere will receive certain payments upon the
achievement of milestones and will receive royalties on sales of products should
they be commercialized. Under these agreements, Emisphere will also be
reimbursed for research and development costs. Emisphere also has the right to
manufacture and supply delivery agents developed under these agreements to its
corporate partners.
The Company also performs research and development for others pursuant to
feasibility agreements, which are of short duration and are designed to evaluate
the applicability of the Company's drug delivery agents to specific drugs. Under
the feasibility agreements, the Company is generally reimbursed for the cost of
work performed.
All of Emisphere's collaborative agreements are retractable by its
corporate partners without significant financial penalty to them.
ELI LILLY AND COMPANY.
In June 2000, Emisphere and Lilly executed a follow-on agreement to the
1997 multi-year research and option agreement to develop oral formulations of
recombinant parathyroid hormone (teraparatide; "PTH 1-34") and recombinant human
growth hormone (somatropin; "rhGH"). The Emisphere/Lilly oral PTH 1-34 program
is currently in Phase I development. In August 2003, Emisphere and Lilly
announced that Lilly would return all rights and data generated on an oral form
of rhGH to Emisphere. In connection with the Lilly agreements, the Company
recognized contract research revenues of $237, $2,923 and $3,828 for the years
ended December 31, 2003, 2002, and 2001, respectively.
NOVARTIS PHARMA AG.
In December 1997, Emisphere entered into a collaboration agreement with
Novartis to develop an oral salmon calcitonin ("sCT"), currently used to treat
osteoporosis. In February 2000, Novartis agreed to execute its option to acquire
an exclusive license to develop and commercialize oral sCT and as a result,
Novartis made a $2,000 milestone payment to Emisphere. In
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March 2000, Novartis paid Emisphere $2,500 to obtain the license to Emisphere's
technology for sCT, and to obtain an option to use the eligen(TM) technology for
a second compound. Novartis' rights to certain financial terms concerning the
second compound have since expired. In February 2003, Emisphere announced
favorable results of a Phase IIa study conducted by Novartis evaluating the
performance in post-menopausal women of an oral tablet form of salmon
calcitonin. Emisphere is entitled to receive an additional milestone payment for
oral calcitonin upon the initiation of Phase III studies by Novartis. The
Company has not recognized any revenue in connection with the Novartis agreement
for the years ended December 31, 2003, 2002 and 2001
REGENERON PHARMACEUTICALS, INC.
During 2000, Emisphere established a research and development collaboration
and option agreement with Regeneron for the development of an oral version of a
derivative of ciliary neutrophic growth factor ("CNTF"), which is under
development as an injectable by Regeneron as AXOKINE, for use in the treatment
of obesity. Emisphere and Regeneron have conducted pre-clinical testing of an
oral version of CNTF. In connection with the Regeneron agreement, the Company
recognized contract research revenue of $28 and $206 for the years ended
December 31, 2002 and 2001, respectively. Regeneron will continue to pay for all
studies related to the pre-clinical product candidate development. Emisphere
received no further contract research revenue related to this program for the
year ended December 31, 2003.
CUBIST PHARMACEUTICALS, INC.
In November 2000, Cubist established a collaboration agreement with
Emisphere for the development of an oral form of daptomycin, under development
as an injectable by Cubist as CIDECIN(R) (now being developed as CUBICIN), an
injectable for use in the treatment of serious or life-threatening soft skin
tissue infections. As of November 2003, the agreement has expired, and the
parties are no longer collaborating on the development of oral formulations of
daptomycin, daptomycin analogues, or any other products. In connection with the
Cubist agreement, the Company recognized contract research revenue of $267 and
$401 for the years ended December 31, 2002 and 2001, respectively. Emisphere
received no further contract research revenue related to this program for the
year ended December 31, 2003.
U.S. ARMY MEDICAL RESEARCH INSTITUTE OF INFECTIOUS DISEASES
In June 2003, Emisphere announced that it signed a cooperative research and
development agreement (CRADA) with the USAMRIID, the U.S. Department of
Defense's lead medical research laboratory for the U.S. Biological Defense
Research Program. USAMRIID is evaluating the use of Emisphere's eligen(TM)
technology to create oral vaccines against anthrax using a new recombinant
protein antigen. USAMRIID is a subordinate laboratory of the U.S. Army Medical
Research and Materiel Command. USAMRIID has agreed to grant Emisphere an
exclusive license to each U.S. patent application or issued patent as a result
of the work performed under the CRADA. Emisphere will be eligible to receive
royalties under a license agreement with the ultimate vaccine developer should
an oral anthrax vaccine ultimately be developed. Emisphere received no contract
research revenue related to this program for the year ended December 31, 2003.
14. SUMMARIZED QUARTERLY FINANCIAL DATA (Unaudited)
Following are summarized quarterly financial data for the years ended
December 31, 2003 and 2002:
2003
---------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30(1) DECEMBER 31(1)
---------- ---------- ------------ -----------
Total revenue............................................ $ 26 $ 246 $ 100 $ 28
Operating loss........................................... (8,998) (10,515) (13,825) (8,181)
Net loss................................................. (9,864) (11,446) (14,377) (9,182)
Net loss per share, basic and diluted.................... $ (0.55) $ (0.63) $ (0.80) $ (0.51)
2002
---------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- ------------ -----------
Total revenue............................................ $ 729 $ 1,089 $ 735 $ 825
Operating loss........................................... (21,521) (24,559) (12,313) (11,299)
Net loss................................................. (21,400) (24,930) (13,016) (11,996)
Net loss per share, basic and diluted.................... $ (1.20) $ (1.39) $ (0.72) $ (0.67)
(1) Adjusted to properly reflect a third quarter billing adjustment of $62.
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EXHIBIT INDEX
INCORPORATED
EXHIBIT BY REFERENCE(1)
- ------- ---------------
3.1 --Restated Certificate of Incorporation of the Company dated June 13, 1997, as amended by the
Certificate of Amendment dated February 5, 1999. A
3.2 --By-Laws of Emisphere, as amended December 7, 1998. A
4.1 --Restated Rights Agreement dated as of February 23, 1996 between Emisphere and Mellon Investor
Services, LLC. B
4.2 --Note Purchase Agreement, dated July 2, 1999, between Emisphere and Elan International Service,
Ltd. C
4.3 --Zero Coupon note, dated July 2, 1999, issued by Emisphere to Elan International Services, Ltd.
For an initial principal amount of $20 million. C
10.1 --1991 Stock Option Plan, as amended. I (2)
10.2 --Stock Option Plan for Outside Directors, as amended. D (2)
10.3 --Employee Stock Purchase Plan, as amended. E (2)
10.4 --Non-Qualified Employee Stock Purchase Plan. E (2)
10.5 --1995 Non-Qualified Stock Option Plan, as amended. I (2)
10.6 --Directors' Deferred Compensation Stock Plan. F (2)
10.7 --Employment Agreement, dated July 31, 2000, between Michael M. Goldberg and Emisphere. J (2)
10.8 --Employment Agreement, dated December 5, 2001, between Alan W. Dunton and Emisphere. K (2)
10.9 --Stock Option Agreements, dated January 1, 1991, February 15, 1991, December 1, 1991, August 1,
1992 and October 6, 1995 between Michael M. Goldberg and Emisphere. E (2)(3)
10.10 --Stock Option Agreement, dated July 31, 2000, between Michael M.Goldberg and Emisphere. J (2)
10.11(a) --Non-Qualified Stock Option Agreement dated February 7, 2002, between Alan W. Dunton and
Emisphere. K (2)
10.11(b) --Incentive Stock Option Agreement dated February 7, 2002, between Alan W. Dunton and Emisphere. K (2)
10.12 --Termination Agreement, dated July 2, 1999, among Emisphere, Elan Corporation, plc and Ebbisham
Limited, now a wholly owned Subsidiary of Emisphere. C
10.13 --Patent License Agreement, dated July 2, 1999, between Emisphere and Elan Corporation, plc. C
10.14 --Subscription Agreement, dated July 2, 1999 between Emisphere and Elan International Management,
Ltd. C
10.15 --Registration Rights Agreement, dated July 2, 1999 between Emisphere and Elan International
Management, Ltd. C
10.16 --Research Collaboration and Option Agreement dated as of December 3, 1997 between Emisphere and
Novartis Pharma AG. G (4)
10.17 --Research Collaboration and Option Agreement dated as of June 8, 2000 between Emisphere and Eli
Lilly and Company. J (4)
10.18 --Research Collaboration and Option Agreement dated March 8, 2000 between Emisphere and Regeneron
Pharmaceuticals, Inc. H (4)
10.19(a) --License Agreement dated as of April 7, 1998 between Emisphere and Eli Lilly and Company. J (4)
E-1
INCORPORATED
EXHIBIT BY REFERENCE(1)
- ------- ---------------
10.19(b) --License Agreement, dated as of April 7, 1998, between Emisphere and Eli Lilly and Company. J (4)
10.20(b) --Amendment to Lease Agreement, dated as of March 31, 2000, between Emisphere and Eastview
Holdings, LLC. J
10.20(c) --Amendment to Lease Agreement, dated as of March 31, 2000, between Emisphere and Eastview
Holdings, LLC. J
10.21 --Promissory Note, dated June 15, 2001, by Lewis H. Bender in favor of Emisphere. J (2)
10.22 --Promissory Note, dated July 31, 2000, by Michael M. Goldberg in favor of Emisphere J (2)
10.23 --Emisphere Technologies, Inc. 2000 Stock Option Plan J (2)
10.24 --Amendment to Emisphere Technologies, Inc Qualified Employee Stock Purchase Plan L (2)
10.25 --Amendment to Lease Agreement, dated as of September 23, 2003, between Emisphere and Eastview
Holdings, LLC. *
10.26 --Agreement, dated September 23, 2003, between Emisphere and Progenics Pharmaceuticals, Inc. *
10.27 --Consulting Agreement, dated November 13, 2003, between Emisphere and Dr. Jere Goyan *
10.28 --Consulting Agreement, dated November 13, 2003, between Emisphere and Mr. Joseph R. Robinson *
10.29 --Contract of Sale for the Farmington facility, dated December 15, 2003 * (4)
14.1 --Emisphere Technologies, Inc. Code of Business Conduct and Ethics *
23.1 --Consent of PricewaterhouseCoopers LLP *
31.1 --Certification Pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to section 302 of
the Sarbanes-Oxley Act of 2002 *
31.2 --Certification Pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to section 302 of
the Sarbanes-Oxley Act of 2002 *
32.1 --Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 *
32.2 --Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 *
- --------------
* Filed herewith.
(1) If not filed herewith, filed as an exhibit to the document referred to by
letter as follows:
A. Quarterly Report on Form 10-Q for the quarterly period ended January
31, 1999.
B. Registration Statement on Form 8-A12G/A dated and filed June 7, 2001.
C. Current Report on Form 8-K dated July 2, 1999.
D. Annual Report on Form 10-K for the fiscal year ended July 31, 1997.
E. Annual Report on Form 10-K for the fiscal year ended July 31, 1995.
F. Annual Report on Form 10-K for the fiscal year ended July 31, 1998.
G. Quarterly Report on Form 10-Q for the quarterly period ended October
31, 1997.
H. Quarterly Report on Form 10-Q for the quarterly period ended April 30,
2000.
I. Annual Report on Form 10-K for the fiscal year ended July 31, 1999.
J. Annual Report on Form 10-K for the fiscal year ended July 31, 2000.
K. Annual Report on Form 10-K for the year ended December 31, 2002.
L. Registration statement on Form S-8 dated and filed on November 27,
2002.
(2) Management contract or compensatory plan or arrangement.
(3) Omitted in part pursuant to Instruction 2 of Item 601 of Regulation S-K.
(4) Portions of this exhibit have been omitted based on a request for
confidential treatment filed separately with the Securities and Exchange
Commission.
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